The Economist dispels some China myths
A few years back I commented on a “Ghost Cities” story on 60 minutes:
They pointed to a “ghost town” development in Zhengzhou, which is capital of a province of 90 million people. I’d expect its current population (4 million in the urban area) to grow to 10 to 20 million in a few decades. How much longer will that development seem unneeded?
Here’s The Economist:
WHEN “60 Minutes”, an American television news programme, visited a new district in the metropolis of Zhengzhou in 2013, it made it the poster-child for China’s property bubble. “We found what they call a ghost city,” said Lesley Stahl, the host. “Uninhabited for miles and miles and miles and miles.” Two years on, she would not be able to say the same. The empty streets where she stood have a steady stream of cars. Workers saunter out of offices at lunchtime. Laundry hangs in the windows of the subdivisions.
The new district (pictured), on the eastern side of Zhengzhou, a city of 9m in central China, took off when the provincial and city governments relocated many of their offices there. Then, high schools with university-sized campuses began admitting students, drawing families to the area. Last autumn one of the world’s biggest children’s hospitals opened, a gleaming facility with cheery colours and 1,100 beds. Chen Jinbo, one of the area’s earlier residents, bemoans the lost quiet of a few years ago. “Rush hour is a hassle now.”
The success of Zhengzhou’s development belies some of the worst fears about China’s overinvestment. What appear to be ghost cities can, with the right catalysts and a bit of time, acquire flesh and bones. Yet it also marks a turning-point for the Chinese economy. Zhengzhou still has ambitious plans, not least for a massive logistics hub around its airport. With such a big urban area already built up, though, vast construction projects have a progressively smaller impact on the economy. The city’s GDP growth fell to 9.3% last year from an average of more than 13% over the preceding decade. The downward trend will continue. As the capital of Henan, one of the country’s poorest provinces, Zhengzhou had anchored the country’s last, large, fast-growth frontier. Its maturation signals that the slowing of China’s economy is not a cyclical blip but a structural downshift.
Of course there are actual ghost towns in China, such as Ordos, and more are likely in smaller cities. But overall the problem was exaggerated by the media.
Until recently China could grow its way out of debt trouble. That is no longer an option. With deflation arriving and the economy weakening, nominal growth is a third as fast as a few years earlier. In the year to the first quarter of 2015, nominal GDP grew by only 5.8%. The financial system is also far more complex than it was in the late 1990s, the last time China had a surge in bad debts. State-owned banks accounted for almost all lending back then. Since the financial crisis their share has fallen to less than two-thirds. Loosely regulated “shadow banks” make up much of the rest.
That NGDP growth rate is not unreasonable, but China needs to be careful not to allow NGDP growth to slow too rapidly. That could trigger a debt crisis.
A much-needed shift towards consumption-led growth is just getting under way. Investment accounts for 50% of economic output, well beyond what even Japan and South Korea registered in their most intensive growth phases. Without rebalancing, overcapacity in industry would only get more severe, further undermining the return on capital. At last, there are glimmers of hope. Investment growth has halved in recent years but consumption growth has held steady; in future, as China’s growth slows, consumption should contribute a bigger share of it (see chart 3).
. . .
Still more important is a change in economic structure. Services took over from industry a couple of years ago as the biggest part of China’s economy, and the gap has widened. Last year services accounted for 48.2% of output; industry’s share was down to 42.6%. Services are more labour-intensive, which brings two benefits. First, China is now able to generate many more jobs at lower levels of growth. Though growth dipped to its slowest in more than two decades last year, China created 13.2m new urban jobs, an all-time high. Second, the strong jobs market has allowed wages to keep on rising at a steady clip, a prerequisite for getting people to consume more.
Even in Gushi, a county officially classified as impoverished, people throng to clothing stores, beauty parlours and the town’s one foreign restaurant (a KFC). Like many there, Zhang Youling, 43, spent much of his adult life away, going to where the jobs were. He worked as a builder in Beijing, a courier in Shanghai and an ice-cream wholesaler in Zhengzhou before returning to Gushi to be with his wife and two children. For the coming summer, he has set aside 6,000 yuan ($970) to take them to Beijing on holiday. “We used to save everything. These days we have the confidence to spend some of what we earn,” he says.
That last paragraph may not seem surprising to a westerner, but to anyone who spent time in China in the 1990s the idea of a migrant worker family blowing a thousand bucks on a family vacation is utterly mind-boggling. Living standards are rising very fast.
Monetary policy is virtually unrecognisable from five years earlier, when the central bank controlled all key interest rates. Funding costs throughout the economy are now more market-based. Banks compete for deposits with an array of investment products; households place 30% of their savings in bank-account substitutes, up from 5% in 2009. Official deposit rates are still fixed, but regulators have given banks flexibility (currently, a 2.5-3.25% range) and hint at full liberalisation within a year.
The government has also relaxed capital controls. Companies previously needed approval for overseas investments above $100m; late last year the threshold was raised to $1 billion. In recent months, capital outflows have surged. Some say this is because Chinese are losing faith in their country. Regulators are far more sanguine, pointing to it as a sign of a better-balanced economy. The alternative””trapping money in China at artificially low interest rates and encouraging wasteful investment””was bound to be more destructive.
With so many downbeat stories in the media, thank god for the Economist, where you can get some accurate information about China:
China has also disappointed those hoping for bold reforms of sluggish state-owned enterprises, but smaller shifts may help. By injecting assets from unlisted state parents into listed subsidiaries, groups such as Citic will face closer market scrutiny. At the same time, the government is loosening its grip on other important levers. It has simplified the process for registering new companies. Entrepreneurs can now, for instance, use non-cash assets as capital. They created some 3.6m firms last year, up by nearly 50% from 2013.
Reforms are themselves generating new risks. A bull run in the stockmarket over the past six months is beginning to resemble the asset bubbles that often arise when countries plunge into financial liberalisation. But keeping the previous economic system in place would be more dangerous. It would make growth faster in the short term but at the cost of ever more debt, heightening the risk of an eventual crash. Taken together, the policy shifts should smooth China’s transition to slower but more resilient growth.
The transition will take time. For now, investment still accounts for half the economy. In Zhengzhou, a layer of construction dust covers much of the city’s southern half. Along with building a vast new airport terminal, workers are digging tunnels for five new subway lines. Traffic is snarled for hours in the evening as trucks haul pillars into place for elevated highways. The pressing concern for residents stuck in the congestion is not economic collapse but rather the continued headaches of growth, even if it is a little weaker than last year.
Take a look at the traffic jam in this photo, and think about the fact that in the 1990s, or even the early 2000s, essentially nobody in Zhengzhou even owned a car.
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6. May 2015 at 09:03
Wasn’t someone in the comments section of a recent post asking if there was any evidence that lesser regulated economies perform better?
6. May 2015 at 11:37
They are still making a lot of right moves in terms of economic policy, but political liberalization has reversed and environmental policy is nigh catastrophic.
Unless the entrenched elites are willing to give up power, I’m still going to win our bet in 2038.
6. May 2015 at 11:55
Articles like this probably explain a lot of the pessimism:
“Under President Xi, China is rapidly retreating from rights reforms and the Party’s promise to ‘govern the country according to law,'” said Sophie Richardson, China director at Human Rights Watch. “Repression of critics is the worst in a decade, and there appears to be no end in sight.”
Of course I hope I’m wrong — the economic liberation of China is the greatest humanitarian story of the last century, arguably ever, and we should all hope it continues. But as Acemoglu has shown, it’s very hard to build the institutions necessary to carry a nation out of the middle income trap.
6. May 2015 at 12:49
Patrick, They should study China.
TallDave, Sorry to tell you this, but you will lose easily, as China will blow right by Mexico. I don’t expect to be alive in 2038, but you’ll probably lose when I’m still alive. Don’t forget that I beat almost all the so-called experts by predicting that China would soon surpass the US in overall GDP, and they did.
Their environmental policies are not catastrophic. Mao’s policies were catastrophic. Their environmental policies are behind the curve, but rapidly improving. Beijing recently announced they are shutting down all coal-fired power plants near the capital, for instance. Living standards are rapidly improving.
The human rights situation continues to improve, in many, many areas. One exception is free speech. But there are lots of other areas like criminal justice, reproductive rights, gay rights, etc, where human rights are improving.
There are hints of progress against corruption (albeit from a very low level.)
6. May 2015 at 13:36
@Patrick You’re probably thinking of my comment in which I was wondering if there was an easy way to counter (certain liberals I’ve had discussions with) claims’ that the Economic Freedom Indexes are rigged to make it look like the best performing economies are the most free market. IE the fans of the Nordic nations who refuse to believe they offset their poor tax/spending policies with good regulatory policies. As a self described “Libertarian Conservative” I’m fully in agreement that free markets tend to produce faster growth.
6. May 2015 at 13:40
Hm. My HBD leanings lead me to China optimism (e.g., China will converge to Western growth rates at Italian levels before 2070). My understanding of China’s institutions lead to China pessimism (below Mexico by 2038). My look at the empirical evidence of Asian economic growth give me mixed results. Many stories of astonishing growth in Asia turned out to be exaggerated and were dashed in the 1997 crisis. I’m sure Sumner’s China optimism is inherently related to his (largely justified) optimism in the Chinese people -Sumner (if I am not mistaken) has a Chinese wife and half-Chinese daughter and probably knows as well as I do the takeover of New York City’s most selective High Schools by children of poor Chinese. I’ll split the difference and say China’s GDP per capita (PPP) will be above that of Mexico, but will remain below that of Latvia by 2038. China may surpass Mexico in GDP per capita (PPP) within fifteen years.
6. May 2015 at 15:32
The threat to China is from it own central bank—it appears to be becoming Westernized and losing its “revealed preference for growth” as the HK Monetary Authority once put it.
The People’s Bank used to laugh in the face of 5% inflation—now it is undershooting its 3% target.
The China economy is still state-planned but they are better at it than the old Mao days.
6. May 2015 at 19:10
E. Harding,
“Many stories of astonishing growth in Asia turned out to be exaggerated and were dashed in the 1997 crisis.”
I never really understood this claim, except perhaps for Indonesia and Thailand. I recall Krugman saying the Singapore economic miracle was a myth. And yet Singapore is now richer than the US. South Korea and Malaysia have done well since 1997, as have Taiwan and Hong Kong. The Philippines are actually doing BETTER than before 1997. What exactly is the myth?
I agree that China will surpass Mexico by 2030.
Ben, It’s not really state planned anymore, not in reality. It’s quite decentralized. It wasn’t even central planning under Mao, to be honest.
6. May 2015 at 21:27
I think it makes more sense to look at regions than institutions when determining future economic growth. China is an East Asian country, and for whatever reason they don’t fall in to middle income traps. Now compare that to Panama, which looks pretty good institutionally but is probably not going to become a first world country.
6. May 2015 at 21:34
Obviously, institutions can be important. The poverty of North Korea can be entirely explained by their institutions but once a country becomes capitalist then I think looking at regions in a better indicator.
7. May 2015 at 03:27
When you watch something day-by-day it’s hard to see how large the changes are compared to looking, say, once a decade.
They either have figured out how to make central planning work (never before in history so it’s unlikely) or they’ve found a way to devolve power and decision making to localities and to private enterprise. We’ll know that LKY had a whole body transplant into XI when we find XI has exiled if not worse a corrupt family member or two. And the mandarin class execs are paid as well as those in Singapore (so the cost of corruption is just too high both dollars and a measure of stupidity).
Books should be written about the current era where they’ve moved maybe a third of the farmers off the land to the (new and old) cities. Compared to say the U.S. turmoil of early 1900s. With the final third completed by 2050 – maybe 30 years after Korea completes a similar transition. Because the quality of life is inversely proportional to fraction of the population living off the land.
7. May 2015 at 05:15
Jared, I agree.
Ari, It’s not really central planning, which never works. They execute corrupt officials.
7. May 2015 at 12:53
China is putting up new cities. We are taking down our iconic signs because they are in violation of planning codes.
http://www.foxnews.com/politics/2015/05/06/lights-out-nyc-reportedly-under-fed-pressure-to-take-down-times-square/
7. May 2015 at 16:56
@ssumner
“I never really understood this claim, except perhaps for Indonesia and Thailand.”
-You might be right. Malaysia also slowed its growth rate down significantly after 1997 and is well below its 1990-1997 linear trend, though in absolute terms, it’s still as well-off as Chile (which also had a milder, but significant slowdown from 1998 to 2002). So there were three countries in Asia that had decisive growth slowdowns after 1997, as many as got from third world to first within the past sixty years without relying on oil (Hong Kong and Macau are not countries; Malaysia is not first-world).
“China is an East Asian country, and for whatever reason they don’t fall in to middle income traps.”
-We don’t know that. We’ve just never seen it happen as clearly as in Latin America.
8. May 2015 at 06:52
E. Harding, It’s normal for a country’s growth to slow as they get richer. It’s hard to grow at 10%/year as you become more fully developed.
Malaysia’s PPP adjusted GDP is surprisingly high, getting close to developed country levels. The Economist had an estimate of $26,000/person for 2015 (PPP). Nobody grows at 10% at that level.
8. May 2015 at 07:21
@Scott,
Just to amplify to your point. I have a friend who moved to Shanghai in 1979. No private cars. Six taxis in the entire city. Pudong with a dirt crossroad with a few hundred residents.
8. May 2015 at 19:54
I would add two things:
1. Although China has one party system, competition within the party is fierce, This probably guarantees some quality at the leadership levels.
2. China is catching up in economic terms, despite enormous growth, its GDP per capita is still below Brazil’s, we are both medium income countries. China is moving on very fast, while Brazil is stagnated, nonetheless, from now on it will be interesting to see how China goes, because now starts the real challenge: how to become a high income country and keep imbalances in check, if not by market forces …
9. May 2015 at 07:02
dtoh, The Shanghai 1990/2010 picture on the internet is revealing.
Jose, I agree.
6. December 2015 at 22:59
The Economist does not understand MMT-based Shimomuran economics, which is the macroeconomics practised in the Tokyo ConsensusZone, so as usual none of their comments are insightful or valid. See http://www.lulu.com/shop/http://www.lulu.com/shop/george-tait-edwards/shimomuran-economics-and-the-rise-of-the-tokyo-consensus/paperback/product-22379793.html