A CCTV World Insight TV interview with myself and US experts - Douglas Paal Vice-President of the Carnegie Institute for International Peace and Professor Max Wolff from the New School University - on the present slowdown in the US economy and President Obama's proposed budget.
China recently made two key economic decisions. First, the 13th Five Year Plan from 2016-2020 should achieve "at least 6.5% annual growth for China to become 'moderately prosperous" -- close to the World Bank's criteria for an "advanced economy." Second, December's Central Economic Work Conference announced that China's policy will concentrate on the economy's "supply side."
This latter decision is welcome. Primary concentration on the economy's "demand" side is misapplied in either a "Western" economic framework or China's Marxist one. Switching focus to the supply side introduces greater precision into economic policymaking as specific numbers must be stated to calculate the requirements for at least 6.5% growth.
There are only two fundamental frameworks of analysis of the economy's supply.
• The first is "growth accounting," developed by U.S. Nobel Prize winner Robert Solow, which is the framework of "Western economics." This analyses the economy's "supply side" in terms of three inputs of capital, labour and total factor productivity (TFP) -- TFP being all growth sources not only due to inputs of capital and labour.
• The second is Marx's, the official basis for China's policy, which analyses the economy in terms of capital, labour and surplus value -- the latter being numerically equal to profits, rent and interest.
For present purposes, these may be reduced to one framework as both Solow and Marx in "growth accounting" are concerned with overall input-output levels and their other differences do not affect this.
The study of economic statistics identifies that "supply side" Inputs have very different weights. Therefore, to achieve "moderate prosperity" not only the supply side's "algebra" but its "arithmetic" must be considered. Given that China's aim is to achieve moderately prosperous and even advanced economic status, the driving forces of the world's most advanced economy, the United States, will first be considered and then China's current differences to the United States analysed. The contrast indicates policies China must pursue to become an advanced economy. Figure 1 below therefore shows the sources of U.S. economic growth and these will be analysed in descending order to importance.
The United States, as with all economies, has two capital inputs, the first of which is "Intermediate products" -- one industry's outputs used as another's inputs (e.g. outputs of steering wheel producers provide inputs into the automobile industry). Financially, as Charles Jones noted for the U.S. National Bureau of Economic Research, "intermediate goods are just another form of capital, albeit one that depreciates fully in production" -- they are "circulating capital." Increase in Intermediate products indicates a growing division of labour and accounts for 52% of output increases by U.S. economic sectors -- the largest growth source.
The second capital input is "fixed investment," or the means of production depreciating over numerous production cycles. This constitutes 24% of increases in U.S. output.
Growth in labour inputs account for 15% of U.S. output increases -- this growth being due to both increase in total time worked ("labour quantity") and improvements in training and education ("labour quality").
TFP, increases in production due to technology, entrepreneurship, etc., account for 9% of U.S. economic growth.
Turning to a comparison with China the most detailed study by Ren & Sun found that in China as in the United States: "Intermediate input growth is the primary source of output growth." Developing China's ability to use division of labour, that is growth in intermediate products, is therefore crucial as this is the most powerful factor on the economy's supply side. But China's ability to use domestic division of labour is greatly hampered by shortage of infrastructure compared to the United States -- efficient division of labour requires ability to transport parts, efficiently communicate and coordinate production, identify markets etc.
China's number of per capita Internet users is equal to only 56% of the United States' per capita total. China's lag in "heavy" infrastructure is devastating -- China's per capita electricity consumption is only 27% of U.S. levels, with the country's length of roads 16%, and length of railways at 7%. China cannot benefit from division of labour at U.S. levels with such underdeveloped infrastructure.
Under globalisation, division of labour is international as well as domestic. From the launching of economic reform in 1978 until 2006 the percentage of trade in China's economy rose from 9.7% to 64.8% -- China made greater use of international division of labour. By 2014 this had fallen to 41.5% -- China's economy was making less use of international division of labour. Boosting China's trade is a vital supply side reform.
Turning to the second most powerful factor of economic growth, China's per capita fixed investment is only $3,199 compared to the United State's $10,017 -- China's per capita fixed investment must be tripled to reach U.S. supply side levels.
Regarding labour inputs, due to its one child policy, China's increase in working age population is negligible, and will decline in future, whereas the United State's annual increase is 0.3%. China's long run situation may alter via its new "two-child policy," and more immediately China can partially ameliorate the problem by raising its very low pension age, but the increase in China's total working time will be negligible or negative.
Measuring labour quality, OECD studies show China has a high standard up to secondary school but the United State has an overwhelming advantage in tertiary education -- the U.S. ratio of enrolment in tertiary education, compared to the number in the age group in the five years following secondary education, is three times higher than China's.
In 2009-2014 annual average TFP growth in both the United State and China was high by international standards at 0.6% in the United State and 0.8% in China -- compared to an average decline for all economies of 0.1%. However, as already noted, TFP is too small a proportion of the economy's supply side to generate fast growth.
Analysing numerically the most powerful factors on the supply side therefore yields clear results. To develop towards advanced economy status China primarily requires massive infrastructure investment facilitating development of division of labour, increases in international trade, enormous increases in per capita fixed investment, and huge expansion of tertiary education.
This article originally appeared on China.org.cn.
The recent publication of China's and the United States' 2014 GDP results has allowed a comparison of the growth of the world's two largest economies, resolving discussion of their relative economic performance with facts and highlighting serious misanalysis of China's economic development in parts of the media.
Taking first the objective data:
· In 2014 China's economy grew by 7.4 per cent and the U.S. economy by 2.4 per cent (see Figure 1). China's economy therefore grew more than three times as fast as the U.S.
Figure 1
China's GDP increased from 58.8 trillion RMB in 2013 to 63.6 trillion in 2014, i.e., by 4.8 trillion RMB. In dollar terms this was $780 billion measured at the exchange rate of Dec. 31, 2014, and $785 billion at 2014's average exchange rate. The US added $653 billion to GDP. China therefore added approximately $130 billion more to world output than the U.S. at market prices. This is shown in Figure 2.
Figure 2
· In 2014 the RMB's exchange rate fell against the dollar, thereby understating China's real output increase compared to the U.S. If measured at World Bank Parity Purchasing Powers (PPPs), China added approximately $1,300 billion to GDP compared to the $653 billion added by the U.S.
By whatever measure, therefore, China's economy considerably outgrew that of the U.S.
Such factual data is particularly illuminating in light of a consistent misrepresentation in certain parts of the financial media that China's economy is in a "crisis" or "severe slowdown," while the U.S. is undergoing "rapid growth." The data shows that, on the contrary, China not only continued to be the world's most rapidly growing major economy but continued to significantly outgrow the U.S.
A selection of headlines gives the flavor of what facts now show to have been unjustified "scare stories" about China. In January 2014, the Financial Times ran an article headlined "China's debt-fuelled boom is in danger of turning to bust." In April, another Financial Times headline declared "China's crisis is coming - the only question is how big it will be." In October, the American Enterprise Institute announced "An economic mess in China."
American academic Michael Pettis is a favorite source in such articles - the U.S. financial website Zero Hedge featured an article entitled "A Chinese Soft-Landing Will Inevitably Lead To A 'Very Brutal Hard Landing,' Pettis Warns." The Financial Times carried several articles by George Magnus, former Senior Economic Adviser to Swiss bank UBS, who predicts a coming slowdown of China's economic growth to 3.9 percent.
The contrast between such headlines and the actual economic results was therefore striking.
But such inaccurate material recycles a decades-old genre of what may be termed "fictional economics" predicting the coming "crisis" or "drastic slowdown" in China. This was not confined to fringe publications but involved persistently inaccurate projections by major Western media. For example, in 2002 Gordon Chang wrote a book entitled "The Coming Collapse of China," the thesis of which is self-explanatory. Chang argued, "A half-decade ago the leaders of the People's Republic had real choices. Today they do not. They have no exit. They have run out of time." Over a decade later, since time has not yet run out, one might expect that such an author's analysis would be disregarded. But instead, Chang was featured by Forbes and Bloomberg TV as a "China expert."
Another example may be taken from The Economist. In June 2002, the magazine produced a special China supplement called "A Dragon out of Puff." This report said of China, "The economy still relies primarily on domestic engines of growth, which are sputtering. Growth over the last five years has relied heavily on massive government spending. As a result, the government's debt is rising fast. Coupled with the banks' bad loans and the state's huge pension liabilities, this is a financial crisis in the making." The Economist's conclusion in 2002 was, "In the coming decade, therefore, China seems set to become more unstable." In reality, far from entering a crisis, China was about to enter the decade of the fastest growth ever experienced by a major economy in recorded history.
Why does such repeated inaccurate analysis of China's economy continue to appear in the Western media? It is striking that, during its economic reform, China has not underperformed its own ambitious projections but has consistently outperformed them. To graphically illustrate this, Figure 3 compares the Deng Xiaoping's projections for China's economic growth shortly after the start of the reform process with China's actual economic growth.
Deng Xiaoping's first stated target was to increase the size of China's economy by 400 percent between 1981 and 2000; the actual increase was 623 percent. The second goal was to increase China's GDP by a further 400 percent between 2000 and 2050, or a 1,600 percent increase between 1981 and 2050. In reality, China's economy had already grown by over 2,200 percent compared to 1981 by 2014. Deng Xiaoping's target was reached 38 years ahead of schedule! As regards China's latest stated goal - to double GDP between 2010 and 2020 - China is also ahead of its growth target.
Figure 3
Given such a reliable record over more than three and a half decades, China is clearly continuing to develop in line with the key goals officially reiterated by President Xi Jinping: "We have set the goal of completing the building of a moderately prosperous society in all respects by the centenary of the Communist Party of China in 2021 and building China into a modern socialist country... by the centenary of the People's Republic of China in 2049."
Outside China, understandably, there is less understanding of the framework of "socialism with Chinese characteristics" within which Chinese economic policy is designed, so it may be useful to use the recent explanation of why China's extremely high growth rate will continue provided by one of China's leading economists, Justin Yifu Lin.
In analyzing domestic China factors, Lin noted, "In 2008, China's per capita income was just over one-fifth that of the United States. This gap is roughly equal to the gap between the U.S. and Japan in 1951, after which Japan grew at an average annual rate of 9.2 percent for the next 20 years, or between the U.S. and South Korea in 1977, after which South Korea grew at 7.6 percent per year for two decades. Singapore in 1967 and Taiwan in 1975 had similar gaps - followed by similar growth rates. By extension, in the 20 years after 2008, China should have a potential growth rate of roughly 8 percent."
While Lin posited that China's average long term growth rate would be around 8 percent, shorter term projections must take external economic factors into account. Lin argued, "The external scenario, however, is gloomier… As a result, Chinese growth is likely to fall below its potential of 8 percent a year. As policymakers plan for the next five years, they should set China's growth targets at 7-7.5 percent, adjusting them within that range as changes in the international climate dictate. Such a growth target can… achieve the country's goal of doubling income by 2020." Indeed, a 7 percent annual growth rate from 2015 would result in China somewhat exceeding its target of doubling the size of its economy from 2010 to 2020.
Lin notes that the reason China can meet such targets also strikes to the core of an elementary economic error that leads to much erroneous media analysis of China. Lin states, "China has the potential to maintain robust growth by relying on domestic demand, and not only household consumption." Economically, in any country, domestic "demand" is not equal to consumption, as writers such as Pettis erroneously state, but is equal to consumption plus investment.
In reality, China has the world's largest investment resources. As Lin noted, "China's investment resources are abundant… private savings in China amount to nearly 50 percent of GDP… Even under comparatively unfavorable external conditions, China can rely on investment to create jobs in the short term; as the number of jobs grows, so will consumption." In a developing economy, investment accounts for 50 percent of economic growth on average, and in an advanced economy it accounts for 57 percent. It is therefore no surprise that China's much greater investment resources are leading its economy to continue to grow much faster than the U.S.
But why is China able to successfully carry out such investment programs, whereas in the U.S. numerous calls for increased investment in areas like infrastructure have not been implemented, even when publicly supported by such leading figures as former U.S. Treasury Secretary Larry Summers?
The reason lies in the fact that China is a "socialist market economy" not a "capitalist market economy." China possesses a state sector which does not aim to encompass the whole economy nor to administer it, but which is strong enough to set (and maintain, if required) China's overall investment level. As the Wall Street Journal accurately summarized, "Most economies can pull two levers to bolster growth: fiscal and monetary. China has a third option. The National Development and Reform Commission can accelerate the flow of investment projects."
No capitalist market economy, including the U.S., possesses such a powerful structure as China's "socialist market economy." This is why China's economy has continued to persistently outperform the U.S. and why all media predictions of disaster over several decades, and again in 2014, have invariably turned out to be false.
Another statistic casts further light on the situation. While sections of the media were running inaccurate stories on China's economy, foreign companies increased their investment in China from $123.9 billion in 2013 to $127.6 billion in 2014. As usual, companies - which have to deal with money and not propaganda - were more in step with economic reality than sections of the press.
For many years, I have made my living by supplying companies more accurate analysis of economies such as China than could be found in the Financial Times, the Wall Street Journal, and The Economist. Such publications have not been able to comprehend the superiority of China's economic structure to that of the West, and have therefore made repeated erroneous predictions. It seems that there are still openings in that field and, in light of the continuing errors in such publications, the factual record for 2014 again clearly shows that those seeking more accurate predictions of what will happen in China's economy will find these in China's media, from China's top economists, and in China's own growth projections.
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This article originally appeared at China.org.cn.
This chart shows the dominant long term trend in the US economy - gradual deceleration. A 20 year moving average is used to eliminate all cyclical or short term trends. The deceleration from 4.4% in 1969, to 4.1% in 1978, to 3.5% in 2002, to 2.5% in the first quarter of 2014 is clear. The temporary recovery in the late 1990s and beginning of the 21st century proved unsustainable and was followed by a sharper fall.
This trend shows that the most enduring feature of the US economy, which must be explained by any analysis, is not any analyses of business cycles, particularly those of a 'manic-depressive' type, but this very long term slowdown of the US economy.
Furthermore, as this deceleration has been going on for 40 years, it clearly has extremely deep roots which are very difficult to reverse. Unless dramatic changes in US economic policy take place, therefore slow deceleration should be built into projections for the US economy.
The period since the international financial crisis began has for the first time in over a century seen the US displaced as the world’s largest industrial producer – this position has now been taken by China. It has also witnessed the greatest shift in the balance of global industrial production in such a short period in world economic history. In 2010 China’s industrial output exceeded the US marginally but this has now been consolidated into a more than 20% lead with the gap still widening further.
In 2007, on UN data, China’s total industrial production was only 62% of the US level. By 2011, the latest available comparable statistics, China’s industrial output had risen to 120% of the US level. China’s industrial production in 2011 was $2.9 trillion compared to $2.4 trillion in the US – this data is shown in Figure 1.
Figure 1
When the comparable data is released for 2012, China’s lead will have increased substantially– between December 2011 and December 2012 China’s industrial output increased by 10.3% whereas US industrial production increased by only 2.7%. Calculations based on estimates in the CIA's World Factbook indicate in 2012 the value of China's industrial production was $3.7 trillion compared to $2.9 trillion for the US – which would mean China's industrial production was 126% of the US level.
Taking only manufacturing - that is excluding mining, electricity, gas and water production - in 2007 China’s output was 62% of the US level, by 2011 it was 123%. Again the gap has widened in 2012 and 2013.
No other country’s industrial production now even approaches China - in 2011 China’s industrial output was 235% of Japan’s and 346% of Germany’s.
World Bank data, using a slightly different calculation of value added in industry, confirms the shift. On World Bank data China’s industrial production in 2007 was only 60% of the US level, whereas by 2011 it was 121%.
Therefore in only a six year period China has moved from its industrial production being less than two thirds of the US to overtaking the US by a substantial margin. If China was the ‘workshop of the world’ before the international financial crisis it is far more so now
The trends producing such dramatic shifts in such a short period are shown in Figure 2. In six years China’s industrial output almost doubled while industrial production in the US, Europe and Japan has not even regained pre-crisis levels. To give precise statistics, between July 2007 and July 2013 China’s industrial production increased by 97% while US industrial output declined by 1%. Industrial production data for July is not yet available for the EU and Japan, but between June 2007 and June 2013 EU industrial output fell by 9% and Japan’s by 17%.
Figure 2
It is this enormous rise in China’s output which also drove the much discussed global shift in industrial production in favor of developing countries - in the six year period to June 2013, the latest date for which combined data is available, industrial production in advanced economies fell by 7% while output in developing economies rose by 65%.
As is clear from Figure 3, China accounted for the overwhelming bulk of the increase in the developing economies. Industrial production in Latin America rose by 5%, in Africa and the Middle East by 6%, and in Eastern Europe by 10%. But China’s industrial production in this period rose by 100% - industrial output in developing Asia as a whole rose by 65%, but the majority of this was accounted for by China.
Figure 3
Such a rise in China’s industrial production has consequences spreading far beyond industry itself. Industry has easily the most rapid increase in productivity of any economic sector – notably compared to services. The decline of industrial production in the EU and Japan, and relative stagnation in the US, means China is cutting the productivity gap between itself and the advanced economies. This is crucial for progress in raising China’s relative GDP per capita and living standards.
This rising productivity also explains why China’s exports have been able to maintain their competitiveness despite substantial increases in the exchange rate of China’s currency the RMB. On Bank for International Settlements data, the RMB’s nominal exchange rate rose by 25% between July 2007 and July 2013. But China’s real effective exchange rate, that is taking into account the combined effect of the nominal exchange rate and inflation, rose by 31% But despite this major currency revaluation China’s exports continued to exceed its imports.
The ability of China to successfully absorb such high increases in its exchange rate, due to high levels of industrial productivity increases, directly translates into relatively lower prices for imports and improved relative living standards for China’s population.
This data also settles the dispute between who believed there was a major industrial revival in the US, such as the Boston Consulting Group, and Goldman Sachs and other analysts who correctly concluded no such major revival has occurred. Those in China, such as Lang Xianping, who wrote that a great US industrial revival was taking place and China’s industry was in crisis look foolish in the light of data showing China’s industrial output doubled in a period when US industrial production did not grow at all. The only reason US industrial performance does not appear very weak, with negative net growth over a six year period, is because of the even worse performance of a major decline in industrial output in the other advanced economic centers – the EU and Japan.
It is naturally important not to exaggerate this scale of advance by China in industrial production. China’s industrial output is now considerably larger in value terms than the US, but the United States retains a substantial technological lead which it will take China a considerable period to catch up with. Due to a long period of globalization and consolidation by US companies, both processes which are only at early stages in China, US manufacturing firms are still four times the size of China’s in terms of overall global revenue– although between 2007 and 2013 Chinese manufacturing firms overtook Germany to become the third largest manufacturing companies of any country.
The scale of these changes in world industrial production also make clear that in comparison to developments in China gas and oil ‘fracking’ in the US, which have attracted widespread media attention, is merely a statistical sideshow – as already noted overall US industrial production has not even recovered to pre-crisis levels.
For the first time for over a century the US has been definitively replaced as the world’s largest industrial producer. Such a once in a century shift can literally only be described as historic.
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An earlier version of this article appeared at China.org.cn
Publication of US 2nd quarter GDP data, following that for China, makes it possible to accurately compare the recent performance of the world's two largest economies. The results are extremely striking as they show that in the last year the slowdown in the U.S. economy has been far more serious than in China. Consequently the data shows that while both economies are being adversely affected by current negative trends in the world economy, China is dealing with these more successfully than the U.S. Intense media discussion in China about its ‘slowdown’ is therefore misplaced unless equivalent attention is paid to understanding why the US economic slowdown is much worse than China’s.
To accurately establish the facts, it should be noted China and the U.S. publish their economic data in slightly different forms. It is therefore necessary to ensure that like is compared with like. The U.S. emphasizes annualized change in GDP in the latest quarter compared to the previous one; for the newest data this means it takes the growth between the 1st and 2nd quarters of 2013 and basically multiplies it by four. China emphasizes the growth between the 2nd quarter of 2013 and the same quarter in 2012.
Both methods have advantages and disadvantages. Quarter by quarter comparisons depend on seasonal adjustments being accurate, which is not always the case, while year by year comparisons are less sensitive in registering short term shifts.
But in the present case the conclusion is not fundamentally changed whichever method is used. If the method emphasized by China is used, then, as shown in Figure 1, in the 2nd quarter of 2013 China's GDP grew by 7.5% compared to a year earlier, while U.S. GDP grew by 1.4%. This means that China's economy grew at over 500% of the rate of the U.S. economy. Using the method preferred by the U.S. China's annualized GDP growth in the 2nd quarter was 6.8% and the U.S.'s was 1.7%, which means that China's economy grew at 400% of the rate of the U.S. economy.
Due to the difficulties of making accurate seasonable adjustments in both China and the U.S., the author would emphasize the year on year comparison; but whichever method is preferred China's economy was growing at 4-5 times the speed of the U.S. economy.
Figure 1
If the whole period since the international financial crisis began is taken then the disparity in growth between China and the U.S. is even more striking. In the five years up to the 2nd quarter of 2013 China's GDP grew by 50.7% and U.S. GDP by 4.5% (Figure 2). China's GDP grew more than ten times as rapidly as the U.S.
Figure 2
Turning to the most recent period, it is widely understood that since the beginning of the international financial crisis, China's economy has far outperformed the U.S., even if the dimensions of this are not clearly grasped. What is not so often understood is what has happened during the last year. During that period the economies of both China and the U.S. slowed, indicating the negative trends in the international economic situation. But the U.S. slowed far more than China.
China's year on year GDP growth fell from 7.6% in the 2nd quarter of 2012 to 7.5% in the same quarter of 2013 - a decline of 0.1%, or a 1.3% deceleration from the initial growth rate. However the year on year growth rate of the U.S. in the same period fell from 2.8% to 1.4% - that is by 1.4% or by 50% of the initial growth rate (Figure 3). Consequently China's growth fell marginally but the U.S.'s growth rate halved.
Figure 3
Furthermore, as the Financial Times correctly pointed out in its editorial on the latest U.S. data, U.S. economic growth has been particularly depressed in the last nine months. In that total period the U.S. economy grew by only 0.7%, or an annualized rate of under 1%. In the same period China's economy grew by 5.3%, or an annualized rate of slightly over 7%. Therefore if over the entire course of last year China's economy has been growing at 4-5 times the speed of the U.S. economy, in the last nine months China's economy has been growing at 7 times the speed of the U.S.
This does not mean that the US cannot partially recover from its extremely depressed 1.4% annual growth rate in the last year – the 10 year moving average of US annual growth is 1.8% and its 20 year annual moving average is 2.5%. But even recovery to these rates would leave the US growing at only one third of the rate of China.
The latest data therefore shows that the global economic discussion about the present world economic situation is not about China's "slowdown" and U.S. "recovery". It is "why is China coming so much more successfully through an adverse global economic situation than the U.S.?" And "why has the U.S. economy slowed so much more dramatically than China's in the last year?
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An earlier version of this article appeared at China.org.cn.
The international financial crisis brought about a radical change in the structure of international industrial competition, and China is winning this new contest. That is the only conclusion that can be drawn from the pattern of industrial expansion and contraction in the major industrial centres in the five years since the beginning of the international financial crisis in 2008.
As taking comparisons only for single years can obscure this fundamental trend, Figure 1 shows the changes in industrial output during the entire last five year period in the world’s four major industrial centres – China, the U.S., the European Union (EU) and Japan. The pattern is clear and striking.
Figure 1
China’s industrial production therefore increased by over three quarters during a period when U.S. industrial production stagnated and EU and Japanese industrial production significantly declined. That is a conclusive victory by China in this competitive struggle.
Extending the comparison to other developing economies, there is no individual industrial centre matching the four major global ones. Figure 2 therefore shows aggregated data for developing economic regions. As statistics for all developing economies are not available for February 2013, the period January 2008 to January 2013 is considered. Data for China is also shown. As no separate China data was published for January, due to the Spring Festival holiday, China’s January data is taken as the mid-point between December and the combined January-February statistics.
Again the pattern is clear over the five year period.
Figure 2
China was therefore successful in industrial competition not only with developed but with developing economies. As the increase in China’s industrial production was over 75%, and it was already one of the world’s main industrial centres, this constitutes a major shift in the balance of world industrial production in China’s favour.
What conclusions follow from these developments?
First, the claim of some Chinese commentators that there is a great revival of U.S. industry and China is lagging behind is factual nonsense. Not only has China’s industrial growth far outperformed that of the U.S., but U.S. industrial production has not even yet recovered to pre-financial crisis levels. Their arguments, based on citing purely individual examples such as that Apple will manufacture a few Macs in the U.S., are based on one of the most elementary and worst forms of statistical distortion – citing individual anecdotes and not overall trends.
Second, these differences in development have long-term consequences spreading to outside industries. Productivity increases in the industrial sector are much greater than in non-industrial sectors. Therefore China’s success in industrial competition raises its overall rate of productivity growth relative to less successful competitors.
These factual trends do not mean China will not face major future challenges within the industrial sector. China has already successfully shifted the centre of gravity of industrial production from low technology products (textiles, toys etc.) into medium technology (construction equipment, smartphones, personal computers, ships etc.). But China’s transition to very high technology industrial production still lies ahead – outside non-market sectors such as military and space production.
But it is not abnormal that China’s industry is currently dominated by medium, not yet high, technology production. China’s GDP per capita is approximately that of Japan in 1966 or South Korea in 1988. At those times Japan and South Korea had successfully made the transition from agricultural and low value added industrial economies to dominance through medium technology sectors – ship building, steel etc. Today China globally dominates the same industries. But at that time the period of domination of Japan and South Korea by high technology product innovation – Sony’s PlayStation and Walkman, Samsung’s high-end televisions and mobile phones – lay 10-15 years ahead.
As Lin Yifu, former chief economist and senior vice president of the World Bank rightly stresses, it is impossible for an economy to develop market sectors greatly out of line with its overall level of development. The full transition of China’s industry to dominance by high technology production lies a decade ahead. The key fact at present is that comparison of trends in the major industrial centers shows that in the intensified global competition created by the international financial crisis China is clearly winning.
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This article was originally published in Chinese at Sina Finance and in English at China.org.cn.
A convenient statistical coincidence shows just how slow US economic recovery is in this business cycle compared to previous ones. The new US GDP data for the 1st quarter of 2012 is for the 17th quarter since the peak of the previous business cycle in the 4th quarter of 2007. In all US business cycles since 1973 by the 17th quarter in the cycle the economy had expanded by almost exactly 10.5% – as can be seen in the chart. In this cycle US growth since the previous peak has been only 1.3%. That is the US economy has been growing at only 12.6%, one eighth, of its rate in previous business cycles.
The new US GDP data was widely seen as 'disappointing'. But the most important trend is not the short term figure of 2.2% annualised growth for 1st quarter of 2012 but the confirmation of the long term deceleration of the US economy. The charts below show that the moving average for US 20 year GDP growth has fallen to 2.6% and the moving average for 10 year US GDP growth has fallen to 1.6%. In both cases the declining long term trend for growth is clear from the charts.
It is because there is a persistent long term slowing of the US economy that the US growth data is consistently seen as 'disappointing'. In fact the problem is a wrong perception. Analysts are surprised by new data only when they have not internalised or built into their models this long term deceleration of the US economy. A more fundamental and longer term analysis of this long term slowing of the US economy can be found here.
PS for those interested more detailed analyses of the new US GDP figures will be found on my Sina Weibo - the Chinese equivalent of Twitter. Having used both Weibo is a better product than Twitter for economists as it has built in facilities for showing charts. Posts are in both English and Chinese. My Weibo is here.
Figure 1 – 10 year moving average of US annual GDP growth
Figure 2 – 20 year moving average of US annual GDP growth
Protectionist measures by the US government have received considerable publicity. These include tariffs against China's solar panel exports, the dispute over rare earths, a bill against "subsidized" exports passed by both houses of the US Congress and other steps.
These measures are real. But it is also important not to exaggerate them. Protectionism is not the main trend in the global economy. This is shown both by factual economic trends and considering the underlying forces at work. Protectionist measures affect trade at the margins but do not alter the core of world trade which continues to expand.
To show this first consider the facts. The volume of world trade fell severely during the international financial crisis, declining by 19.7 percent between April 2008 and May 2009. But it then more than recovered. According to the latest available data, by January 2012 the volume of world trade was 4.8 percent above pre-crisis levels - Figure 1.
Figure 1
After the financial crisis US imports fell sharply, from 15.7 percent of GDP in the third quarter of 2008 to 10.6 percent of GDP in the second quarter of 2009, but then recovered to 14.8 percent of GDP by the fourth quarter of 2011.
Regarding relations between China and the US, frequently seen as the main area of protectionism, in dollar terms China's exports to the US rose 22 percent between their pre-crisis peak in September 2008 and the same month in 2011, well above the 15.4 percent increase to the EU, and not far behind the 27 per cent increase to Japan. In short, US post-financial crisis trends showed trade recovery, not deepening protectionism. Nor was protectionist actions even the main trend in trade between the US and China.
Claims that protectionism is the dominant trend in the world economy are therefore factually exaggerated, and take individual developments out of context without examining their overall weight.
Analysis of fundamental economic forces confirms why protectionism is not the main trend. Modern production is on such a large scale that it cannot find an adequate market for its volume of production, at efficient levels, purely within a national economy. That is why, for example, China's reform and opening-up was necessary, but exactly the same pressures affect the US.
Even in 1929 serious retreat into protectionism led to disastrous economic decline and crisis, culminating in economic and political destabilization of all countries and finally world war. Today, when production is on a far larger scale than 1929, the economic results would be more catastrophic. This is why all major economies have so far rejected large-scale protectionism.
Fundamental economic analysis therefore confirms what the facts reveal, that certainly there will be some protectionist actions, but these will be at the margins, and globalization, not protectionism, will remain the main trend in the world economy.
Nor is protectionism likely to be the main instrument of US 'neo-cons' or a Republican president. US neo-cons have much experience in how to slow Asian economies. This was successfully achieved against Japan and then the South East Asian "Tiger" economies during the 1997 debt crisis. In neither case was protectionism the main weapon.
The first 'neo-con' strategy was to transfer disputes from the economic realm, where the US is gradually weakening, to the military and political fields, where the US remains much stronger.This tactic is followed in the US 'pivot' toward the Asia-Pacific region.
Within the economic realm the main methods US 'neo-cons' used were forcing other countries to overvalue their currency, forcing cuts in investment levels, which slow economies, and lower foreign inward investment to reduce technology transfer. All these methods are being attempted against China. Protectionism is not dominant in any of these methods.
Attention must certainly be paid to real protectionist measures but exaggerating the degree of protectionism is factually incorrect, not based on analysis of the world economy's main forces, and fails to identify the main economic tactics used by US 'neo-con' circles.
Competition within globalization, not protectionism, is still the world economy's main trend.
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An earlier version of this article appeared, in Chinese and English, in Global Times.
Considerable publicity was given to the decline in the official US unemployment rate to 8.3 per cent in January 2012 and the creation of 243,000 non-farm payroll jobs. The problem is that, as usual, no baseline or serious study of overall trends was given to evaluate this monthly data.
The reality is the number in US non-farm employment still remains 5.6 million, 4.1%, below its peak level in January 2008 (Figure 1). But this figure very substantially flatters as since then the US population has grown by almost 4%.
In fact there has been no significant increase in the percentage of the US population of working age in employment since the depth of the recession, and the participation rate in the labour force of the US population of working age continues to drop.
Figure 1
The sharp drop in the participation of the US participation of working age in the total labour force (i.e. employed and unemployed) is shown in Figure 2. Between January 2008, the peak of US non-farm employment, and January 2012 the participation rate in the US labour force of the population over the age of 16 fell by 2.5 per cent – from 66.2 per cent to 63.7 per cent.
Figure 2
Regarding those actually in employment the situation is worse. The percentage of the US population over the age of 16 in employment fell by 4.4 per cent, from 62.9 per cent to 58.5 per cent, between January 2008 and January 2012. There has been essentially no significant recovery from the low point of 58.2 per cent in December 2008 to the 58.5 per cent in January 2012 (Figure 3).
Figure 3
US GDP recovery is the slowest in this business cycle of any since World War II, and in December 2011, the latest available data, US industrial production was still 5.4% below its level in the previous business cycle. As productivity growth means that less workers are required even when previous peak levels of output are regained it will be a substantial period before the US regains its previous employment level. Paul Krugman therefore noted the situation accurately: ‘the gap remains huge. Suppose that we need 100,000 jobs a month to keep up with population growth, and that we’re 10 million jobs in the hole — both conservative estimates. Then we need about 7 years of growth at this rate to restore full employment.’
It remains to be seen whether US employment growth can continue at its present rate for seven years, But the fundamental trend so far during this business cycle has not been a decline in real unemployment but an increase in the proportion of the US population dropping out of the labour force.
Currently a number of attempts are being made to claim a major revival of US industry is taking place. For example Harold L. Sirkin, of the Boston Consulting Group, writes: ‘A resurgence of U.S. manufacturing seems to be in the offing. With production costs rising in China, some companies are bringing their manufacturing back to the U.S…. That's partly confirmed by the data: The Institute for Supply Management (ISM) recently reported that U.S. manufacturing had expanded for 24 consecutive months. Likewise, the Federal Reserve reported a 0.6% increase in manufacturing in July 2011, with a year-on-year gain of 3.8%.’ Washington Post columnist Vivek Wadha claims: ‘America is destined to once again gain its supremacy in manufacturing, and it will soon by China’s turn to worry.’
It is therefore important to be clear that these claims are a myth. As may be seen in Figure 1 US industrial production has not even regained pre-financial crisis levels. In December 2011, the latest available data, US industrial production was 5.4 per cent below its peak in the previous business cycle. Equally striking, for the long term, is that since June 2000, the peak of the last but one business cycle, average annual US industrial growth has been only 0.3 per cent. In short, far from a ‘rebirth’ of US industry occurring, US industrial production has scarcely grown for over a decade and so far in the present business cycle it has not even regained its previous peak level of output. On the latest monthly data it would take US industry two years to regain its previous peak output.
Figure 1
Sirkin presents as evidence to justify his claims: ‘Volkswagen, for example, recently opened a new $1-billion factory in Chattanooga, Tennessee; Embraer, the Brazilian manufacturer of mid-size commuter jets, recently opened an assembly plant in Melbourne, Florida; and Mitsubishi Nuclear Energy Systems, which builds nuclear power plants and components, is locating a new engineering center in Charlotte, North Carolina.’ Publicity was given by others to a US company exporting chopsticks to China.
Unfortunately presentation of individual examples proves nothing. Industrial production is an aggregate, an average of different movements by companies. There will therefore always necessarily be cases above and below the average. Finding individual companies which are expanding, whether in chopsticks or anything else, therefore doesn’t constitute proof – even if US industry were sharply declining individual expanding companies may well exist.
Sirkin’s statistic that US manufacturing has been expanding for 24 months also doesn’t prove anything. Choosing particular starting dates, rather than considering the overall trend, has a well understood effect in distorting analysis. For example take 1933, the depth of the Great Depression, as a starting point for measuring US economic growth during the 1930s. By 1939 the US economy had expanded by 50 per cent. Solely from this one might conclude that the 1930s were a period of prosperity, whereas actually they were the worst decade in US economic history. The statistical distortion is to measure from the lowest point of the business cycle, ignoring the enormous fall in US GDP which took place in 1929-33. To avoid such statistical distortion economic analysis must state what points in the business cycle it is comparing and consider the economic process as a whole.
To see how this error distorts perception of US industry note that by the time US industrial output reached its bottom in the present recession, in June 2009, it had to grow by 21 per cent to regain its previous peak output. By December 2012, which indeed was after two and a half years of expansion, the increase was 14 per cent. Such an expansion of 14 per cent might sound impressive – it is a growth of over five per cent a year. But such an 'optimistic' conclusion distorts the reality – because 21 per cent growth was required to even regain the previous peak level of production!
Apple’s Steve Jobs stated the reality of US manufacturing reality at a dinner with President Obama last February. Asked what would shift iPhone production to the US, Jobs bluntly replied ‘those jobs aren’t coming back’.
US manufacturing ‘rebirth’ can only be claimed when there is statistical evidence to support it, not when output has not even regained previous peak levels.
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An earlier, non-technical, version of this article appeared in Global Times.
China’s economic growth has become a key factor not only for itself but for world markets. As the scale of China's impact is still too frequently underestimated it should be noted that, measured in current dollars and at market exchange rates, i.e. in terms of actual effective demand, in the three years following the start of the international financial crisis China contributed 33.4 per cent of global market growth – more than four times as much as the US 8.1 per cent (Table 1). While final data for 2011 is not yet available, it is already clear from the first three quarters figures that China’s market last year expanded by over $1 trillion – approximately twice as much in dollars as the US, despite US growth having resumed. Table 1 makes clear no other economy has approached China in terms of market/global aggregate demand expansion.
It is therefore a key question whether China will continue essentially the same scale of market growth in 2012. The answer is ‘yes’ - but because of the issue’s importance the reasons should be clearly outlined. Interlinked with this is the decisive role played by developing economies in recovery from the financial crisis – the interlinking being that China is by far the largest developing economy, while the developing economies have become China’s largest trade partners.
In the three years covering the period from the beginning of the international financial crisis to the latest available annual data, i.e. in 2007-2010, developing economies accounted for 78.6 per cent of world market growth and developed economies for only 21.4 per cent. Considered from another angle, simply taking different classifications, either the BRIC economies (Brazil, Russia, India and China), or China plus Latin America, contributed the majority of world market/effective demand expansion – either of these groupings accounting for more than twice as much market expansion as the developed economies.
Table 1
Turning to more detailed trends, the first feature determining China’s continued dominant position in world market expansion, one the consequences of which are insufficiently frequently noted, is that as China’s economy becomes larger a similar percentage yearly growth necessarily turns into an increasingly large annual absolute market increase - in inflation adjusted terms, China’s economy expanded by 2.3 trillion RMB in 2008, 2.4 trillion RMB in 2009, and 3.1 trillion RMB in 2010.
But even frequently cited constant price growth figures underestimate the expansion of China’s position in the world market. Actual sales, and therefore changes in aggregate demand, use real money which is affected by exchange rate shifts and inflation – further figures in this article are therefore at current market exchange rates and prices unless otherwise stated. In 2009, when China froze the RMB’s exchange rate due to the international financial crisis, China’s economy grew by $469 billion – compared to a US contraction of $353 billion. In 2010, when China allowed the RMB exchange rate to rise, its annual economic expansion rose to $935 billion and the figure will be over $1 trillion in 2011 – roughly twice US market expansion.
Table 1 also makes clear the second reason China’s market will continue its expansion. World growth is now dominated by developing economies and China is their most rapidly expanding trading partner.
Considering trends among developing economies, China accounting for 33.4 per cent of global market expansion. Latin America was second – constituting 17.3 per cent of world growth, with Brazil accounting for 58 per cent of this. China and Latin America together accounted for 50.7 per cent of world market growth..
Among other developing economic regions, South Asia contributed 8.0 per cent to world market growth, with India accounting for 84 per cent of this. Developing East Asian economies, excluding China, accounted for 7.0 per cent of world growth – Indonesia constituting 54 per cent of this. The Middle East and North Africa accounted for 6.1 per cent of world growth with no single dominant regional economy – the largest contributor, Egypt, constituted only 19.9 per cent of the total. Developing countries in Europe and Central Asia accounted for 4.5 per cent of world growth – of which 55 per cent was Russia. Sub-Saharan Africa grew rapidly, but due to its low starting point only contributed 2.1 per cent of world growth.
Turning to developed economies, Japan illustrates the importance of currency movements for shifts in markets measured in dollar terms. Due to the yen’s sharp exchange rate rise, Japan contributed 14.9 per cent of the dollar expansion of the world market despite Japan’s economy contracting in inflation adjusted terms. The US contributed 8.2 per cent to world market growth, despite the US not having grown in constant price terms, due to the dollar rising against other currencies,
The ‘disaster area’ for world markets was the developed European economies with a decline of $668 billion - equivalent to subtracting 9.2 cent from world growth.
It is already clear 2012 will show no fundamental change in this pattern. Developed European economies will again be the worst performing region – suffering a recession possibly magnified by a low Euro exchange rate. The US should expand, but slowly compared to previous upswings in US business cycle. Therefore if the world economy is to grow this will again have to be primarily due to developing economies.
Fortunately, the large developing economies are slowing but still growing substantially more rapidly than developed ones. China, the dominant factor in the equation, even on pessimistic estimates is likely to grow by at least 7-8 per cent in real terms this year which, after increases in the exchange rate of the RMB and inflation is take into account, means an expansion of its market of probably 12-15 per cent in dollar terms. Minimum real growth estimates for India are at least seven per cent.
It is also clear from the pattern in Table 1 why BRIC economies will again dominate world growth – in 2007-2010 they contributed 52.5 per cent of world market expansion. Not only are the BRICs individually the largest developing economies but each is the centre of a major regional economic area. While Brazil has slowed, Russia’s economy has been accelerating, and it is in any case China and India which are the dominant dynamic BRIC economies.
This overall situation clearly interrelates with China as it already carries out the majority of its trade with developing economies – 54 per cent of total trade, 49 per cent of exports and 60 per cent of imports.
The implications for China’s markets are clear. China has not only the world’s most rapidly expanding domestic market, and declining inflation gives it extra room for domestic economic loosening/stimulus in 2012, but its biggest trading partners are the most rapidly growing regions of the world economy. It is this combination of domestic and international factors which determines that China will continue to remain the world’s most rapidly expanding market/supplier of increased aggregate demand in 2012. Given the negative prospects in Europe, and slow growth in the US, it will then be the situation in the developing economies, which is increasingly related to the situation in China, which will necessarily determine the overall prospects for world growth in 2012.
* * *
This is an expanded version of an article which originally appeared in Shanghai Daily.
The beginning of 2012 is a suitable moment to assess China's economic prospects for the year and coming period. This overall perspective is clear – China will grow strongly, remaining the world's fastest growing major economy, and will continue to substantially outperform Western pessimist predictions. This is the same fundamental analysis maintained by the author over the last two decade period. Factual results during these twenty years have confirmed such projections - as opposed to the opposite perspective. As accurate or inaccurate predictions do not depend on personal characteristics, but on different fundamental analyses, therefore what leads to repeatedly correct and incorrect projections regarding China's economic growth?
The core issue is simple but difficult for the majority of non-Chinese analysts to admit, despite constant confirmation by economic facts and repeated falsification of predictions of China's serious slowdown. This core issue is that statements by Chinese analysts that China has a stronger economic structure than the US and Europe, and that this therefore produces stronger economic performance, is not a boast but actually factually correct. As this stronger character of China's economic structure is not understood by many Western analysts, they therefore systematically, and each year, underestimate China's economic growth potential.
Nevertheless, a genuine difficulty for non-Chinese analysts is that explanations of this economic strength are frequently posed only in terms of specifically 'Chinese characteristics'. It is therefore worth spelling out more generally why China has a stronger economic structure than the US and Europe, and how this relates to global economic issues that will be faced in 2012.
![A model performance [By Jiao Haiyang/China.org.cn]](http://images.china.cn/attachement/jpg/site1007/20111231/001372acd0b51068e5cb0a.jpg "A model performance [By Jiao Haiyang/China.org.cn]")
A model performance [By Jiao Haiyang/China.org.cn]
China self-definition of its system is a 'socialist market economy'. This denotes it differs fundamentally from the economy, modeled on the former USSR, which existed prior to China's 1978 economic reforms, in that economic policy is not run by administrative but by market means. China has a large and vibrant private sector – indeed the world's most rapidly growing private sector. However China differs from the US or Europe in having a sufficiently large state sector, and a nationalised core banking system, that it can directly set the economy's overall investment level – the state sector is too small in the US or Europe to achieve this. This combination of market system and a state sector sufficiently strong to determine the overall level of investment is what gives China its greater economic strength than the US or Europe - such a structure can be understood either from a Chinese 'socialist' point of view or a Western 'Keynesian' one, and for present purposes it is unimportant which is chosen.
To illustrate this, consider a key contemporary economic problem – the current situation in the US. The Financial Times on December 15 accurately described the situation in the US economy. It noted that the share of wages in US GDP had fallen to the lowest level since records began and concluded: 'The decline in the labor share, along with a shift of labor income towards higher earners, may be an important part of why the US economic recovery is so sluggish. Workers on lower wages consume much of their income, while higher wage earners and those with capital income are more likely to save. That will not affect total demand if savers lend to those who want to consume or invest in buildings and start-ups – but investment has been slow to recover in the wake of the recession.'
In short, the US economy is growing slowly not because there is a shortage of funds for investment, on the contrary profits are at a record high, but because investment is very low – indeed the entire decline in US GDP in the current 'Great Recession' is accounted for by the investment fall. The problem is that in the US there is no mechanism which ensures that the huge funds available for investment are actually invested.
In China no such problem exists. If funds are not directly invested by companies, then the state owned banking system and state sector can invest them. Therefore no shortfall of demand occurs of the type analysed by the Financial Times in the US. During the entire international financial crisis China, unlike the US, suffered no investment decline – on the contrary investment increased. The problem of accumulation of unused funds of the US type, that is in Keynesian terms a shortage of effective demand, does not arise in China. Equally if China's economy is booming, and companies are utilizing all funds for investment, the state steps back and cuts its own investment – reducing it to cool overheating. That is why China's macroeconomic policy is stronger than that in the US - the problems of either shortage of or excessive demand, which plague the US and European economies, are smoothed in China.
This evidently does not mean China escapes all macroeconomic issues. No policy maker can judge absolutely accurately how strongly the international economy will grow, what will be all the inflationary or deflationary pressures present, exactly how China's own economy will respond to a given measure etc. Therefore there are always issues of overheating, undershooting, inflation, deflation etc. But these are qualitatively smaller fluctuations than in the US or Europe.
The period since the onset of the international financial crisis showed this strength of China's economic structure clearly. Faced with the international financial crisis in 2008, China was able to launch a massive stimulus package which meant its economy did not suffer a recession at all. The recovery of the world economy in 2010-2011 combined with the aftermath of the stimulus package to create some economic overheating and 2011 was therefore mainly spent damping inflation. In 2012, with negative trends dominating the world economy, China will loosen policy.
The overall result is evident. In the four years to the latest economic data, for the 3rd quarter of 2011, the US grew by 0.5 percent, the EU shrank by 0.3 percent, and China grew by 42.2 percent. China's economy therefore suffered some fluctuations on a strong growth path, whereas the US and Europe suffered overall economic stagnation. The stronger character of China's economic system was shown by these facts – those predicting crisis for China, on the same scale as the US or Europe, made the wrong predictions because they failed to analyze that strength.
It is this superior strength of China's economic structure that also makes it clearly possible to predict for 2012 that China's economy will continue to grow strongly, that it will remain the fastest growing major economy in the world, and that it will outperform on the upside Western pessimists predictions – as in previous years the facts of 2012 will confirm that analysis. Not until they understand the greater structural strength of China's economy will current critics be able to make persistently accurate predictions.
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A shorter and edited version of this article originally appeared on China.org.cn.
One of the biggest questions for the global economy in 2012 will be whether the US follows Europe into recession – the other is whether the large developing economies will be able to repeat their strong growth performance during the previous wave of the financial crisis in 2008-2010 by ‘decoupling’ from the US and Europe.
A significant negative for US prospects came with the release of the latest S&P Case-Schiller house price index. This showed a larger than expected 3.4 per cent annual fall for the latest period for which data was available – October. But much more significant than one month's figures is the overall trend.
As shown in Figure 1 US house prices reached their post-financial crisis low in May 2009 after falling 31.7 per cent from their peak. Recovery continued until May 2010 after which prices began falling again. By October 2011 US house prices were 33.0 per cent below their all-time peak – the worst level since the international financial crisis began.
As housing is, with shares and bonds, one of the three great US asset classes, a significant fell in this category will have an impact across the whole US economy. In particular:
Figure 1
The overall view of this blog remains that the US will continue to have historically slow growth rather than re-entering a recession, and the latest US consumer confidence figures for December were the best for eight months. But the fact that the trend of US house prices has now been down for 17 months is a serious negative.
Whatever their immediate mood US consumers are constrained by objective financial factors. With unemployment not falling significantly and incomes not rising falling house prices will further constrain consumers. The recent increase in consumer purchasing in the US has been financed by a reduction in savings levels – which is unsustainable.
The house price data by itself does not lead to a view the US is entering recession, but it pushes US growth towards the ‘slower’ end of the ‘slow’ spectrum.
The present rapid shifts in the international and Chinese economic situations, resulting from the second wave of the international financial crisis centred on the Eurozone, are a challenge both to policy makers and a major opportunity for those with an accurate analysis of China's economy.
China speed [By Jiao Haiyang/China.org.cn]
The reasons for this are the same as those when I ran a consulting company and knew inaccurate media analysis was an opportunity to make a profit. Businesses need accurate information to take correct decisions. If a newspaper writes an economy is going to boom when actually it suffers recession, the paper doesn't directly lose anything, but a company acting on the wrong analysis can lose a great deal of money. Economic and business writing therefore operates under an objective discipline which doesn't necessarily exist elsewhere - companies rationally pay a great deal of money for accurate information.
The reason a similar opening exists in China at present is that attempts are being made to convince businesses that China faces an 'economic crisis' on the same scale as that hitting the European Union (EU) and the US. This view is factually nonsense, as any comparison of economic data shows. In the four years to the latest data the US economy grew by 0.5 per cent, the EU's shrank by 0.3 per cent, and China's economy grew by 42.2 per cent. Given such comparisons claims that China is suffering from 'crisis' is rather like saying the US has cholera, the EU has typhoid, and China has a cold and therefore they are basically in the same situation as 'all are ill'. Such claims destroy rational scales of comparison and are therefore wholly misleading in predicting what will happen.
China's economy naturally faces problems - all economies always face problems. It has had excessive house price increases, which are now gradually coming under control, and its consumer price index has been too high - although again it is now falling. Recession in the Eurozone will reduce orders to China's exporters. But China's economic year on year growth rate in the last quarter was 9.1 per cent compared to 1.5 per cent for the US and 1.4 per cent for the EU. If the US and EU were paralleling China's growth far from claiming, this was a 'crisis' they would be calling it an unprecedented boom!
A typical example of such fairy stories regarding China's 'economic crisis' was a recent article in the Wall Street Journal by Nouriel Roubini and Ian Bremmer president of the Eurasia Group - a risk analysis company. This was entitled 'Whose economy has it worst?' and was introduced: 'With Europe, China and the US in crisis, the real question is which of them will stumble first.' The data already given above show such statements are bombast - there is no crisis in China's economy similar to the US or EU.
Why, therefore, are such economic fairy stories published, why are they are publicized, and how to profit, not purely monetarily, from them?
One reason they appear, of course, is simply that people make wrong analyses. But the reason they are publicized is different. Take for example Gordon C Chang. He wrote a book in 2001 entitled 'The Coming Collapse of China'. This argued 'A half-decade ago the leaders of the People's Republic of China had real choices. Today they do not. They have no exit. They have run out of time.'
In the ten years since China's economy more than doubled in size. After such radically wrong predictions you might expect that Chang would find it difficult to obtain coverage for his analysis. But instead he is regularly published by Forbes magazine with articles posing such questions as 'Can Beijing rescue a stumbling economy'. Some 'stumbling' with nine percent GDP growth! Such analyses have nothing to do with reality but fit the politics of Forbes - which specializes in analyzing the ultra-rich in the US and is hostile to China.
Business people caught up in such political maneuvers can lose huge sums of money. For example, in a case rather similar to the one of China at present, those backing a particular political grouping in Russia in the 1990s persuaded US hedge fund manager George Soros to become involved in a takeover battle around a Russian telecommunications company Svyazinvest. I was retained as a consultant by others involved and concluded Svyazinvest was a terrible investment. Therefore Soros was being pulled in for reasons of political maneuvers and not serious financial analysis. Soros lost approximately a billion dollars.
Companies rightly analyzing that China's economy will continue to grow, GE and Goldman Sachs immediately come to mind, are those most successful in business in China. Equally there are Western analysts who correctly predicted China's growth over the last period - Goldman Sachs Jim O'Neill, who invented the term BRIC, and the specialized consultancy Dragonomics for example.
This gives a major opportunity to those with an accurate analysis of China’s economy. Businesses following the erroneous view that China's economy is going to drastically slow or enter crisis will lose money. Those who rightly predict China's economy will continue to grow rapidly will gain credibility. This requires accurate analysis and reporting - not pretending there are no problems in China's economy but correctly contextualizing that these are far less than in the US and EU. The facts over the next year, as in previous years, will simply show that China’s economy continues to grow strongly, suffering no economic crisis qualitatively equivalent to that in the EU and US at present.
* * *
This article originally appeared on China.org.cn. It has been amended to remove references only relevant to readers in China.
Europe’s economy is probably entering a double-dip recession. The indications from world trade, as analysed previously, are so far that the world economy as a whole is facing slowdown but not renewed recession. However a detailed breakdown shows extreme unevenness in the trade recovery - with only Asia and Latin America surpassing pre-financial crisis levels. Regional trends for imports and exports, using a three month moving average to smooth short term fluctuations, are shown in Figures 1 and 2.
Considering trends in detail, pre-crisis world trade peaked in April 2008. In the latest month for which data is available, September 2011, world trade was 2.3 per cent above its pre-crisis maximum on individual month comparisons and 3.6 per cent above on a three monthly moving average.
Table 1 shows a detailed breakdown of trade since the financial crisis by region. This data shows that only in developing Asia and Latin America are both exports and imports clearly above pre-financial crisis levels. Taking three monthly moving averages, imports are up from pre-crisis levels by 16.7 per cent in developing Asia and 9.4 per cent in Latin America, with exports up 17.0 per cent in developing Asia and 6.9 per cent in Latin America. In the US exports are slightly above pre-crisis levels but imports are significantly below. In all other regions – the Euro area, Africa and the Middle East, Central and Eastern Europe, and Japan – both exports and imports remain below pre-crisis levels.
The recovery of world trade to above pre-crisis levels is therefore due to the situation in two developing regions. The weakness of trade in the Euro area is worse than most regions, particularly in terms of imports, but not really exceptional. Trade in most areas of the world economy remains significantly below pre-crisis levels.
Table 1
Trade with China
Among the largest economies the chief beneficiary of this pattern of world trade is China - although it is likely the pattern itself is in significant part a result of the dynamics of China's trade.
In the period between China's peak pre-crisis level of exports and imports, in July 2008, and September 2011 China's exports to Asian developing economies rose by 22.9 per cent and its imports from these economies rose 31.4 per cent. China's exports to Latin America rose by 53.0 per cent and its imports by 59.9 per cent. These are clearly exceptional growth rates. China is the main trade partner for most developing Asian economies as well as for a significant number of Latin American economies including Brazil.
The patterns of world trade since the financial crisis therefore indicate the consolidation of a dynamic trading interaction between China, developing Asia and Latin America. China's economy and trade is not yet sufficiently large to offset a global scale recession in the EU and/or US, but there is clear evidence that China's economy is sufficient to produce the most dynamic of post-crisis world trade interactions centred on Asia and Latin America.
Figure 1
Figure 2
The full scale of the difference in economic performance of China compared to the US, Europe and Japan during the international financial crisis is shown in Figure 1. It is summarised in the following figures:
Figure 1
These are evidently extraordinary statistics. During this four year period China’s economy expanded 70 times as fast as the US.
Such data also clearly refutes the current attempt to claim that in China there is an economic ‘crisis’ in some sense equivalent to that in the US or Europe. Such arguments are intellectually sloppy (at best) attempts to undermine rational thought by destroying any serious quantitative comparisons.
To give examples of such claims, a recent article by Nouriel Roubini and Ian Bremmer in the Wall Street Journal is introduced: ‘With Europe, China and the U.S. in crisis, the real question is which of them will stumble first.’ Similarly Will Hutton in the UK’s Observer claims: ‘Nobody would start from here – an ill-designed single currency interacting with an insupportable burden of private debt created by oversized, undercapitalised banks. And it's as much a problem in the US and China as in Europe.’
The data given above shows such claims are false. GDP growth of 42.2% in China, an annualised 9.8%, is not remotely comparable to the US’s annualised 0.2%, or the EU’s annualised minus 0.1%.
Naturally it is impossible to have an annual 9.8% growth rate for almost four years and have no problems at all – in fact no economy ever has no problems! China has had consumer price inflation, primarily due to international commodity price increases, which reached 6.5% before falling and it has had excessively high house price increases – which are also now falling. But none of this constitutes a ‘crisis’ on anything quantitative scale remotely approaching that of the US and Europe.
Nor, to take Hutton’s point, does the EU financial crisis have anything like the same impact in China, or even the US, as in the EU. The effect of the decline in imports from the EU on China’s exports is noticeable but only in the sense that it reduces China’s overall export growth from a very high to a high rate of growth – 15.8% last month, in a factual situation in which none which China’s GDP growth in the last four years has come from net trade. Indeed reduction of China’s trade surplus means that net trade has been a subtraction from China’s GDP growth during that period. The exposure of China’s banks to Europe’s debt crisis is also minimal. While the financial exposure of the US to the Eurozone is certainly higher than China’s there is also no indication that the actual scale of crisis or defaults in Europe is pushing the US into recession – whereas a double dip recession in Europe itself is extremely possible.
Hutton, in short, is engaging in inflated rhetoric to attempt to create a relative equals sign between the situation in China (and the US) and that in Europe when none exists. Inflated rhetoric is merely a form of destroying the quantitative scale of comparison which is a precondition for rational thought.
The GDP data for China, US and Europe GDP data should also end attempts by Kate Mackenzie the Financial Times and Nouriel Roubini to present the US’s Michael Pettis, and similar analysts, as having had a correct analysis of China. Michael Pettis runs an objectively moderated blog on China but his analysis of China has been factually shown to be quite erroneous – claiming that: 'the US would be the first major economy out of the crisis and China one of the last.’ Evidently a situation where China has grown by 42.2% and the US has grown by 0.6% shows the reverse has been the case. Claims that it is too early to judge whether China or the US has been more successful in coming through the financial crisis are just attempts to avoid the test of facts that has taken place. Even if, against the evidence, China’s economy were now to slow significantly the scale of growth it has already achieved demonstrates that has come through the financial crisis far more successfully than the US or Europe.
The basis of any serious analysis or theory is facts. Those who refuse to refer to the data of the relative performance of China, the US or Europe during the last four years do so only because their analyses will not stand the test of examination by these facts.
I have a new article at China.org.cn which analyses the impact of the present 'Great Stagnation' in the developed economies on the prospects for China's economy.
It concludes:'Given extremely slow growth in the developed economies, and that examination of underlying macro-economic factors such as savings and investment indicates no reason to expect a substantial growth acceleration, this places China in a new international economic situation. For almost the entire period since China launched its economic reforms in 1978, it has been growing more rapidly than other economies but in an international context where the developed economies were growing significantly. The only serious previous recession in the advanced economies during China's reform period was right at its beginning, in 1980-81, when China was scarcely integrated in the international economy. The international slowdowns in 1990 and 2000 were brief and mild and while the 1998 South East Asian financial crisis impacted China significantly, it did not originate in the developed economies...
'In economics and business there is no virtue in either optimism or pessimism, there is only a virtue in realism. Given current trends, China has to base itself on a perspective that for several years there will be slow growth of the developed economies and therefore slow growth of their imports. Developing economies, while growing more rapidly than developed ones, will not in the very short term be able to fully compensate China's exports for stagnation in developed economies.
'The international framework for China's economy is therefore clear. It is important to understand that what is faced is a 'Great Stagnation' not a new 'Great Recession' - that is there is no reason to anticipate major international economic downturn of the 2008 type. China therefore does not need a new huge stimulus program of the type it launched in 2008 - which would lead to severe economic overheating. But the international economic situation requires adjustments in emphasis.
'First, even more than previously, China has to rely on developing domestic demand. Greater analytical clarity on this is important as at present domestic demand is frequently confused with domestic consumption - the two are not the same.
'Second, while developing economies will not immediately be able to fully make up for the negative pressure on China's exports from the 'Great Stagnation', they provide an important addition to China's domestic demand - in the last fifteen years the percentage of China's exports going to developing economies have risen from 35 percent to 50 percent. All developing economies face the Great Stagnation, therefore all face constriction on exports to developed countries, while China's imports are continuing to expand. This will produce greater integration of developing economies with China in both exports and imports.
'Within developing economies many of China's top companies, such as Huawei, Haier, and Lenovo already have high brand values and the present situation therefore creates opportunities to further enhance the positions of China's international brands.'
The full article, including a brief comparative analysis of the 3rd quarter US GDP figures with previous US post-war business cycles, may be found here.
One of the more factually inaccurate pictures being spread by supporters of the policies of the present UK government - with its priority to budget deficit reduction - is that UK economic performance during the financial crisis is superior to that of the evidently crisis hit Eurozone. A typical version of this appears in an article on 3 October in the Daily Telegraph by its international business editor Ambrose Evans-Pritchard.
Evans-Pritchard states: ‘My sympathies go to the hard-working citizens of Germany, Spain, Italy, Portugal, and Ireland for being led into this impasse [the Eurozone] by foolish elites.’ Presumably Evans-Pritchard's sympathy goes to the inhabitants of the Eurozone, rather than his own country the UK, because he believes the UK has been doing better than the Eurozone.
The factual situation is the exact opposite of the impression presented by Evans-Pritchard. Judged by economic performance, the average citizen of the UK far more needs Evans-Pritchard’s sympathy than the average citizen of the Eurozone - i.e. the UK’s economic performance during the financial crisis is much worse than that of the Eurozone. This may be seen in Figure 1 – which shows UK GDP compared to that of the Eurozone since the peak of pre-financial crisis output. Comparison is straightforward as in both the Eurozone and the UK the peak of the previous business cycle was in the 1st quarter of 2008.
Bn the 2nd quarter of 2011, that is 14 quarters after the peak of the previous cycle, Eurozone GDP was 2.0 per cent below its previous peak level whereas UK GDP was 3.9 per cent below its previous peak - i.e. UK economic performance was almost twice as bad as that of the Eurozone.
Figure 1
Equally striking is the clear way in which present government’s policies made UK economic performance worse than in the Eurozone. It may be seen from Figure 1 that while the initial decline in UK GDP was greater than in the Eurozone - the greatest decline in UK GDP being 6.4 per cent registered in the 3rd quarter of 2009, compared to a maximum Eurozone drop of 5.5 per cent in the 2nd quarter of 2009 - recovery in the UK was also initially more rapid. This may be clearly seen in Figure 2, which shows year on year GDP changes.
The UK and the Eurozone reached their 1st quarter 2008 peaks with almost exactly the same economic momentum behind them – 1.9 per cent growth in the previous year in the UK and 2.0 per cent in the Eurozone. However by the 3rd quarter of 2010, the one immediately following the departure of the previous government, UK GDP was rising at 2.5 per cent compared to 2.0 per cent in the Eurozone. Eurozone recovery subsequently slowed somewhat to 1.6 per cent by the 2nd quarter of 2011.
However UK GDP growth under the new government, which gave priority to budget deficit reduction, dropped astonishingly, by more than two thirds, from 2.5 per cent to 0.7%. Under the new government the year on year growth of UK GDP therefore fell from being higher than that of the Eurozone to being less than half that of the Eurozone!
Figure 2
The present author is not a supporter of the present constitution of the Euro. On the contrary I predicted the current events unfolding in Greece and other countries in advance due to fundamental weakness in the design of the Euro. Writing in 1996, i.e. fifteen years ago:’ [the Treaty of] Maastricht’s proposals are … disastrous. It proposes to create the most fundamental features of a common state — a single currency and a central bank. But it does not create any state budget which can deal with the huge regional and sectoral implications of this. The process that would unfold with the creation of a single currency by this method may be predicted with certainty. Substantial parts of the EU… will be pushed into severe recession if they join.There will be sharply deepening regional imbalances and inequalities.’There is evidently no reason to revise that analysis.
It is therefore all the more striking that UK economic performance is actually worse than in the Eurozone. And a substantial reason it is worse is clearly due to the policies of the present government with their priority to budget deficit reduction.
In any discussion of the relative economic performance of the Eurozone and the UK two fundamental facts must be held in mind against unsubstantiated myths:
This factual situation evidently has a more general economic significance than merely for the UK and the Eurozone. For reasons dealt with frequently on this blog a policy of simply running budget deficits is inadequate to deal with the consequences of the present financial crisis as it does not tackle its driving force - the decline in investment. But under conditions of private sector weakness any rapid reduction in the budget deficit will lead to rapid economic slowdown or contraction. This is sharply illustrated by the fact that the UK government, by such policies, has reduced the UK's rate of economic recovery to less than half that of the openly crisis struck Eurozone.
Other countries thinking of embarking on immediate deficit reduction policies, such as those advocated by the Republicans in the US, should look at the UK and draw the appropriate negative conclusions. Do not be totally distracted by financial fireworks: the policies of the present UK government are so bad they have produced an economic recovery which is only half that of the Eurozone!
The international financial system is passing through the agony of a new round of the Eurozone debt crisis for the simple reason that European governments, like that in the US, refuse to deal with the core of the economic recession in Europe for reasons of economic dogma.
Anyone who looks at the economic data for the Eurozone without wearing ideological blinkers can see the situation at once – it is charted in Figure 1. The Eurozone recession is due to a collapse in fixed investment. Taking OECD data, at inflation adjusted prices and fixed parity purchasing powers (PPPs), then between the last quarter before the recession, the 1st quarter of 2008, and the 2nd quarter of 2011 Eurozone GDP fell by $204bn. But private consumption declined by only $29bn while the net trade balance increased by $32bn and government consumption rose by $91bn. However fixed investment fell by $290bn – i.e. the recession in the Eurozone was wholly due to the fixed investment decline
Figure 1
Equally evidently, due to its scale, until this fall in investment is reversed it will take a prolonged period for the recession to be overcome. Therefore to restore growth, which by now is generally realised is the core to turning round the budget deficit problem, the fixed investment decline must be overcome.
Nor is there anything mysterious about how to do this – the state has entirely adequate means. To take the most decisive international case China made the core of its stimulus package direct state investment particularly aimed at infrastructure and housing – the result being that China’s economy has grown by over thirty per cent in three years.
Europe and the US clearly do not have the scale of state sector, nor the political willingness, to act on the scale China did. But US history shows that even without proceeding to a socialist scale of measures direct state intervention on investment is entirely possible.
Roosevelt expanded US state investment from 3.4% of GDP to 5.0% between 1933 and 1936 (data from US Bureau of Economic Analysis Table 1.5.5). Jason Scott Smith, in his study of New Deal public spending, summarises such investment as including 480 airports, 78,000 bridges, 572,000 miles of highway - which, in addition to its immediate effect in stimulating demand, reinforced the productive position of the US economy. Roosevelt, it is superfluous to point out, was neither a socialist nor a communist (despite claims to the contrary by the US right!).
Quarterly, up to date, data is regrettably not available on what is occurring across the Eurozone for state investment, but it is available for the US and there is no reason to suppose, with current policies, that the situation in Europe is any better. Between the peak of the previous US business cycle, in the 4th quarter of 2007, and the 2nd quarter of 2011 US private fixed investment fell from 15.8% of GDP to 12.2% - i.e. a decline of 3.6% of GDP. Yet in the same period US state investment did not compensate but also fell marginally – from 3.3% of GDP to 3.2% of GDP. Therefore while Roosevelt expanded the weight of US state investment current US administrations have been letting it fall.
Instead of directly addressing the core issue of the investment fall European administrations are either attempting to stimulate it indirectly – which, as it is ineffective, has led to fiscal/sovereign debt crises, or are acting via expansion of the money supply – which, in a situation whereby companies and households are paying down debt, is merely the famous ‘pushing on a piece of string’.
The most favourable outcome of such a situation is that eventually the debt will be paid down, but only after several years of stagnation. The less favourable variant, of course, is that the banking system breaks under the strain and renewed recession is further propelled by fiscal cutbacks. All these problems simply arise from the fact that, under the rubric of the dogma ‘private equals good, state equals bad’, European governments refuse to use the state tools available to deal with the investment fall which is at the core of the Eurozone recession.
Some European politicians are now beginning to call for state measures to increase investment, UK Business Secretary Vince Cable being one. But the action they envisage so far is inadequate to deal with the scale of the investment fall.
China's economy, which does not have such ideological inhibitions, will continue to expand while the Eurozone remains relatively stagnant for a significant period - and as long as economic stagnation continues there will be no resolving of the Eurozone debt crisis.
Acknowledgement
Some of the data in this article regarding the US was worked up in an exchange with Gavyn Davies on his blog. Readers may therefore want to look at it there, where further points are developed, and some of the issues also become clearer in the context of an exchange with Gavyn Davies own analysis.
The current falls in the prices of bank shares are widely covered in the financial media. However the overall pattern and scale of the decline in market evaluation of banking shares is still not sufficiently frequently drawn together. The aim of this note is therefore to show this pattern in clear terms. It reveals market estimations of a second wave of major bank share price collapses. This is particularly significant as it follows a lack of recovery of the first wave - i.e. there is a clear pattern of a spreading pool of 'collapsed' share prices of major banks. The cases of Barclays, Bank of America and Société Générale in this wave will be looked at in particular in comparison with the earlier cases of Citigroup, RBS and Lloyd's Banking Group.
The 1st wave of bank share price collapses
The overall features of the wave of bank collapses in 2008 is too well known to need rehearsing here. Attention is simply drawn to the fact that, in addition to the formal bankruptcy or takeover of investment banks (Lehman Brothers, Bear Stearns, Merrill Lynch), a series of very large retail banks were left in a state which, from the point of view of their share prices, means they may be regarded as ‘collapsed banks’ – ‘collapsed’ for present purposes being defined as having suffered a fall of more than 90% in share price. These share prices may also be regarded as 'collapsed' in the sense that no significant recovery has taken place.
Attention is drawn to these features as there is sometimes an implicit assumption that share prices in these banks may have recovered at least to some degree in line with the overall recovery in share prices. This is clearly not the case.
Figure 1
Figure 1 therefore shows the share prices for three of the largest such banks – Citigroup, RBS and Lloyd’s Banking Group. The share prices in all these banks rapidly fell by around 90% during the financial crisis – the falls beginning, as a leading indicator of the coming crisis, in all cases between December 2006 (Citigroup) and February 2007 (RBS and Lloyd’s Banking Group). To make possible international comparisons, as with other banks considered here, share prices have been converted into dollars using daily exchange rates.
Figure 1 shows clearly the 1st wave of collapses in bank share prices and that no recovery has taken place from it. On 9 September 2011 the shares of Citigroup had fallen by 94.8% from their peak, the shares of Lloyd’s Banking Group had fallen 95.9% and the shares of RBS had fallen 97.6%
The 2nd wave of bank share price collapses
The significance of the new current wave of severe bank share price falls is illustrated in Figure 2. This shows that the share prices of a further series of very large banks – Barclays, Bank of America and Société Générale are analysed – had initially suffered falls in share prices during the financial crisis which were as large as the first group of ‘collapsed’ bank share prices. However unlike the first group this second set of institutions had undergone a genuine recovery in share price. What is now significant, therefore, is that the recent share prices of this second group are now falling sharply downwards towards the level of ‘collapsed’ banks – i.e. a second wave of very large banks are being pulled into a maelstrom of share price collapses.
Figure 2
Specifically, for the banks considered above:
The share price pattern of these banks is therefore common. They reached low points early in 2009 before recovering by autumn 2009. Since then at first a slow, and now rapid, renewed decline in their share price has taken place. In other words the market judgement is that a new wave of severe share drops of major banks – including Barclays, Bank of America and Société Générale – is taking place down towards the level of the 1st wave of ‘collapsed’ (in terms of share prices) banks, that is Citigroup, RBS and Lloyd’s.
In order to show this pattern Figure 3 shows the share prices of both the 1st and 2nd wave of share price falls in the banks considered.
Figure 3
Severe price falls, by normal standards, are of course taking place for most other banks – including Goldman Sachs, Deutsche Bank, HSBC etc – but these cannot be said to be approaching the level of near 90% falls for the banks analysed above.
Conclusion
The conclusion of the above trends is evident. Bank share prices show a clear pattern of two waves of ‘collapse’ among large retail, or retail/investment, banks.
The market therefore clearly judges that the pool of ‘collapsed’ banks, in terms of share prices, is threating to spread in a second wave.
