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China, again

September 1st, 2009

My piece in last Thursday’s Fin is over the fold

The number eight is regarded is auspicious in China, particularly in financial matters, because the word for ‘eight’ rhymes with that for ‘prosperity’ or ‘wealth’. ‘Four’, on the other hand is unlucky, differing only in intonation from the word for ‘death’.

By chance or otherwise, these associations seem particularly apposite in assessing the prospects for the Chinese economy over the next few years. The Chinese economy (or at least the modern sector represented in the national accounts) has experienced economic growth rates of eight per cent or more for the last two decades.

The growth rate may be accounted for, in about equal measures by growth in labour and capital inputs, and growth in total factor productivity arising from the modernisation of the economy. The rate of productivity growth may decline a little as the easy gains from catching up to the developed world are exhausted, but it is unlikely to fall much below 4 per cent.

The effective labour force is also growing at around 3 per cent, thanks to demographic transition and migration from rural areas. High investment rates mean that capital labour ratios are also rising.

The result is that a growth rate of 8 per cent is the minimum needed to absorb the growth in the labour force, and even then, Chinese employment officials warn that migrants who returned to the countryside in the wake of the economic crisis will find it hard to get new jobs.

A rate of 4 per cent, more than respectable in most economies, would imply no growth at all in labour demand, with disastrous implications for unemployment rates and for the social harmony so prized by the Chinese government.

It is unsurprising then, that the government has seized on the positive associations of the number ‘eight’ with its slogan ‘bao ba’ or ‘protect eight’. It has backed this slogan with a stimulus package larger, relative to the economy, than those in the US or Australia.

The stimulus package has been effective in reversing the slowdown associated with sharp reductions in exports. Most experts predict that the goal of eight per cent growth will be attained. But a good deal of the stimulus has leaked into the housing market, putting more air into a bubble that was beginning to deflate. Prices are so high that Chinese investors are looking to the Australian market (itself overpriced on most measures) to provide better value.

The need to keep the economy growing strongly while avoiding a dangerous housing bubble presents Chinese policy makers with a difficult task. The balancing act becomes even more difficult when climate change is taken into account. ?As long as the Bush Administration was in office, China could largely ignore the climate change problem. The Bush approach, ably supported by the Howard government, was to encourage the most intransigent elements in the Chinese government to resist any movement on climate policy, then point to that intransigence as an excuse for US (and Australian) inaction.

But even in the Bush era, China saw investment in renewable energy as a strategic imperative, announcing a 20 per cent target for 2020 at a time when the Howard government was still dithering. The huge investment programs associated with the stimulus package have provided more opportunities to steer the Chinese economy away from reliance on coal.

The fact that even after three decades of reform, China has a decidedly mixed economy, has made the management of the crisis easier. State-owned banks have done most of the lending and, with many foreign investors forced to the sidelined, state-owned corporations have undertaken large-scale investments in areas such as clean energy.

In the leadup to Copenhagen, the Chinese have made it clear they intend to claim the moral high ground. As well as comparing the programs they already have in place to the promises made, but mostly not yet delivered, by the Obama Administration, they have announced that expect their own emissions of greenhouse gases to peak by 2030. Assuming comparable measures by other developing countries, this would probably be consistent with stabilising global concentrations of greenhouse gases at around 550 parts per million.

As with the relatively weak commitments announced so far by developed countries, that’s not enough to prevent damaging climate change, but it gives some hope of avoiding the catastrophic implications of ‘business as usual’. And if Copenhagen produces even an imperfect agreement encompassing China and the developed countries, the prospects of a stronger deal later on, including limits on the emissions of all countries, will be greatly enhanced.

John Quiggin is an ARC Federation Fellow at the University of Queensland. He is currently visiting East Asia.

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  1. Jim Birch
    September 1st, 2009 at 11:38 | #1

    Your phrase “the modern sector represented in the national accounts” interests me. I guess this means farmers conducting near subsidence agriculture on small plots. Is it possible to estimate what’s happing in the “off the books” sector?

    Migration to cities could increase the land per person and incomes. When I was in China in the 80s, people in the countryside were poor – though not desperately. We hear about the city rural income split but I wonder if there’s any reliable estimates of where this is heading?

  2. O6
    September 1st, 2009 at 12:18 | #2

    China has a modern agriculture sector, witness its uptake of genetically engineered crops, never mind its supply of cheap tomato paste to Woolworth etc. Surely this sector will steadily expand, taking over the land used by subsistence farmers and employing those of them who don’t move into the cities?
    Where can one find a good overall description of this modern sector?

  3. Hermit
    September 1st, 2009 at 15:41 | #3

    China’s recent boom is not as impressive (in a qualitative sense) as that of the US post WW2. It seems to be based on unfettered pollution and uncomplaining labour from rural areas. China has no soft power in the form of international entertainment or name brand goods. Now one of the growth factors, cheap coal, may soon face decline
    http://www.energybulletin.net/node/49931
    It will only take a severe environmental setback in Australia to question whether we should keep supplying them raw materials. If materials export and goods import is penalised such as carbon taxes in lieu the whole situation changes. Australian firms will have the raw materials at home, albeit with expensive labour, but no new penalties. That is just one reason why China’s position is precarious.

  4. September 1st, 2009 at 16:23 | #4

    O6, most countries that have had subsistence land taken over by the cash economy have found that more people get displaced from the agricultural sector, net. That is, more people get forced into the cash economy too, more than new cash jobs in that sector take up. It doesn’t work to take up more unemployed, it generates them (net) by expanding the cash work force pool even more.

  5. Martin
    September 1st, 2009 at 17:13 | #5

    @Hermit I think people have been predicting the ‘collapse of China’ since Mao took over in 1949. There are moves to deal with the worst of the pollution, and China’s labour costs are higher than say Vietnam’s. (Shenzhen for example has a higher GDP/head than Russia or Mexico).

  6. Donald Oats
    September 1st, 2009 at 17:54 | #6

    My one question is whether a 550ppm mid-century target warrants being referred to as stabilising at around 550pm? If we get anywhere near 550ppm it is an optimistic assumption that the climate system will stabilise, even if all human GHG production was turned off. The observations of what is currently happening with regards to environmental releases of GHGs – some of which are likely the result of temperature rises so far – is cause for great concern about the ability to stabilise, should these environmental releases increase in response to further temperature rises.

    The set of reachable stable points – the list of ppm targets for which stabilisation is still possible – is now shrinking fast. Soon the only trajectories left will be those that involve active reduction of the global GHG pool, and on the basis of how slow we’ve been to respond up ’til now, I don’t think we should assume any capability of doing that.

    The problem as I see it is that we’ve treated the 450ppm and 550pm stabilisation targets as though stabilisation will happen automatically, even as we reach those concentrations of GHGs in the atmosphere. The targets are like mortgage backed securities where the statistical multiplexing of different quality loans, with default rate estimates from a benign time, have buried a bomb that’ll go off when circumstances change. Holders of gold MBS got shafted as the risk assumptions failed spectacularly. Our GHG stabilisation targets are also based on risks assessed on a more benign history than the future will likely be – unless we push much harder targets for renewable energy penetration, and demand the absolute reduction of large scale coal burning.

  7. September 2nd, 2009 at 23:58 | #7

    Pardon me for saying so but this article is well below Pr Q’s normally high standard. It tells us nothing that a cursory reader of the newspaper would not already know. I think Pr Q is over-doing it.

    This article also, uncharacteristically, fails to acknowledge that Pr Q’s doom-laden predictions, made earlier this year, about the PRC have so far failed to go through the formality of occurring – in both economic and political indices.

    On economics, Pr Q appeared to predict a painful recession for the PRC:

    The problem is that, with exports falling off a cliff, it’s going to be very hard to maintain growth unless Chinese households suddenly stop saving and start consuming. No doubt this will happen in the end, but the process will certainly be painful.

    And on politics, Pr Q was no less gloomy, canvassing the real possibility of an anti-Party revolution:

    The likelihood of a severe economic slowdown will pose big problems for the political system. In a Western democracy, the immediate reaction to a severe economic shock is typically to throw out the incumbent government. Even if the other side does no better, the easy availability of an alternative government reduces pressure for revolutionary change. There’s no obvious analog in the Chinese context.

    [STROCCHI VINDICATION ALERT]

    I think its time to cash in my prediction cheques on the PRC. At around the same Pr Q was going bearish I was getting very bullish about the PRC economy. Back in early FEB 09 I predicted that the PRC’s massive stimulus would shift resources from the flagging overseas sector in the coast to the growing domestic sector in the hinterland:

    I also predict that the PRC will engineer a relatively soft-landing for its largely-export driven economy. Unemployment in export related industries will rise but the largely state-run economy will turn to internal development, largely in the peasant hinterlands.

    I also argued that the PRC still generated a strong support for its policies amongst the hundreds of millions of people grateful to the Party for organizing a unified country following a progressive path to development.

    This will have the added benefit of politically pacifying unrest in the hinterland

    I was in the PRC in late 2006 and noticed, even then, the genuine patriotic fervour of the masses. This sounds like a stale Marxist cliche, but Chinese people still have a naive love of their fatherland. It seems to help, going by the astounding success they made of the Olympics – not a single hitch.

    There are still pockets of incorrigible dissent. No doubt many of which are worthy. But those seeking to overthrow the PRC govt know that they face almost certain death if they start to cause too much trouble.

    The PRC is a pretty tough customer if you cross it. But otherwise it plays reasonably fair. Alot of liberals have an instinctive reaction against the PRC’s dictatorial statism. But then again, alot of liberals have just been going through the motions and phoning it in for nearly the past two decades.

    Its way past time that liberals faced up to the fact that their models are just not cutting it at the edge anymore, as evinced by the mult-cultis, the GFC and the PRC.

  8. September 3rd, 2009 at 00:01 | #8

    Comment #7 was ineptly tagged. Welcome to delete it. I have re-submitted it properly tagged below.

  9. September 3rd, 2009 at 00:03 | #9

    Pardon me for saying so but this article is well below Pr Q’s normally high standard. It tells us nothing that a cursory reader of the newspaper would not already know. I think Pr Q is over-doing it.

    This article also, uncharacteristically, fails to acknowledge that Pr Q’s doom-laden predictions, made earlier this year, about the PRC have so far failed to go through the formality of occurring – in both economic and political indices.

    On economics, Pr Q appeared to predict a painful recession for the PRC:

    The problem is that, with exports falling off a cliff, it’s going to be very hard to maintain growth unless Chinese households suddenly stop saving and start consuming. No doubt this will happen in the end, but the process will certainly be painful.

    And on politics, Pr Q was no less gloomy, canvassing the real possibility of an anti-Party revolution:

    The likelihood of a severe economic slowdown will pose big problems for the political system. In a Western democracy, the immediate reaction to a severe economic shock is typically to throw out the incumbent government. Even if the other side does no better, the easy availability of an alternative government reduces pressure for revolutionary change. There’s no obvious analog in the Chinese context.

    [STROCCHI VINDICATION ALERT]

    I think its time to cash in my prediction cheques on the PRC. At around the same Pr Q was going bearish I was getting very bullish about the PRC economy. Back in early FEB 09 I predicted that the PRC’s massive stimulus would shift resources from the flagging overseas sector in the coast to the growing domestic sector in the hinterland:

    I also predict that the PRC will engineer a relatively soft-landing for its largely-export driven economy. Unemployment in export related industries will rise but the largely state-run economy will turn to internal development, largely in the peasant hinterlands.

    I also argued that the PRC still generated a strong support for its policies amongst the hundreds of millions of people grateful to the Party for organizing a unified country following a progressive path to development. So I predicted a dampening of unrest:

    This will have the added benefit of politically pacifying unrest in the hinterland

    I was in the PRC in late 2006 and noticed, even then, the genuine patriotic fervour of the masses. This sounds like a stale Marxist cliche, but Chinese people still have a naive love of their fatherland. It seems to help, going by the astounding success they made of the Olympics – not a single hitch.

    There are still pockets of incorrigible dissent. No doubt many of which are worthy. But those seeking to overthrow the PRC govt know that they face almost certain death if they start to cause too much trouble.

    The PRC is a pretty tough customer if you cross it. But otherwise it plays reasonably fair. Alot of liberals have an instinctive reaction against the PRC’s dictatorial statism. But then again, alot of liberals have just been going through the motions and phoning it in for nearly the past two decades.

    Its way past time that liberals faced up to the fact that their models are just not cutting it at the edge anymore, as evinced by the PC’s, the GFC and the PRC.

  10. Ikonoclast
    September 3rd, 2009 at 22:52 | #10

    China plays fair? Don’t be ridiculous. It’s a totalitarian state.

    Not so long ago, China arrested businessman Stern Hu; ostensibly on charges of bribery and stealing state secrets. Hu holds Australian citizenship but also Chinese citizenship. China’s attitude seems to be that Hu’s Australian citizenship is a “flag of convenience” and that he is still first and foremost a Chinese citizen. China is an authoritarian state with an effective presumption of guilt (without trial or with rigged trials and upon any pretext) against any person over whom it can exercise power. Hu’s arrest highlights two issues. The first is that of dual citizenship. The second is the morality of doing business with China or more generally of a democracy doing business with any authoritarian state.

    Australia would be best served adopting a policy which required immigrants to renounce any other citizenship before being granted Australian Citizenship. Furthermore, the immigrant’s former country of citizenship (if a democracy) would be requested to formally revoke that citizenship. If the immigrant’s former country of citizenship is not a democracy (for example China or Zimbabwe) then the immigrant could unilaterally revoke their citizenship of that country by oath and that oath shall be accepted under Australian law. Australia should unilaterally inform non-democratic countries that this oath is considered binding by Australia under Australian law and in terms of Universal Human Rights. In other words, dual citizenship should not be permitted by Australia in any circumstances.

    In the long run, the democratic nations of the world should all exit the United Nations and form a new organisation of Democratic Nations. The charter of this organisation ought to be to move to a point which totally proscribes trade, travel and all relations, including diplomatic relations, with non-democratic nations. Realistically there would have to be a phased implementation, perhaps over 10 years.

    A reasonable guide to the definition of democratic would be world states considered as electoral democracies by Freedom House. It is time to stop compromising about democracy, human rights and the rule of law. It is time to put human rights ahead of trade and economics. It should be made clear to all authoritarian nations that they will be progressively frozen out of ALL relations with democratic nations over 10 years. If China (for example) made a fuss, the democratic block could unilaterally repudiate all debt to China. It would also benefit our economies in the democratic block to revive industries and trade within the block to replace imports from China and other totalitarian states.

  11. Michael of Summer Hill
    September 3rd, 2009 at 23:24 | #11

    Jack Strocchi, since you predicted everything in China will you take credit for those out of work?

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