Last Hope for the Chinese Economy: Consumption
Last year, consumption fell to 33.8 % of gross domestic product, and no country had a lower percentage. There is clearly room for domestic spending to play a much larger role in China’s economy.
In fact, for more than a half decade, Chinese leaders have been talking about the need to rebalance their economy toward consumption, and they have taken steps to do so. They created, for instance, subsidies to consumers to buy appliances and cars. Yet, as we have seen in other countries, sales of these items quickly dropped once Beijing ended the incentive payments.
The targeted subsidies, although steps in the right direction, have been ineffective in reorienting the economy because Chinese leaders, in the three-decade “reform era,” have maintained an export—in other words, anti-consumption—growth model. And when the global economy faltered in 2008, they turned to government spending to make up for the fall in exports. As a result, the Chinese economy became, in the memorable words of Premier Wen Jiabao, even more “unstable, unbalanced, uncoordinated, and unsustainable.”
The failure of China’s leaders to make structural changes in the prosperous period of a half decade ago indicates they are not going to take bold steps to increase consumption now when the economy is sliding precipitously. To increase consumption, they would have to change their growth model by, for instance, letting the renminbi float, permitting banks to compete for deposits by offering market interest rates—which means charging market rates to state enterprises—allowing labor to organize and demand higher wages, and providing a substantially stronger social safety net.
With the possible exception of the last item, they are not prepared to do any of these things. Low consumption, unfortunately, is the inevitable result of China’s growth model, not merely a remediable feature of it. Therefore, no one should have been surprised last month when Vice Premier Wang Qishan suggested to American trade officials that his government was going to further skew the economy to avoid a “balanced recession.”
In the current downturn, the prospects for consumption are not particularly good. There are three things to follow closely. First, consumption’s role in the economy declined even though real wages increased in China 12.5% a year for a decade, so we have to wonder what will happen when employers begin to cut workers in the face of sagging domestic and external demand and flagging productivity.
Second, after an extraordinary nationwide real estate boom, about half of China’s household wealth is represented by property. Yet prices began to soften in September, collapsed in October, and maintained downward momentum last month. Whether or not there will be a crisis in confidence, the rapid decline of real estate values will inevitable create a negative wealth effect, undermining consumption.
Read the rest here: http://www.forbes.com/sites/gordonchang ... nsumption/
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China to prepare for social unrest
Beijing has underlined its concern that an economic slowdown could lead to social unrest in China, with the country’s security chief urging local officials to do more to prepare for the “negative effects of the market economy”.
Zhou Yongkang, a member of the politburo, told provincial officials that they needed to find better methods of “social management” – a euphemism which can include everything from better internet censorship and strategic policing of violent unrest, to a better social safety net.
“It is an urgent task for us to think how to establish a social management system with Chinese characteristics to suit our socialist market economy,” he told a seminar on “social management innovation”.
“Especially when facing the negative effects of the market economy, we still have not formed a complete mechanism for social management,” he said. Mr Zhou also urged officials to limit spending on wasteful “vanity” projects that trigger public anger.
His comments are the clearest sign yet that Beijing is worried that the global economic crisis could lead to serious domestic social unrest. Mr Zhou’s remarks, published by the state-run Xinhua news agency on Saturday, came at the end of a week which saw evidence of a slowdown in Chinese manufacturing, an easing in credit policy to avert a sharper slowdown, and two outbreaks of violence.
Recent months have seen a rise in unrest – apparently linked to economic grievances, including workers’ fears about the economic dislocation caused by Beijing’s long-term plan to move away from low-value manufacturing to more creative and innovative industries.
Read the rest here: http://www.ft.com/intl/cms/s/0/61673902 ... z1fcm5d74E
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China's Hard Landing
The state-led growth model is leading the country into trouble.
China is a poster child for the Austrian school of economics' theory of the business cycle. After undertaking the biggest stimulus program the world has ever seen in response to the global financial crisis, the country is drowning in unproductive investments financed with credit.
The government spent 15% of GDP largely on public works projects in inland regions, financed with loans from the state-owned banks. Investment as a share of GDP soared to 48.5% in 2010, and the M2 measure of money supply ballooned to 140% that of the U.S.
Now comes the hangover. The public works projects are winding down, unleashing a wave of unemployment and an uptick in social unrest. The banks' nonperforming loans are rising, and local governments are insolvent. The country is littered with luxurious county government offices, ghost cities of empty apartment blocks, unsafe high-speed rail lines and crumbling highways to nowhere.
One effect of negative real interest rates was a nationwide bubble in private housing, with the average price of an urban apartment reaching eight times the average annual income. Real estate is the most popular investment for the wealthy, according to a central bank survey in September. Millions of luxury apartments are vacant, even as there is a shortage of affordable housing for the poor.
Property construction became "the most important sector in the universe," in the words of UBS economist Jonathan Anderson. It directly accounts for about 13% of the economy, 20% if one includes related industries like concrete and steel. It also provided 40% of local government revenues through land sales.
Worsening inflation forced the government to put on the brakes this year. As with most property busts, transactions dried up, followed by a free fall in prices. Land prices were down 60% year on year in September. Property developers are slashing prices of new homes to stave off bankruptcy.
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There is no easy way to avoid the bust that is coming. The silver lining is that China's increasingly state-led growth model will be discredited, and a debate will begin on restarting the reforms that stalled in the mid-2000s. A financial sector that allocates credit based on politics rather than price signals led China into this mess. Popular pressure to dismantle crony capitalism is building, and the Communist Party would be wise to get in front of it while it can.
Read the rest here: http://online.wsj.com/article/SB1000142 ... logsModule
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China is already halfway to their economic apocalypse in my opinion.
Economic collapse with Chinese characteristics = a return to cannibalism???
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) who have too many apartments, and consolidate its power even further.
