Richard McGregor of the Financial Times has an interesting piece on China’s macroeconomic situation. Brad Setser of Roubini Global Economics dissected the piece thoroughly here from an economic perspective.
The time-worn analogy of turning around a supertanker is often used to illustrate the government’s policy task. It might be more accurate to liken the Chinese economy to a flotilla of large and small boats, all steaming ahead at full bore, with little regard to the direction of the fleet or the diktats of its commanding officers in Beijing.
The flotilla analogy is appropriate on many levels. Chinese political economy has many different pieces. Some sectors or industries or localities are more nimble than others. These ships could turn on a dime to avoid trouble or to take advantage of a shift of the wind. Some are more efficient than others. These ships are not burdened by massive debts or old factories. The ships come in all shapes and sizes. While trying to turn some ships around, collisions seem inevitable.
Ok, enough indefinites. The generally-accepted basic strategy of Chinese development has been export promotion based on controlling the value of the yuan, with the idea that these export industries would absorb workers. One interesting graph that the McGregor piece includes from the IMF calls this story into question.
For all of China’s economic growth, this graph makes one believe that it has not been that successful in creating jobs. In fact, I think that the graph is at least partially accurate but overstates its case. Two responses are necessary to temper the impact of this bit of data. First, it almost certainly underestimates service sector employment and probably agricultural workers in factories to the tune of tens of millions. Second, the baseline employment level in 1982 almost certainly included nearly every urban resident of appropriate age and how it counted agricultural workers is unclear. That being said, the set of economic policies that the government has put into place has created an environment where the industrial sector is overly capital-intensive. China the garment and toy factory of the world makes sense given the economic situation, but China the major steel producer is slightly off.*
China has successfully developed thus far and has moved hundreds of millions out of poverty. A key component of this strategy is the undervalued yuan and a low interest rate. The low interest rate (temporarily) keeps losses down on the Treasury Bills that the People’s Bank of China (PBoC) uses to control the exchange rate. Unfortunately, the low interest rate leads to an investment rather than consumption based economy, as well as contributing to the bubble-fest in the real estate and stock markets.
In the end, the main point of the piece is that it is going to take some significant – if not necessarily drastic – actions to shift the course of the fleet that is the Chinese economy. Trying to avoid collisions and getting all of the different pieces to listen to the admiral’s orders is not simple.
For more than three years, Beijing has shouted from the rooftops that its economy is out of balance: too reliant on exports and investment for growth, with a dangerously high share of output from energy-intensive, polluting heavy industries.
But the plethora of policies rolled out to rebalance the economy has had little, if any, impact, partly because of their timidity and partly because the system is not responsive. Exports are still outpacing imports. Investment dominates at the expense of consumption. And heavy industry is still expanding, ensuring Beijing’s targets for increased energy efficiency have not been met.
But with a low to negligible cost of capital, weakening central control and intense competition to grow between every locality in the country, Beijing’s policymakers are finding that the present model has no off switch.
Stephen Green, of Standard Chartered bank in Shanghai, says today’s excess liquidity is the result of a host of policies rolled out over two decades and that “there is indeed no easy way of reversing them”.
“In this regard, China has become the victim of its own success,” he says. “Unpicking the mass of decisions and entrenched interests involved in this growth model is a huge undertaking. Beijing has to change the model over time and somehow learn to cope with the liquidity, and not just this year but in 2008 and 2009 as well, since we see the trade surplus just getting bigger.”
The Chinese economy is unbalanced. So far, the policy measures that Beijing has used to try to return to proper alignment have been marginally successful at best. Stronger steps are necessary to right the ship of state before it is too late.
* On the other hand, China is a major consumer of steel and since steel is pretty heavy and difficult to transport, it might make sense for steel production to occur relatively close to consumption.