Is the Chinese Economy in Trouble ?

 

By Paul Krugman

These are scary times in America, with one of our major parties careening into authoritarianism and the other having difficulty moving forward thanks to two uncooperative senators. Most of what I write, inevitably, focuses on the troubled prospects for our republic. But everyone needs a break. So today I want to talk about a happier topic: The risks of an economic crisis in China.

OK, not exactly happier. But a change in subject, anyway.

Warnings about the Chinese economy aren’t new — but until now the worriers, myself included, have been consistently wrong. Back in 2013 I suggested that China’s growth model was becoming unsustainable, and that its economy might be about to hit a Great Wall; obviously that didn’t happen.

Yet the more closely you look at how China has been able to keep its economy going, the more problematic it looks. Basically, China has masked underlying imbalances by creating an immense housing bubble. And it’s hard to see how this ends well.

The background: The reforms introduced by Deng Xiaoping at the end of the 1970s created an economic miracle. China, which was desperately poor, is now a middle-income nation, and given its size, that makes it an economic superpower. But China’s economic growth has been gradually slowing. Here’s a five-year moving average of the country’s growth rate:

A slowing miracle.University of Groningen

There’s nothing mysterious about this slowdown. China was able to achieve incredibly rapid growth through a combination of technological borrowing from more advanced nations and a huge transfer of population from rural areas to cities. As its technological sophistication grew and the reservoir of rural labor shrank, growth was bound to slow. In addition, the one-child policy gave China the kind of demography we usually associate with richer countries: The working-age population peaked a few years ago and is now shrinking:

The legacy of the one-child policy.FRED

In and of themselves, slower growth and a demographic transition needn’t imply a crisis. But here’s the problem: Chinese spending patterns haven’t adjusted to the needs of a slower-growth economy. In particular, the country still has a very high savings rate, so to maintain full employment it needs to invest an incredibly high share of G.D.P. — more than 40 percent.

What drives investment? Normally, it depends a lot on how fast the economy is growing: growth is what creates a demand for new factories, office buildings, shopping malls and so on. So very high investment as a share of G.D.P. is sustainable if the economy is growing at 9 or 10 percent a year. If growth drops to 3 or 4 percent, however, the returns on investment drop. That’s why China really needs to change its economic mix — to save less and consume more.

But Chinese savings have stayed stubbornly high — and yes, excessive saving is an economic problem.

A few years ago a study from the International Monetary Fund tried to explain high Chinese savings. It suggested that the biggest culprit was the same demographic transition that is one cause of slowing growth: A declining birthrate means that Chinese adults can’t expect their children to support them later in life, so they save a lot to prepare for retirement. This demographic factor is reinforced by the weakness of China’s social safety net: People can’t count on the government to support them in their later years or to pay for health care, so they feel the need to accumulate assets as a precaution.

Chinese policymakers know all this, but somehow haven’t been able to deal with these underlying issues. Instead, they’ve kept the rate of investment very high despite slowing growth — mainly by encouraging huge spending on housing construction. A 2020 paper by Kenneth Rogoff and Yuanchen Yang shows that Chinese investment in real estate now greatly exceeds U.S. levels at the height of the 2000s housing bubble, both in dollar terms and as a share of G.D.P.:

Now that’s a housing bubble.Kenneth Rogoff and Yuanchen Yang

Rogoff and Yang also show both that housing prices in China are extremely high relative to incomes and that the real estate sector has become an incredibly large share of China’s economy.

None of this looks sustainable, which is why many observers worry that the debt problems of the giant property developer Evergrande are just the leading edge of a broader economic crisis.

I’ve already pointed out that until now China has been able to defy the doomsayers. So you might be tempted to give Chinese policymakers the benefit of the doubt, and assume that they’ll manage to deal with this situation. It turns out, however, that they haven’t really been dealing with their economy’s underlying problems, they’ve been masking those problems by creating a housing bubble that will ultimately magnify the problem.

But why should the rest of the world care? China, which maintains controls on the flow of capital into and out of the country, isn’t deeply integrated with world financial markets. So the fall of Evergrande isn’t likely to provoke a global financial crisis in the same way that the fall of Lehman Brothers did in 2008. A Chinese slowdown would have some economic spillover via reduced Chinese demand, especially for raw materials. But in purely economic terms, the global economic risks from China’s problems don’t look all that large.

China does, however, have an autocratic government — the kind of government that in other times and places has tended to respond to internal problems by looking for an external enemy. And China is also a superpower. It’s not hard to tell scary stories about where all this might lead.

And with that, I return you to your regular worries about what’s going on in the United States.

Roots of the U.S.-China Trade Dispute

Roots of the U.S.-China Trade Conflict

https://portside.org/2019-09-05/roots-us-china-trade-conflict

Author: David Kotz

Date of source: September 1, 2019

Democratic Left (Democratic Socialists of America)

The most anti-worker president in recent memory slaps big tariffs on products made in China — in the name of protecting the jobs of American workers. Corporate lobbyists criticize the tariffs — but say we must get tough on China’s trade policies. Some Democratic senators warn Trump not to back down in trade negotiations with China.

What can socialists make of all this? To answer this question, let’s examine the background of the trade conflict and the reasons why it broke out recently.

China Rises

Beginning in 1978, the ruling Communist Party in China made a radical turn, called the “reform and opening.” Central planning was gradually replaced by a market economy. The previously closed economy was opened to trade with the capitalist countries. Privately owned companies came to predominate. However, a core of large state-owned enterprises remains, and the government actively regulates the economy. China’s economic system today bears some resemblance to the heavily state-regulated capitalist economies of Western Europe in the post-Second World War decades, although paired with a different political and social system ruled by the Communist Party.

When China started down this road, the U.S. government was enthusiastic and supportive. U.S. big business saw big profit opportunities in a growing China market. The reform and opening led to remarkably rapid economic growth, at about 10% per year for decades. U.S. business lobbied for China’s admission to the World Trade Organization in 2001. Many U.S. companies set up shop in China, which has abundant low-wage (yet relatively healthy and well-educated) labor coming from a huge rural sector. China also has a business-friendly government, docile official trade unions, and a government that makes huge infrastructure investments in transportation and power that underpin the profitability of operating in the China market. 

As “Made in China” labels proliferated in U.S. stores, many U.S. workers lost their jobs. Cheap imports from China, along with those from other low-wage countries, have played a role in driving down the real wages of U.S. workers since 1980. That did not concern the U.S. corporations that were boosting profits by moving production to China, nor did it bother the many sectors of U.S. business that purchased cheap inputs from China. 

About Face

Read the entire piece here. 

https://www.dsausa.org/democratic-left/roots-of-the-u-s-china-trade-conflict/

Economist Joseph Stiglitz: Capitalism Hasn’t Been Working for Most Peopl...

Trump and the China Deal

Trump and China.

https://prospect.org/article/trump-and-china-art-desperate-deal

trade.

Ahem—Not All of US Were Wrong About China (or About Wall Street, Either). 

In various ways, the Who Lost China debate is back with us again, with any number of commentators now realizing that China’s rise in global power and influence and its model of authoritarian rule (a kind of capitalist Leninism) pose a genuine threat to democratic values and to the well being of millions of workers in Western economies, particularly workers in the manufacturing sector.

A representative such commentary is that of the Brooking Institution’s William Galston, who in his Wall Street Journal column this Wednesday laments how America slept while China was eating its lunch. A number of nations, including some now in Europe, he notes, are welcoming greater Chinese investment in and ownership of key infrastructure, while the U.S., under Donald Trump, seems somnolently uninterested in any comparable investment, or even involvement. The American model, with its various virtues and warts, is in retreat. “However you look at it,” Galston writes, “the past 20 years have been a geopolitical catastrophe for the U.S.”

For this decline, Galston blames the diversion of our attention to Afghanistan and Iraq in the post 9/11 period, while the far more serious threat to American power and democratic values was gathering in China. (To his credit, Galston was one of the relatively few centrist Democrats who opposed—powerfully and articulately—our going to war in Iraq.) But he also says that we made two additional unforced errors. “Leaders of both parties dramatically underestimated the impact on the U.S. economy of China’s accession to the World Trade Organization in 2001,” he writes. “Over the next decade, a surge of Chinese imports wiped out millions of manufacturing jobs.” The second mistake was the accompanying belief that as China entered the global economy, welcomed foreign investment and became more capitalistic, “it would become a less autocratic society that posed no systemic threat to liberal democracy.”

We all made that mistake? Who’s “we,” Bill?

Only some “leaders of both parties” supported granting China “Permanent Normal Trade Relations” status in 2001, which paved the way for its entry into the WTO. The measure barely passed in the House, with the overwhelming majority of Democrats voting No. The labor movement foresaw the evisceration of American manufacturing quite clearly, and formed the core of liberal opposition to PNTR. For this, labor and liberals were condemned in the mainstream media for their backward-looking “protectionism.” 

As well, even as the PNTR debate raged, a number of China scholars and other liberals predicted that China’s new capitalist turn didn’t augur the nation’s transformation to liberal democracy. In 2001, Jim Mann authored a piece for the Prospect—the first of several he was to write for us over the years—explaining why a more capitalist China wasn’t likely to become a more democratic China. 

Free Trade” Is Today’s Imperialism by the 1 Percent

Geoff Gilbert, 

Truthout

PUBLISHED

January 13, 2019

Opposition to “free” trade is clearly growing — both the progressive and the corporate elements of the Democratic Party are now critical of agreements like the North American Free Trade Agreement and the Trans-Pacific Partnership. Less clear are the alternatives to free trade that might emerge. As progressives continue to build power inside and outside of the Democratic Party, we must clarify our understanding of the international political economy, and imagine and begin to build real alternatives to free trade. Building these alternatives must become an essential component of a more progressive US foreign policy. 

The conventional wisdom says that if you oppose free trade, you must support protectionism or economic nationalism. This is misleading. There is no such thing as “free” trade. People create all of the systems that govern our political economy. These systems inevitably favor certain human activities over others, and we can design them to act any way that we want. The important question is: For whom are trade policies “free”? Put another way: Who do trade policies favor?

Debunking “Free” Trade

“Free” trade is free only for capital owners: the plutocratic fewwho own and control multinational corporations. When countries enter into free trade agreements, the governments of both countries effectively agree that their laws will not favor businesses from their country over businesses from any other countries. The main way that free trade does this is by attempting to reduce all tariffs to as close to 0 percent as possible, to eliminate import quotas that countries can use to limit the amount and types of goods imported from specified countries, and to discourage countries from more directly subsidizing their own businesses. 

Read the entire piece:  https://truthout.org/articles/free-trade-is-todays-imperialism-by-the-1-percent/

Trump Trade Policy- Without a Clue

Paul Krugman

Are we going to have a full-blown trade war with China, and maybe the rest of the world? Nobody knows — because it all depends on the whims of one man. And Tariff Man is ignorant, volatile and delusional.

Why do I say that it’s all about one man? After all, after the 2016 U.S. election and the Brexit vote in Britain, there was a lot of talk about a broad popular backlash against globalization. Over the past two years, however, it has become clear that this backlash was both smaller and shallower than advertised.

Where, after all, is the major constituency supporting Donald Trump’s tariffs and threats to exit international agreements? Big business hates the prospect of a trade war, and stocks plunge whenever that prospect becomes more likely. Labor hasn’t rallied behind Trumpist protectionism either.

Meanwhile, the percentage of Americans believing that foreign trade is good for the economy is near a record high. Even those who criticize trade seem to be motivated by loyalty to Trump, not by deep policy convictions: During the 2016 campaign self-identified Republicans swung wildly from the view that trade agreements are good to the view that they’re bad, then swung back again once Trump seemed to be negotiating agreements of his own. (We have always been in a trade war with Eastasia.)

China and Trade.

Tomgram: Michael Klare, On the Road to World War III?

Posted by Michael Klareat 7:37am, October 30, 2018.
Follow TomDispatch on Twitter @TomDispatch.

Includes analysis of U.S. trade war with China. 

Here Comes the Next Crash !

Crisis After Crisis: 10 Years After the Crash, There’s No ‘Reforming’ Global Capitalism

The real battle is now between two post-globalization camps: democratic socialists… and fascists.

By Walden Bello, September 17, 2018. Originally published in Transnational Institute.

 

Print

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It is now clear that financial crises are not discrete events but are linked phenomena that have been unleashed on the globe ever since the financial markets were liberalized during the Reagan-Thatcher era in the early 1980s.

To take just the three most prominent crashes, surplus capital that could not find profitable domestic outlets after the Japanese bubble burst in the late 1980s found its way as speculative capital into Southeast Asia, where it contributed to the Asian financial crisis in 1997-98. The Asian crisis, in turn, helped generate Wall Street’s implosion in 2008, owing to the Asian countries’ channeling the financial reserves they had accumulated to protect them from a repeat of 1997 into the United States — where they helped fuel the subprime real estate boom.

The turbulence that hit global stock markets last February, causing much fright and a paper loss of 4 billion dollars, was a reminder that the next big implosion may be just around the corner. A just concluded study by the Transnational Institute reveals that in 10 critical areas where major reform is needed, few to no measures have been taken to prevent a recurrence of 2007. These areas range from shadow banking to fractional reserve banking to international financial governance to central bank accountability.

Skating on Thin Ice Once More

So, not surprisingly, current indicators show that the world again is skating on thin ice.

First, the “too big to fail” problem has become worse. The big banks that were rescued by the U.S. government in 2008 because they were seen as too big to fail have become even more too big to fail, with the “Big Six” U.S. banks — JP Morgan Chase, Citigroup, Wells Fargo, Bank of America, Goldman Sachs, and Morgan Stanley — collectively having 43 percent more deposits, 84 percent more assets, and triple the amount of cash they held before the 2008 crisis.

Essentially, they’ve doubled the risk that felled the banking system in 2008.

Second, the products that triggered the 2008 crisis are still being traded. This includes around $6.7 trillion in mortgage-backed securities (MBS) sloshing around, the value of which has been maintained only because the Federal Reserve bought $1.7 trillion of them.

U.S. banks collectively hold $157 trillion in derivatives, about twice global GDP. This is 12 percent more than they possessed at the beginning of the 2008 crisis. Citigroup alone accounts for $44 trillion, or 50 percent more that its pre-crisis holdings, prompting a sarcastic comment from one analyst that the bank seems “to have forgotten the time when they were a buck a share,” alluding to the low point in the bank’s derivatives’ value in 2009.

Third, the new stars in the financial firmament — the institutional investors’ consortium made up of hedge funds, private equity funds, sovereign wealth funds, pension funds, and other investor entities — continue to roam the global network unchecked, operating from virtual bases called tax havens, looking for arbitrage opportunities in currencies or securities, or sizing up the profitability of corporations for possible stock purchases. Ownership of the estimated $100 trillion in the hands of these floating tax shelters for the superrich is concentrated in 20 funds.

China Is Being Smart, Trump Isn't

China’s Being Smart, and Trump Isn’t

Thomas L. Friedman

Early in the movie “Crazy Rich Asians” a Chinese-Singaporean father admonishes his young kids to finish their dinner, saying, “Think of all the starving children in America.” I’m sure that everyone of my generation in the theater laughed at that joke. After all, we’d all been raised on the line: “Finish your dinner. Think of all the starving children in China.”

That little line contained within it many messages: The first, which any regular traveler to China’s biggest urban areas can tell you, is that rich China today — its luxury homes, cars, restaurants and hotels — is really rich, rich like most Americans can’t imagine.

The second is that this moment was destined to be a test of who will set the key rules of the global order in the 21st century: the world’s long-dominant economic and military superpower, America, or its rising rival, China. And this test is playing out with a blossoming full-scale trade war.

What does such a test of wills sound like? It sounds like a senior Chinese official telling me at a seminar at Tsinghua University in April that it’s just “too late” for America to tell China what to do anymore on issues like trade, because China is now too big and powerful. And it sounds like President Trump, in effect, telling China: “Says who? Show me what you got, baby!” Or as Trump actually tweeted last week: “We are under no pressure to make a deal with China, they are under pressure to make a deal with us. … If we meet, we meet.”

Read the entire essay. 

https://www.nytimes.com/2018/09/25/opinion/trump-china-trade-economy-tech.html

Tariffs

Trump’s Tariffs are Not Really the Point

We pay too much attention to President Trump’s tariffs. We’ve missed the point of what China is doing, and what we want. 

Ronald Reagan told us that markets are good, government is bad, and we should let free markets solve all our problems. Winners will prosper, and gains will trickle down to workers and communities. 

At the global level, this meant free trade policy that blurs national boundaries, and merges or integrates our economy into the global economy. This approach shifts power in favor of global corporations, while reducing policy space for governments, workers, communities, and the environment. 

China has never accepted our free-trade free-market model. Zhang Xiangchen, China’s ambassador to the WTO, made this clear a few days ago.

China has been vigorously exploring a road of market economy, which suits China’s own national situation and circumstances, and we have made remarkable progress in this endeavor. Whatever others may say, we will march along this road unswervingly.  … As for those who speculated that China would change and move onto a different path upon its WTO accession, … that was their wishful thinking. 

Trump and China Trade

Trump’s Selling Out His Country for Personal Gain Continues. When the news broke that President Donald Trump was chiding the Commerce Department for sanctioning a Chinese tech company, ZTE, everything about the move was puzzling. ZTE epitomized why the Trump administration was taking a harder line against Beijing.

ZTE sold products containing U.S. products to Korea and Iran, and then tried to cover it up. The FCC has refused to prohibit U.S. carriers from buying equipment made by ZTE for fear of hidden “back doors” that could spy or introduce malware.

Yet Trump suddenly undercut his cabinet department last week with a mysterious tweet:

President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!

Why on earth would Trump undermine his government’s own policy? One likely explanation soon became clear. On Tuesday, The National Review reported:

The Chinese government is extending a $500 million loan to a state-owned construction company to build an Indonesian theme park that will feature a Trump-branded golf course and hotels.

A subsidiary of Chinese state-owned construction firm Metallurgical Corporation of China (MCC) signed a deal last week with the Indonesian firm MNC Land to build an “integrated lifestyle resort,” as part of Beijing’s global influence-expanding “Belt and Road” infrastructure initiative.

The project will include a number of Trump-branded hotels, a golf course, and a residence. While the $500 million loan will not be directly allocated to any of the Trump-branded features, Beijing’s contribution of half the project’s total operating budget ensures the success of the broader theme-park venture.

This is not an explicit quid pro quo, of course, but Trump’s habits of subordinating the national interest to the profits of his family businesses continue. First Russia, now China. There’s a simple word for these habits: treason. ~ ROBERT KUTTNER 

Trade Dispute With China

Testimony before the Senate Finance Committee Subcommittee on International Trade, Customs, and Global Competitiveness for a hearing on ‘Market Access Challenges in China’ 

Testimony • By Thea M. Lee • April 11, 2018

This litany of unfair trade practices and currency manipulation has had a serious and pervasive negative impact on American jobs and wages. As my colleague, Rob Scott, demonstrated in a 2017 report, Growth in U.S.–China Trade Deficit between 2001 and 2015 Cost 3.4 Million Jobs [ https://www.epi.org/publication/growth-in-u-s-china-trade-deficit-between-2001-and-2015-cost-3-4-million-jobs-heres-how-to-rebalance-trade-and-rebuild-american-manufacturing ], the deficit cost jobs in all 50 states and the District of Columbia. Between 2001 and 2011, the growing trade deficit cost directly impacted workers $37 billion a year, while also putting downward pressure on the wages of all non-college graduates by $180 billion a year.

Well informed analysis. 

Read the testimony. 

https://www.epi.org/publication/testimony-before-the-senate-finance-committee-subcommittee-on-international-trade-customs-and-global-competitiveness-for-a-hearing-on-market-access-challenges-in-china/

Trump, Trade, China, tariffs,

How the Globalists Brought Us Trump. The headlines today are filled with alarmist language about how Trump’s retaliatory tariffs against China risk setting off a trade war. He’s imposing up to $60 billion worth of tariffs against an array of goods to compensate for a range of Chinese predatory tactics, including theft of intellectual property, subsidy of production below cost, and coercive “partnerships” with U.S.-based companies seeking to do business in China.

Here’s the pity of it all. The financial and political elite had this coming, by denying for decades the reality of China’s mercantilism. I write about this in the current issue of the Prospect. But Trump is pursuing a long overdue correction in a foolhardy way.

The right way to go after China’s predatory state capitalism would have been to keep China out of the WTO until we agreed on some set of symmetrical rules of the road. Clinton and Bob Rubin blew that one.

The elites deceived themselves into thinking that if we let China into the club first, China would evolve into a liberal, free-trade democracy. That sure produced some chuckles in Beijing.

The right way now would be to get together with the EU and mount a common diplomatic offense against China’s mercantilism. Instead, Trump went after the EU as well with his steel and aluminum, and is now facing retaliatory tariffs from Europe against the U.S. 

Trump has blown open a door to a long overdue drastic revision of policy—but in the crudest possible way, one that could backfire. His trade advisers, unlike Trump, are serious people. Trade chief Robert Lighthizer, a veteran of trade negotiations, knows how to do this diplomacy right. But this is really complex stuff, and it’s unlikely that Trump will listen to Lighthizer, except on the headlines. (His own lawyer defending him in the Mueller investigation, John Dowd, just quit because Trump refused to take his advice.)

A Chinese View of Trade

“Belt & Road” v.s. Liberal Order

May 22 , 20

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This is really the best of times and worst of times. With the rise of a large number of developing and emerging countries and relative declining of “advanced countries”, the global convergence of power is accelerating and the balance of power continues to tip in favor of the former. This big picture provides a useful prism through which a clearer view of the world today and tomorrow, including the future of globalization, global governance and global liberal order, comes to our minds.

Liberal order in crisis

Without any doubt, a crisis has been raging across the “liberal democratic world” for some time with “black swan events” appearing in the U.S. and in many European nations which have wreaked havoc with the political eco-system in the western world, weakening the centrist and progressive forces that used to underpin the U.S.-led postwar world liberal order.

Only this time around, the challenges to liberal order as well as liberal democracy come from both within and outside, mostly from within, which raises many eyebrows as to whether the U.S.-led and U.S.-defined liberal order can survive.

Talking about challenges from within, first and foremost is the loss of credibility of economic neo-liberalism since the 2008 financial crisis as the governing ideology for global economic order, which has made many countries to turn to the East, in particular China, for new ideas and concepts.

Krugman : China and Friday's Stock Plunge

And, perhaps Monday's.


What caused Friday’s stock plunge? What does it mean for the future? Nobody knows, and not much.

Attempts to explain daily stock movements are usually foolish: a real-time survey of the 1987 stock crash found no evidence for any of the rationalizations economists and journalists offered after the fact, finding instead that people were selling because, you guessed it, prices were falling. And the stock market is a terrible guide to the economic future: Paul Samuelson once quipped that the market had predicted nine of the last five recessions, and nothing has changed on that front.


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Still, investors are clearly jittery — with good reason. U.S. economic news has been good though not great lately, but the world as a whole still seems remarkably accident-prone. For seven years and counting we’ve lived in a global economy that lurches from crisis to crisis: Every time one part of the world finally seems to get back on its feet, another part stumbles. And America can’t insulate itself completely from these global woes.

But why does the world economy keep stumbling?

On the surface, we seem to have had a remarkable run of bad luck. First there was the housing bust, and the banking crisis it triggered. Then, just as the worst seemed to be over, Europe went into debt crisis and double-dip recession. Europe eventually achieved a precarious stability and began growing again — but now we’re seeing big problems in China and other emerging markets, which were previously pillars of strength.

But these aren’t just a series of unrelated accidents. Instead, what we’re seeing is what happens when too much money is chasing too few investment opportunities.