Economy of China:

Kiko wrote:BYD's meteoric rise has sparked interest while also raising questions about the Chinese government's subsidy policies and the impact of these practices on global trade. BYD's rapid expansion in Europe is also under scrutiny, leading to the European Union's investigation into the possibility of tariffs on the Chinese company's products. So while celebrating its successes, BYD also faces the challenge of responding to the concerns and criticisms that accompany its breakneck growth.

This year, there is a new premier, Li Qiang.  But Li’s speech was very much in line with last year’s by the previous premier Li Keqiang.  As last year, Li Qiang set a target for real GDP growth in 2024 of “around 5%” and said that China would be looking to “transform” China’s economic growth model.

The NPC will also be considering the annual budget.  Defence spending is expected to rise by 7.2%, while public security spending is slated to rise by 1.4%, no doubt necessary given the military surrounding of China by the Western powers. Central government expenditures are expected to rise by 8.6% to reduce the burden somewhat on the highly indebted local governments. Other targets announced by Li include the creation of 12m new urban jobs and increasing consumer prices by about 3% (apparently to avoid deflation – see below).  Li said these targets would “not be easy” but that “high quality development” remained the priority.

All this is pretty much in line with the targets set in China’s last five-year plan.  The 14th plan agreed in 2021 was a comprehensive document covering all aspects of the Chinese economy in detail.   But it had some key targets.  In particular, China aimed at becoming a “moderately developed” economy by 2035 and to reduce inequality between urban and rural areas.  The plan was based on the dual circulation model, where expanding manufacturing exports – the past key to China’s miracle growth -is combined with developing the domestic economy and reducing reliance on foreign imports and investment. The objective is that China can continue to grow and increase living standards despite attempts by Western governments to curb or strangle such growth.

Can China succeed in achieving both its growth target for this year and reach the longer-term objectives over the next ten years or so, taking nearly 1.4bn people up to living standards only enjoyed by a small group of nations in Europe, North America and East Asia?

If you were to read the Western press and their economists, you would conclude that the chances of China doing that are no better than a snowball surviving on being thrown into the sun.  It is the almost unanimous cry of Western economists, particularly the ‘China experts’, that the China ‘miracle’ is over, and worse, China is heading into a debt deflation spiral that will mean growth targets will not be met at best, and more likely there will be a major slump.  This is despite the fact that in 2023 China had an official growth rate of 5.2%, more than double that of the ‘booming’ US economy, and five times the rate of growth in the rest of top capitalist economies of the G7.  (Don’t get me into the argument that China’s growth figure is fake and growth is much lower.  Those that argue this have little supporting evidence.)

Ah, but you see, manufacturing is in recession (as measured by official surveys), consumption is weak (still below pre-pandemic levels) and foreign investment, seen as the life-blood for the Chinese economy has dried up. And even worse, prices of goods and services are falling.  Readers may be surprised to hear that Western economists, who spend much of their time demanding that inflation rates in their countries be reduced to no more than 2% a year after the post-COVID inflationary spiral of the last three years, see no merit in the lack of any rising prices (and therefore rising real wages) in the Chinese economy: it’s ‘inflation bad for the US; but no inflation bad for China’.

In a recent article, John Ross has shown that to achieve China’s Plan GDP target for 2025 ie a doubling GDP from 2021, it would require an average annual growth of 4.7% a year. So far, China is ahead of this goal with annual average growth in 2020-2023 of about 5%.  Indeed, since the beginning of the pandemic, China’s economy has grown by 20.1% and the U.S. by 8.1%—that is China’s total GDP growth since the beginning of the pandemic has been two and half times greater than the US.

Yes, China’s annual growth rates have slowed from the breakneck pace of the 1990s onwards and the Chinese workforce is declining. But just look at the increase in GDP per person that China has achieved compared to the G7 economies since 2019, some of which have even contracted (IMF data). The rise on per capita basis is even higher against the US (nearly four times).

Yes, increasingly China cannot rely on an expansion of a cheap workforce from rural areas to achieve more output, but instead must raise the productivity of the existing labour force, especially through investment in technical innovation.  And it is doing so.  The Federal Reserve Bank of Dallas shows that ‘total factor productivity’ (which is a crude measure of innovation) is growing at 6% a year, while it has been falling in the US.

Despite this evidence, every year the Western ‘China’ experts (and even many in China itself) predict stagnation, given the huge debt levels in all sectors. China is going to stagnate like Japan has done in the last three decades.  The only way to avoid ‘Japanification’, say these experts, is to ‘rebalance’ the economy from ‘over-investment’, ‘excessive savings’ and exports to a domestic consumer-led economy as in the West and reduce the state control of the economy so that the private sector can flourish.

This year on the occasion of the NPC, Martin Wolf, the Keynesian guru of the Financial Times, returned to this theme, echoing the arguments of other Keynesian China experts like Michael Pettis.  According to Wolf, China’s growth will now slow to a trickle as in Japan because it overloaded with excessive debt and because it has not rebalanced the economy towards “the consumer”. China needs to get its consumption share up to Western levels or it will not be able to grow and so stay locked in a ‘middle income’ trap.

China generated 28 per cent of total global savings in 2023. This is only a little less than the 33 per cent share of the US and EU combined.  This is all wrong, say Wolf and Pettis.  What is needed is a shift from ‘excessive savings’ to consumption.  There is over-investment in property and infrastructure, instead of handouts to households.  China will only grow from here if consumption leads, not investment.

But how can anybody claim that the mature ‘consumer-led’ economies of the G7 have been successful in achieving steady and fast economic growth, or that real wages and consumption growth have been stronger there?  Indeed, in the G7, consumption has failed to drive economic growth and wages have stagnated in real terms over the last ten years, while real wages in China have shot up.  Moreover, these consumer-led economies have been hit by regular and recurring slumps in production that have lost trillions in output and income for their populations.  The irony is that China’s consumption growth rate is way higher than in the G7 economies.

China has not had a contraction in national income in any year since 1976, while the consumer-led G7 economies have had slumps in 1980-2, 1991, 2001, 2008-9 and 2020.  Much has been made of China’s ‘disastrous’ zero COVID policy.  But apart from saving millions of lives, China still did not enter a slump in 2020, unlike all the G7 economies in 2020.

Yes, China has the highest ratio of gross investment to GDP among the major economies.  But this supposedly ‘over-invested’, ‘excessive savings’ economy has grown more than four times faster than the consumer-led OECD economies and 40% faster than India as a result.  What this suggests that if China were to ‘rebalance its economy towards the consumer and reduce investment; and reduce the public sector and ‘free up’ the private sector (the sector that provides most consumer goods in China), growth rates would fall even more than they have done in recent years.

Moreover, the arguments of the Western experts that China is stuck in an old model of investment-led export manufacturing and needs to ‘rebalance’ towards a consumer-led domestic economy where the private sector has a free rein are just not empirically valid.  Is China’s weak consumer sector forcing it to try and export manufacturing ‘over capacity’?   Not according to a recent study by Richard Baldwin.  He finds that the export-led model did operate up to 2006, but since then domestic sales have boomed, so that the exports to GDP ratio has actually fallen.  “Chinese consumption of Chinese manufactured goods has grown faster than Chinese production for almost two decades. Far from being unable to absorb the production, Chinese domestic consumption of made-in-China goods has grown MUCH faster than the output of China’s manufacturing sector.

Western experts go on about the size of China’s export surplus, namely that the current account (the balance of receipts from abroad against payments), claiming that the surplus is as high as 4% of China’s GDP.  And China’s exports are 15% of the world total.  And just in the last month exports rose over 7% so that China’s balance of trade with the rest of the world reached an all-time high of $125bn in February.

But what that shows is that Chinese manufacturers remain highly competitive in world markets, despite all the efforts of the West to impose tariffs and other protectionist measures.  China is doing particularly well in electric vehicle production, solar energy and other green technologies. But as Baldwin points out, this export success does not mean that China depends on exports for growth.  China is growing mainly because of production for the home economy, like the US.

It is true is that ‘productive’ investment growth has fallen back in China.  In my view, successive Chinese governments made a big mistake in trying to meet the housing needs of its burgeoning urban population by creating a housing for sale market, with mortgages and private developers being left to deliver. Instead of local governments launching housing projects themselves to house people for rent, they sold state assets (land) to capitalist developers who proceeded to borrow heavily to build projects.  Soon housing was no longer for living but for speculation (Xi quote).  Private sector debt rocketed – just as in the real estate bubble in the West.  It all came to a head in the COVID pandemic as developers and their investors went bust.

What the Chinese government now needs to do is take over these large property developers and bring them back into public ownership, complete the projects and switch to building for rent.  The government should annul the developers’ debt to foreign investors and only meet obligations to small investors; and end the mortgage and private finance system permanently.  The unproductive real estate sector has got so large in China as a share of investment and output that it has seriously degraded growth.  This is where the economy does need rebalancing.  There needs to be a switch to productive investment in technology and knowledge industries.  If the words of the Five-Year Plan mean anything, it seems that the current Chinese leadership is aware of that.

Previous CP leaders also relied too much on foreign investment and a rising capitalist sector to grow the economy.  But China’s capitalist sector has experienced falling profitability (just as in the West) and so has cut back on productive investment.  The state sector has had to step up to the plate. What flows from that is, contrary to the views of the Western experts, it’s not less investment and more consumption, not less public and more private investment, not more foreign and less state investment that China needs to sustain its previous economic success, but the opposite.

higurashihougi wrote:Defence spending is expected to rise by 7.2%, while public security spending is slated to rise by 1.4%, no doubt necessary given the military surrounding of China by the Western powers. Central government expenditures are expected to rise by 8.6% to reduce the burden somewhat on the highly indebted local governments. Other targets announced by Li include the creation of 12m new urban jobs and increasing consumer prices by about 3% (apparently to avoid deflation – see below).  Li said these targets would “not be easy” but that “high quality development” remained the priority.

higurashihougi wrote:In particular, China aimed at becoming a “moderately developed” economy by 2035 and to reduce inequality between urban and rural areas.  The plan was based on the dual circulation model, where expanding manufacturing exports – the past key to China’s miracle growth -is combined with developing the domestic economy and reducing reliance on foreign imports and investment. The objective is that China can continue to grow and increase living standards despite attempts by Western governments to curb or strangle such growth.

higurashihougi wrote:Can China succeed in achieving both its growth target for this year and reach the longer-term objectives over the next ten years or so, taking nearly 1.4bn people up to living standards only enjoyed by a small group of nations in Europe, North America and East Asia?

If you were to read the Western press and their economists, you would conclude that the chances of China doing that are no better than a snowball surviving on being thrown into the sun.  
...
Ah, but you see, manufacturing is in recession (as measured by official surveys), consumption is weak (still below pre-pandemic levels) and foreign investment, seen as the life-blood for the Chinese economy has dried up. And even worse, prices of goods and services are falling.

higurashihougi wrote:Yes, China’s annual growth rates have slowed from the breakneck pace of the 1990s onwards and the Chinese workforce is declining. But just look at the increase in GDP per person that China has achieved compared to the G7 economies since 2019, some of which have even contracted (IMF data). The rise on per capita basis is even higher against the US (nearly four times).

higurashihougi wrote:Yes, increasingly China cannot rely on an expansion of a cheap workforce from rural areas to achieve more output, but instead must raise the productivity of the existing labour force, especially through investment in technical innovation.  And it is doing so.  The Federal Reserve Bank of Dallas shows that ‘total factor productivity’ (which is a crude measure of innovation) is growing at 6% a year, while it has been falling in the US.

higurashihougi wrote:Despite this evidence, every year the Western ‘China’ experts (and even many in China itself) predict stagnation, given the huge debt levels in all sectors. China is going to stagnate like Japan has done in the last three decades.  The only way to avoid ‘Japanification’, say these experts, is to ‘rebalance’ the economy from ‘over-investment’, ‘excessive savings’ and exports to a domestic consumer-led economy as in the West and reduce the state control of the economy so that the private sector can flourish.

higurashihougi wrote:This year on the occasion of the NPC, Martin Wolf, the Keynesian guru of the Financial Times, returned to this theme, echoing the arguments of other Keynesian China experts like Michael Pettis.  According to Wolf, China’s growth will now slow to a trickle as in Japan because it overloaded with excessive debt and because it has not rebalanced the economy towards “the consumer”. China needs to get its consumption share up to Western levels or it will not be able to grow and so stay locked in a ‘middle income’ trap.

higurashihougi wrote:China generated 28 per cent of total global savings in 2023. This is only a little less than the 33 per cent share of the US and EU combined.  This is all wrong, say Wolf and Pettis.  What is needed is a shift from ‘excessive savings’ to consumption.  There is over-investment in property and infrastructure, instead of handouts to households.  China will only grow from here if consumption leads, not investment.

higurashihougi wrote:Yes, China has the highest ratio of gross investment to GDP among the major economies.  But this supposedly ‘over-invested’, ‘excessive savings’ economy has grown more than four times faster than the consumer-led OECD economies and 40% faster than India as a result.  What this suggests that if China were to ‘rebalance its economy towards the consumer and reduce investment; and reduce the public sector and ‘free up’ the private sector (the sector that provides most consumer goods in China), growth rates would fall even more than they have done in recent years.

Arnaud Bertrand wrote:It’s interesting to think through what Yellen [U.S. Treasury Secretary Janet Yellen] is actually saying when she asks China to address its “industrial overcapacity”, particularly in fields like solar panels or EVs.

[...] What are the key metrics to assess if a country has “industrial overcapacity”? [...]

Let’s start with capacity utilization rates. Look at the graphs: it’s crystal clear they’ve been pretty much constant in China for the past 10 years, standing at roughly 76% right now, which is in the same ballpark as America’s own utilization rates at about 78%. So no issue there.

Now let’s take a look at inventory levels. As of the beginning of 2024, China’s finished good inventory PMI index stood at about 49 (https://en.macromicro.me/collections/25/cn-industry-relative/5728/china-pmi-new-order-and-stock-index ) vs the US at 48 for manufacturing inventories (https://en.macromicro.me/collections/8/us-industry-relative/40/ism-inventory ). An index of over 50 is a sign of growing stock levels: this is not the case here for either country, so there is no issue with inventory levels.

Lastly, let's check profit margins. China’s industrial profits rose 10.2% in the first 2 months of the year (https://bloomberg.com/news/articles/2024-03-27/china-s-industrial-profits-rise-in-sign-of-stabilizing-economy?embedded-checkout=true ), consolidating a gaining streak since August last year. So no issue there either.

So what gives? No matter how you look at it, there is just no sign of industrial overcapacity in China.

Could the US maybe mean that China is breaking WTO rules by practicing “dumping”, meaning the practice where companies export products at  prices lower than what they charge in their home market, or below the cost of production? No, this is not what China is accused of doing here: despite the very low prices for its EVs or solar panels, the companies involved still make a profit (heck, as we just saw, industrial profits are rising at double digit growth), and they DO charge higher prices abroad than at home.

No, the real issue here is in fact not one of industrial capacity but one of competitiveness. What is crystal clear is that the competitiveness of Chinese companies is overwhelming: today, in scores of industries - like solar or EVs - there is simply no way for American or European companies to compete with Chinese ones. This is the real issue: Yellen and Western leaders are afraid that if things keep going, China will simply eat everyone’s lunch.

Contrary to popular belief, this competitiveness isn’t thanks to Chinese "cheap labor". One guy who explained this extremely well is Apple’s Tim Cook (https://inc.com/glenn-leibowitz/apple-ceo-tim-cook-this-is-number-1-reason-we-make-iphones-in-china-its-not-what-you-think.html): “There's a confusion about China. The popular conception is that companies come to China because of low labor cost. I'm not sure what part of China they go to, but the truth is China stopped being the low-labor-cost country many years ago. And that is not the reason to come to China from a supply point of view. The reason is because of the skill, and the quantity of skill in one location and the type of skill it is.” He credits the Chinese education system for this: “I give the education system a lot of credit for continuing to push on that even when others were de-emphasizing vocational [...] China called that right from the beginning.”

Having a huge depth of skills is one thing, but there is also control of the entire supply chain since China is the only country in the world that produces all categories of goods classified by the World Customs Organization (WCO). This gives it a key advantage when it comes to end prices: when you want to build something in China you can literally find the entire supply chain for it at home.

Energy prices is another thing: for instance the International Energy Agency highlights that "low-cost electricity is key for the competitiveness of the main pillars of the solar PV supply chain" (https://iea.org/reports/solar-pv-global-supply-chains/executive-summary ) and "around 80% of the electricity involved in polysilicon production today is consumed in Chinese provinces at an average electricity price of around USD 75 per megawatt-hour (MWh)". For comparison, in 2023 energy prices for industrial customers in Germany averaged 251.21 USD per megawatt-hour (MWh) (https://statista.com/statistics/1346782/electricity-prices-commercial-industrial-customers-germany/ ): that's an incredible 234.94% more expensive!

Lastly, China has become an innovation powerhouse. In 2023 it filed roughly as many patents as the rest of the world combined (https://brevettinews.it/en/patents/wipo-annual-report-2023-more-patent-applications-but-less-trademarks-and-design/ ) and it’s now estimated to lead 37 out of the 44 critical technologies for the future (https://aspi.org.au/report/critical-technology-tracker ). All this too has implications when it comes to the final prices of its products. To take the example of solar panels again, the IEA notes that "continuous innovation led by China has halved the emissions intensity of solar PV manufacturing since 2011" (https://iea.org/reports/solar-pv-global-supply-chains/executive-summary ), which means that not only does China have raw electricity prices which are immensely cheaper than in the West, but it's innovated in such a way that it uses way less electricity in the production of its solar panels...

So “the threat of China’s industrial overcapacity” is a buzzword that actually means that China is simply too competitive, and by asking it to address this, what Yellen is truly asking of China is akin to a fellow sprinter asking Usain Bolt to run a less fast because he can’t keep up.

Now I’m not saying there isn’t some merit in this ask. At the end of the day, it’s understandable that when you see a competitor continuously gaining in strength, you grow quite anxious as to your own future and that of your people. But it needs to be framed the right way: framing it as if China was doing something malign with deliberate “overcapacity” is just a very unfair characterization. China played the game right: as Tim Cook explained, it first and foremost invested in its people, in their education. They also invested big time in innovation and they didn’t shoot themselves in the foot when it comes to energy prices the way Europe did, among many other policies.

Demonizing this is just not right, and it’s certainly not the right way to ask China for what’s an incredibly big favor: running less fast so the West can keep up… Especially when the West running slow is the result of catastrophic leadership for the past few decades: first and foremost choosing to waste trillions of dollars in killing people abroad instead of investing in its own progress…

I’m afraid this “overcapacity” framing is just another illustration of this poor leadership: when you prefer to blame others for your own failures rather than face reality.

higurashihougi wrote:You can hate china, but you can't stop buying china's stuffs.
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higurashihougi wrote:Meanwhile...

https://www.rt.com/business/595569-china-growth-forecast-raised/

[b]China’s growth forecast raised