Duncan’s Economic Blog

China to save the world?

Posted in Uncategorized by duncanseconomicblog on May 15, 2009

Socialist Economic Bulletin is an excellent website with the kind of in depth analysis that blogs often lack.

The recent post on the link between saving, investment and growth correctly points out the long term links between current investment and future growth.

I do worry though that the latest post goes to far in it’s praise of China’s macro-strategy.

The high savings, high investment, export led model has certainly served China well over the past decade. Although it has also helped to lay he groundwork for the financial crisis through the build up of global imbalances (between spending and saving). Equally whilst an economy cannot survive on consumption and borrowing alone, nor can it survive on saving and exporting – what happens when the custoers run out of money? In some ways China is just as unbalanced as the UK.

Investment is now something like 45% of GDP. A huge figure.

The article on SEB argues that:

The argument that has appeared in sections of the foreign language media that China should not increase investment because this will increase ‘overcapacity’ is entirely fallacious theoretically. A high level of investment does not consist in creating more production capacity of the same type at the same levels of technology, efficiency, or productivity – the proposal that China should create more low value added production capacity is evidently false. The issue is high investment to upgrade China’s economy technologically and in terms of productivity and efficiency. Moreover, factually, China is at the beginning of this upgrading of its investment capacity. Capital stock per US worker or per West European worker is very much higher than per Chinese employee. To overcome this lag requires that the investment stock per Chinese worker rise more rapidly than in the US or Europe for a prolonged period.

I am afraid I disagree. It is incredibly hard to find out exactly what China is investing in – and maybe they are ‘moving up the value chain’ and investing in technology. That would be fine. I fear they are not.

I concur with Willem Buiter over at the FT:

Although it is hard to understand the exact size of the fiscal stimulus it has provided, there is no doubt that this stimulus was large. Interest rates have been cut. Credit growth, including bank lending to state enterprises and to construction has exploded. The problem with this approach is that the composition of the demand stimulus and production boost is completely wrong. The government has simply done more of whatever it was doing in the past: increased investment in the production of exportable goods and heavy industry (metals and chemicals), increased production of semi-finished manufactured goods and increased investment in infrastructure. The inevitable result of this investment boom will be increased excess capacity in exportables and unprecedented environmental destruction.

China is missing a huge opportunity. Its short-run imperative (boost demand through a fiscal stimulus) coincide with its long-run imperative (reduce the national saving rate and the external current account surplus). This stands in sharp contrast to the US and the UK, where the short-run imperative (boost demand through a fiscal stimulus) conflicts 180 degrees with its long-run imperative (save more and reduce the external current account deficit). China saves too much in the household sector, the corporate sector (especially the state enterprises) and the public sector. It badly needs an unfunded pay-as-you go social security retirement scheme to boost consumption by the old. China’s fiscal position is such that the country could introduce the benefit (pension) part of the social security scheme for a number of years without having the social security tax in place!

If China adds capacity to exports (for which there is little demand at present) it wil simply make the sitaution worse. Although its own GDP will be boosted in the short term (as investment rises), adding further supply to a depressed global arketwill only drive down prices further.

SEB are right to note the long term link between investment and growth, but incorrect I fear to assume all investment is therefore good.

Building an office block counts as investment. It’s not still always the right thing to do:

6 Responses

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  1. […] China to save the world? « Duncan's Economic Blog […]

  2. Mr. Mxyzptlk said, on May 15, 2009 at 8:03 pm

    I did read the Socialist Economic Bulletin and now me head hurts!

  3. charliemarks said, on May 16, 2009 at 6:26 pm

    My guess is that they will focus on developing domestic markets to make up for the fall in demand for exports. I can’t help thinking that the decision to opt for a NHS style model for universal healthcare in the next few years was in part motivated by the need for consumer spending to replace overseas demand for goods and services.

    And we would be foolish to see China as a typical market economy – state-owned and cooperative enterprise is more prevalent and domestic capitalists are largely integrated into the Party, so levels of investment can be maintained rather than the panicky disinvestment which has been taking place here in the UK. So although the export zones are significantly quieter, with plants shut down and workers made redundant, this has not rippled into the rest of China’s economy through mass layoffs elsewhere.

  4. duncanseconomicblog said, on May 17, 2009 at 3:39 pm

    Charlie,

    I hope you’re right and they decide to focus on domestic demand – and save a bit less.

    I agree entirely on the second point. People pont to the surge in bank lending as a sign of optimism – but it’s a command economy with state owned banks, so tey can simply be ordered to lend.

    My point is not all ‘investment’ is equal. Building huge office towers in th middle of nowhere is ‘investment’. But the money could be better spent.

  5. charliemarks said, on May 17, 2009 at 9:22 pm

    It’s rather a shame that our mostly state-owned banks aren’t also being ordered to lend…

    Though such office towers might not represent a perfect investment, the workers employed will be spending their wages on goods and services – so there’s a multiplier effect.

    Our side of this will have to be to sustain and increase domestic production for both export and domestic markets – and save more!

  6. charliemarks said, on May 19, 2009 at 10:44 pm

    Oh look:

    “China is to expand a programme which subsidises the purchase of new cars and home appliances as it tries to stimulate its slowing economy.

    “The scheme was already on offer to rural areas, but is now being rolled out to cities and wealthier regions.

    “Beijing hopes to boost demand for goods made by Chinese firms while encouraging more energy efficient, less polluting, vehicles and appliances

    “Residents of Beijing, Shanghai and some coastal regions may benefit.

    “The plans came a day after the government outlined plans to revitalise and restructure its light industries sector and petrol refining industry – measures that are expected to create about 3 million jobs.” [http://news.bbc.co.uk/1/hi/business/8057544.stm]


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