Kasandras Beware - China's Economy Will Not Hit A Wall

 

moon of  alabama

The economist and columnist of the New York Times Paul Krugman wrote about China hitting the wall:

China is in big trouble. We’re not talking about some minor setback along the way, but something more fundamental. The country’s whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be.
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Wages are rising; finally, ordinary Chinese are starting to share in the fruits of growth. But it also means that the Chinese economy is suddenly faced with the need for drastic “rebalancing” — the jargon phrase of the moment. Investment is now running into sharply diminishing returns and is going to drop drastically no matter what the government does; consumer spending must rise dramatically to take its place. The question is whether this can happen fast enough to avoid a nasty slump.

That was written in 2013 when China's GDP at purchase power parity reached $16.3 trillion. The number has since more than doubled to a projected $33 trillion in 2023. (In the same time span U.S. GDP(ppp) grew from $17 to $26 trillion.) But that hasn't influenced Krugman's conclusions. Two week ago he wrote another column that paints the same gloomy picture and prescribes the same false medicine:

Since the late 2000s, however, China seems to have lost a lot of its dynamism.
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... China clearly can’t sustain anything like the high growth rates of the past.
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At a fundamental level, China is suffering from the paradox of thrift, which says that an economy can suffer if consumers try to save too much. If businesses aren’t willing to borrow and then invest all the money consumers are trying to save, the result is an economic downturn. Such a downturn may well reduce the amount businesses are willing to invest, so an attempt to save more can actually reduce investment.
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The obvious answer is to boost consumer spending. Get state-owned enterprises to share more of their profits with workers. Strengthen the safety net. And in the short run, the government could just give people money — sending out checks, the way America has done.

How is giving checks (btw: no Chinese or European citizen uses those antique instruments) to people who are saving instead of consuming supposed to increase their consumption? I would presume that it would rather increase their savings. Giving more income to people who like to save to increase consumption is like pushing on a string.

David Fishman, an economist who lives in China and speaks Mandarin, had an interesting chat with a taxi driver. He concludes:

1. Even after buying a property, long-term considerations still drive Yang to save money, most prominently his daughter and parents.
2. Yang and his wife give up consumption in pursuit of their long-term goals, even working an extra job, to put away extra cash for those goals.
3. He associates loose/free consumption habits with youth and a lack of responsibility. His consumption today is strategic and intentional.
4. He is unperturbed by the prospect of real estate losing value, since he bought his house to live in, and doesn't intend to resell it.

Now, macro econ punditry is *not* my lane.

But if I hear a pundit talking about Chinese consumers, and how they will/won't behave in response to some government policy, I will always wonder what their mental model of this generic Chinese consumer's behavior looks like.

To be credible, that consumer behavior model should probably look like Yang, willing to work an extra job & skip consumption, not out of today's financial necessity, but in preparation of being a good filial son, and so his 3-year old daughter can take dance lessons someday.

And that is Krugman's problem with diagnosing China's economy. People work hard in China. And they like to save instead of consuming all their income. They retire pretty early but live long (though that retirement age is likely to rise). So having a bit of money on the side will make for a nicer living in later years:

The official retirement age for men is 60. Women in managerial positions have a retirement age of 55, while blue-collar female workers can retire at 50.

Chinese people are simply not Americans. But Krugman's economic models presume that they are and he isn't willing or capable of looking beyond those.

Still he was onto something when he opened his column with this:

The narrative about China has changed with stunning speed, from unstoppable juggernaut to pitiful, helpless giant.

It is indeed a fact that the narrative about China's economy has changed way more than China's economic numbers. But Krugman fails to ask why.

Some argue that this narrative change serves investment interests:

First, the most salient preoccupations of Western commentators reflect the skewed distribution of foreign-owned capital within the Chinese economy.
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The second feature relates to the financial industry’s reliance on the art of political-economic storytelling to sell investment options.

But it is probably more a political instrument to support the general U.S. war against China.

Newsweek recently published a rather laughable story which asked if Shanghai (25 million permanent inhabitants) had turned into a 'ghost town'.

The Global Times editors see political motives behind such 'bad China' narratives:

If only Newsweek is doing this, then it is an isolated case, indicating the media outlet's problematic professional ethics and the negative impact it caused is not significant. However, starting from March or April this year, not only Newsweek but also other US and Western media outlets have been selectively using some specific data from a certain point or in a certain field to generalize, and even fabricate information to undermine, the Chinese economy. This is a coordinated and large-scale campaign, with consistent steps, intense actions, and extensive content, which is rare in recent years. Can we say that this is a coincidence?

The 'bad China' narrative is an economic phenomenon but is used for political reasons:

In the field of economics, there is a term called narrative economics, which uses storytelling to influence judgments, even at the cost of creating false information, to undermine the morale and confidence of the target and attempt to deter foreign investment, thereby having a substantial impact on the economy. The US has openly regarded China as its biggest competitor and even treats China as an imaginary enemy in many practical aspects. We cannot expect it to engage in fair competition with China. In order to win this "competition" initiated by itself, the US often resorts to any possible means. This perspective can explain the phenomenon in which the US is badmouthing the Chinese economy in a collective manner and can also roughly predict the US' future actions toward China, indicating that it aligns with the basic facts.

The problem the Gloom and Doom in China narratives have is that they are propaganda. Propaganda does not change reality. It falls apart when confronted with facts.

War propaganda falls apart when a war is lost. Economic propaganda falls apart when the new numbers come in. Krugman's doom and gloom propaganda from 2013 was defeated by China's growth. His 2023 propaganda is likely to have the same fate.

Posted by b on September 12, 2023 at 16:39 UTC | Permalink

https://www.moonofalabama.org/2023/09/kasandras-beware-china-will-not-hit-the-wall.html