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If I believed in Austro-Chinese business cycle theory
Most of China's growth this year has been unsustainable, driven by stimulus. China's money supply has risen 29% in the past year. At the government's behest, banks have increased their lending by nearly $1.4 trillion, or 32%, during that time.
That flood of borrowed cash has been channeled into new infrastructure and production capacity. These investments will account for up to half of China's gross domestic product this year, according to some estimates.
A key question is whether China needs all of this investment. Analysts at the London hedge fund Pivot Capital Management say that China already has enough idle steel-production capacity, for example, to match the steel output of Japan and South Korea combined.
Meanwhile, the ratio of investment to GDP is rising, suggesting China's investment is less and less efficient, says Edward Chancellor at Boston asset-management firm GMO.
The combination of soaring investment and dwindling returns was seen in Japan in its asset bubbles in the 1980s and in the "Asian Tigers" just before their crises in the late 1990s, he says.
The link is here. Does anyone know how to say "excess capacity" in Chinese? Even more importantly, can you get it past the typepad spam blocker?
Posted by Tyler Cowen on November 10, 2009 at 09:17 AM in Economics | Permalink
Comments
Well, I tried, but it seems 4 characters in Chinese set off the filter. So, in pinyin (with tones) guo4yu2rong2liang4 would get the idea across fine, though I imagine there's a different technical term.
Posted by: christopher at Nov 10, 2009 10:12:47 AM
I think you have pointed out some good ideas on Chinese excess capacity. However, China is a developing country and most of its gross domestic product comes from exporting goods and services which are based on massive production. Since China has a large labor force and the production cost per unit is low, therefore, it causes excessive capacity. For example, steel is one of the most productive goods in China. The reason the Chinese does that is because China has very cheap labors and rich raw materials of steel, which it will cost less to produce steels.
By the way, "超额生产能力" is the translated version of "excess capacity" in Chinese. I hope it helps.
Posted by: Steven W. at Nov 10, 2009 10:24:06 AM
Judging from the successful prediction of your previous "If I believed in austrian theory post" then we should see a bubble burst in 10... 9... (continues countdown)
Posted by: Doc Merlin at Nov 10, 2009 10:46:44 AM
Just to note: Steven's phrase is better than mine (more specific to industrial production).
Posted by: christopher at Nov 10, 2009 11:03:16 AM
Most of China's growth this year has been unsustainable
Good lord, what an empty statement. NOTHING is sustainable - anything extrapolated out in a straight line will eventually hit a constraint. What amazes me is that these Wall Street types are still able to put out "two points (or less) and a ruler" projections and have anybody pay attentiopn to them.
Posted by: bartman at Nov 10, 2009 11:08:34 AM
Bottom line: do you believe that central planning works? All of the data and anecdote out of China suggest loan officers forced, by their bosses (the govt), to lend. Are these loans likely to find their way to profitable, efficiency-enhancing projects? Do price signals really work in an economy that has the degree of central planning that China has?
Posted by: Sunset Shazz at Nov 10, 2009 11:33:51 AM
Is the WSJ complaining because at least one government in the world has succeeded in expanding lending drastically? Or because the Chinese stimulus has taken the form of a successful expension of money supply? Or simply confirming that they do not understand China ?
The ratio of China's investment to total GDP does appear to be rising despite their governments wish to expand consumption. However, how much of that rise would be scored as invetment in other countries? At the detailed level, the Chinese system has in the past prioritised invetment over consumption; and the incentive that creates in the bureaucracy has proably lead to reporting more investment and less consumption than would be reported where reported economic indicators in an official's area of respnsibility is not a prime determinant of career progress. Adjusting statistical practice to the new political priorities will take time.
Posted by: David Heigham at Nov 10, 2009 11:45:05 AM
Actually, what the WSJ article left out is the amount of foreign direct investment that continues to come into China. How do you explain that? That's not Chinese central planning, unless you want to argue that US multinationals are part of a communist cabal.
Now, what this might argue is that we have some deflation ahead of us, with growing world manufacturing capacity. So much for fears of quantatitive easing.
Posted by: Bill at Nov 10, 2009 12:22:17 PM
"Excess capacity," huh? When China finally decouples from the US and their currency appreciates, their Chinese consumer will become their primary consumer for Chinese products. I think you can definitely make the argument that China will face economic problems in the future as their central planning efforts backfire, but ultimately their ability to produce and their ability to consume may make whatever hardships they experience occur less frequently and be over with quickly.
Posted by: Stephen M at Nov 10, 2009 12:55:50 PM
One aside is that nearly every person I know in China - who are mostly in the entrepreneurial and managerial class - has some sort of "escape hatch" strategy in place in case the poop hits the fan. Popular landing spots are Australia, New Zealand, Canada, and to a lesser extent the US. Interestingly, Singapore and HK are not popular with this crowd.
They aren't the sort of super-rich who have pieds-a-terre in random places; they're basically fairly "ordinary" upper-class professionals or small biz types.
They all want to stay in China if they can, but don't completely trust things there.
Posted by: Foobarista at Nov 10, 2009 1:00:18 PM
@Foobarista Why would anyone go to Hong Kong to escape a meltdown in mainland China? It's not owned by the British any more, you know.
Posted by: david at Nov 10, 2009 1:16:34 PM
Let's see, the US economy starts building sustainable energy capital either because the Congress passes a comprehensive energy bill or the EPA and Energy regulations kick in and demand increases for steel, copper, aluminuum for the power lines and wind generator towers and solar power mirrors which China will readily supply.
Meanwhile, the US metals refiners are tuned to high efficiency with capacity reduced to match demand bolstered by filing dumping charges against China.
Meanwhile, China's new metals refineries are being built into a depressed price market, so the technology used is the most efficient.
And China does invest in the best technology; China's electricity generation infrastructure is significantly more efficient than that of the US, and also capable of significantly lower pollution, tho the pollution equipment is bypassed or disabled because basically they have no incentive to pollute less than the US. While the idea of the electric generation deregulation was new firms would build new coal plants that were more efficient to compete with the then very old coal plants in the Ohio valley which needed to be retrofitted to meet clean air regulations, the old plants used politic influence to not meet EPA standards by replacing the parts of the plants as they failed, without totally replacing them with the best, most efficient technology. With small cogen plants costing less and delivering electricity at competitive prices, the US has built few new coal plants so the US coal plants become less and less efficient in comparison to China which is constantly building new plants of the best technology.
Of course, in the US, throwing away perfectly good computers just to go to the next generation has been seen as the most virtuous thing to do, and good for business. And really, how many computers have you junked that were perfectly good for what you did, but the hassle of a software upgrade or getting one bad part replaced made throwing the thing in a closet or away easy to justify? The new computer was really excess capacity, but the existing capacity was junked, not immediately, but after keeping it around got too painful.
Posted by: mulp at Nov 10, 2009 1:30:24 PM
We should tell the Chinese how to stimulate their economy as we did ours: cut taxes on the wealthy and let it all trickle down; run bigger deficits to finance these tax cuts; give tax credits to persons with high incomes to upgrade to newer homes (sponsored by the Republican Senator of Georgia); and spend more on the military, our most productive national asset. Perhaps we can get them to support agricultural subsidies not to grow food. That'll get them going in the right direction.
Posted by: Bill at Nov 10, 2009 2:26:39 PM
It's accelerating in neutral. Once they get around to placing it in gear, applying a real load, the story will be quite different.
Posted by: kevinearick at Nov 10, 2009 9:04:46 PM
It's accelerating in neutral. Once they get around to placing it in gear, applying a real load, the story will be quite different.
Posted by: kevinearick at Nov 10, 2009 9:05:10 PM
It's accelerating in neutral. Once they get around to placing it in gear, applying a real load, the story will be quite different.
Posted by: kevinearick at Nov 10, 2009 9:05:40 PM
Is it not true, by what we can learn from statistics that the "New Economy" of China, which is what all refer to, touches no more than 20% of the population, and of that 20% a further limited percent actually advance economically.
If so, there is a broad range of "rural" poverty and limited "development" to absorb any excesses of fiscal errors.
Posted by: R. Richard Schweitzer at Nov 10, 2009 11:44:32 PM
This is all largely true as per Michael Pettis and Pivot. China is very big in a few industries it has no natural advantages in - like aluminum. Aluminum's costs are basically 50% power plus some labor and alumina, alumina's costs are largely driven by the quality of the bauxite. China does not have cheap power, nor does it have good bauxite deposits. Steel is a similar story: China imports most of its iron and doesn't have cheap power.
One seriously has to wonder how long China can prop up a very inefficient state owned sector which is heavy industry + banks without taking down the financial system. The idea that China is low cost in everything is absurd as per comparative advantage and factually incorrect with regards to its natural resource allocation.
Posted by: Nemo Incognito at Nov 11, 2009 2:02:23 AM
The correct term is 产能过剩.
Posted by: excessive capacity at Nov 11, 2009 2:06:12 AM
See this is why we rule China: our central bank is independent. This is so important that Ben Bernanke has met with scores of Congressmen to preserve this competitive advantage.
http://www.nytimes.com/2009/11/11/business/11fed.html
Posted by: Andrew at Nov 11, 2009 10:14:54 AM
I agree. It's all a bit risky and eventually it's going to catch up with them over there. Still with such a population advantage they will dominate eventually.
http://ravingsoftom.blogspot.com/2009/11/chinas-command-economy-resource.html
Posted by: Thomas Gal at Nov 12, 2009 2:20:19 AM
http://www.youtube.com/watch?v=0h7V3Twb-Qk&feature=player_embedded
Fast forward to 1:20. Certainly, fiscal spending boosts measured GDP (a measure of activity), by definition. But does this inure to the benefit of its people? Is the return on these investments sufficient?
Posted by: Sunset Shazz at Nov 13, 2009 10:21:55 AM
This is not as simple as it looks. Clearly the Chinese government is trying its best to plan the economy. And if one goes to a Chinese book store or university s/he is much more likely to be exposed to Keynes than Mises or Hayek. That suggests a problem in China's future.
But China is also in need of development in housing, transportation infrastructure, sewers, water pipes, electricity generation, etc. That requires a massive investment just as the one that we saw in the 1950s in the US, when America, with a tiny percentage of the global population, was using up about half the world's supply of cement. And while many will point to the ghost developments popping up all over the country they fail to visit previous ghost developments. I saw such building activities more than a decade ago and thought them to be massive errors. But today those buildings and roads serve the inhabitants of those developments well and proved to be very needed, even if they were not profitable for the developers that created them at the time. Given the huge number of people in the countryside looking to move to urban areas it is clear that China will need much more, not less housing development and associated infrastructure and services.
Then there is the belief that Chinese businessmen dance to the tune played by the government. The reality says otherwise. While the central government is the driver behind most of the large operations, smaller and medium sized businesses tend to look to profit and local factors rather than federal political goals as their guide.
I do not mean to suggest that central planning and stupid political moves will not harm China's economy. It is obvious that the CP can do damage just as the Democrats and Republicans have in the US. I am only making the argument that the Chinese economy a dynamic non-linear system that is harder to analyse than Tyler and others suggest. For my part I continue to invest capital in Chinese mining operations that have proven to be quite profitable over the years. While it is possible that some of them will suffer greatly during the inevitable corrections one needs to take some risks when pursuing investment gains.
Posted by: VangelV at Nov 17, 2009 10:42:40 AM
