Comments on: Is the pessimism about the Chinese economy warranted?

By: Qing

Qing — Sat, 07 Mar 2009 07:55:29 +0000

Rosa, basically I agree with you, but it wasn’t quite my point that China should ‘depend’ on exports exactly. More that any business maximising profits will target their products to consumers able to purchase them. Up to now, that has largely meant US and EU consumers (that’s where most disposable income is located). This shouldn’t be thought of as a national strategy, just the natural result of a functioning market.

Now people almost everywhere aren’t treating their income as disposable because of uncertainty about future earnings.

How can the Chinese ‘strengthen and grow their domestic consumer base’?
Consumption is a function of income, which is determined by productivity and the pace of the economy (the money multiplier) and the savings rate, which is determined by the interest rate and future expectations (confidence). The pace of the economy is unfortunately very much slower than it has been due to the global crisis of confidence, which also increases the savings rate.

The Chinese government can help reduce a few barriers to confidence such as improving insurance coverage and increasing employment. Since the private sector cannot borrow currently due to high risk aversion in financial markets, the best way to increase employment quickly is government consumption. This can be usefully targeted toward long term productivity enhancing investments.

The idea that the government should increase domestic consumption to off-set the fall in foreign consumption is, I feel, a misunderstanding of the nature of household consumption. Governments can invest in long term productivity if private asset holders are unwilling to do so, and they can try to increase confidence, but they can’t directly increase domestic household consumption.

By: Rosa

Rosa — Fri, 06 Mar 2009 20:19:59 +0000

I see the stimulus package as a largely positive thing. Stimulating investment in this way will help expand China’s already growing middle class. Which will lay the foundation for increases domestic consumer spending in the long term. Right now it makes sense for the Chinese economy to depend on exprts as Qjing points out. But with giant economies like that of the U.S. rapidly contracting almost daily, it is wise for the Chinese to strengthen and grow their domestic consumer base in the long term.

By: Qing

Qing — Thu, 19 Feb 2009 22:57:29 +0000

ReallyNotSure:
The concept that China is “over reliant on exports” is weak. There is no economic logic in pushing domestic demand if purchasing power abroad is greater than at home. Deriding producers for selling to those with money is lunacy. Obviously if existing customers lose purchasing power, producers should find new customers, reduce their prices or reduce their quantity. It is not a “weak point” of China to have been selling to those who, till now, had the resources to pay. Inability to adapt to a changed environment would be, however.

On what basis do you assert the stimulus “does not help the millions of poor”?. It includes RMB1.8 trillion investment in railways, roads, airports and power grids, 1 trillion in post earthquake reconstruction, and 370 billion in rural development and infrastructure projects. Are you suggesting Shanghai fatcats will take up shovels and rebuild Sichuan, lay rail tracks and power lines, pour concrete for dams and staff the restaurants and small businesses that service all the workers who do do all that work?

Regarding protests: the repeal of hukou restrictions on graduates is a stroke of genius. It endears the government to the young educated class, while simultaneously increasing flexibility in the labor market without risking mass migration and increasing the incentive to study at the tertiary level, thus increasing the long term productivity of Chinese workers.

You say “deflation is taking hold in China”. China’s inflation rate, as measured by the consumer price index was 1.0% in January. Since 1% is not less than 0% this does not constitute deflation. Even if China were in deflation (which it is not) deflation does not reduce the purchasing power of ‘average Chinese’. Deflation is a fall in prices, or equivalently, an increase in the value of money.

You make the good point that China has many pressing environmental concerns. This is indeed true and should be addressed as part of the stimulus process, not sidelined by it.

Professor Zhang has laid out a solid case against excess pessimism. A case that should be heard and heeded, not scorned.

By: James

James — Thu, 19 Feb 2009 17:20:45 +0000

ReallyNotSure:

I’d be happy to pass this along to David Dollar, but he might also be able to respond if you leave a comment for him directly on his blog:
http://eapblog.worldbank.org/blogs/david-dollar

Best regards,
James

By: ReallyNotSure

ReallyNotSure — Thu, 19 Feb 2009 06:36:16 +0000

James, ask David Dollar to read the report from the World Bank done on China’s water crisis. I think the environment issues in China are at a point where things are starting to break in China, coming at a time on the back of the economic crisis. Its a scary report on the water shortage problems of China. And the damage that has been done to water systems is nothing more than a social time bomb waiting to explode. The bad drought in the North this year 2009 is a good example. Water been pumped from all over the place just increases the loss of water in other areas. With a massive stimulus package this year I would expect many environment policies to be put on the side lines while focusing on the economy, steel and cement factories been some of the biggest polluters it just seems in China that the outlook for its future is getting worse not better. In the quest for a better life and money I find China in fact is destroying itself from the inside out.

By: ReallyNotSure

ReallyNotSure — Thu, 19 Feb 2009 06:26:42 +0000

Supply and demand, if foreign countries are not buying exports will keep dropping. Now with massive job losses over seas we are seeing a huge economic shift in the world. China’s weak point is it relies so much on a export driven economy. The the stimulus package only makes a few rich companies close to the government richer, it does not help the millions of poor or create long term domestic consumption. After the stimulus then what? as this is just a temporary measure that can’t last for that long. Considering the rest of the world keeps going down, and millions more are losing jobs I can’t see how demand is going to pick back up this year at all. In fact, I feel that we will see a global depression as stimulus packages around the world don’t seem to be having the desired affect. Yes, they help, but at the end of the day most people know now that we have been sending on credit for to long and the debt has caught up to us.

Your article does not focus on an important point which is what happens to the millions that have lost jobs and the millions more that are going to lose jobs. The stimulus package only targets a few. The level of protests in China is growing fast, if this is not contained foreign investors will pull money out of China if they feel there is risk with social unrest.

Deflation is taking hold in China, you have built up so much reserve cash and printed yuan, does that mean with loan rates increasing from the banks that you have a lot more money out there, if so the yuan devalues which lowers the buying power for the average Chinese person, the Deflation does a 180 and turns fast into inflation because commodity prices start to rise again, creating more angry poor people in China that find over the next 6 months that they can’t even afford to buy simple food products.

By: James

James — Wed, 18 Feb 2009 16:40:35 +0000

No everyone is pessimistic about China’s future! David Dollar, the World Bank’s China country director, see’s the glass as half-full when considering the China’s 4th quarter GDP growth in 2008.

Read the argument on his blog:
http://eapblog.worldbank.org/content/china%E2%80%99s-4th-quarter-gdp-glass-half-full