On Thu, Aug 22, 2013 at 7:30 AM, Marv Gandall <[email protected]> wrote:
> On 2013-08-21, at 6:25 PM, raghu wrote: > > Ok, now we are finally moving past the strawmen > > What "strawmen"? You objected to the subject of this thread, and I replied > to your objections. But no matter. > The strawmen I was referring to is the endless parade of variations on the theme "China is not Greece". You are not the source of these spurious arguments; the authors of the Economist article linked to at the head of this thread are. And no doubt, we will keep hearing about how China is not Greece over and over again whenever the China rebalancing debate comes up. It is tiresome, but oh well. > In the aggregate the "losers" in a big readjustment will be the coastal > exporters and the corporate sector more generally and the "winners" will be > households. It is not at all clear that the household sector is politically > that powerful compared to the corporate sector. > > Chinese exporters at the lower end of the value chain have for some time > been losing business to firms relying on cheaper labour in Southeast Asia > and elsewhere, but it's not expected that the "corporate sector generally" > will be hurt by the state-driven rebalancing of the economy. It's > anticipated that corporations producing higher-end goods for the world > market and those in the rapidly expanding consumer goods and services > sector will continue to be profitable, barring a deeper crisis of the world > economy. > That's the point: Pettis (among others) claims that the numbers don't add up for this scenario. Corporate profits in the aggregate come from confiscation of household savings. Those profits MUST shrink in favor of household income - by definition - under a rebalancing scenario. It is basically a zero-sum game: there isn't any excess demand anywhere in the world to allow a positive-sum dynamic. http://www.ft.com/cms/s/0/2f018d1c-f475-11e2-a62e-00144feabdc0.html<http://www.ft.com/cms/s/0/2f018d1c-f475-11e2-a62e-00144feabdc0.html#ixzz2ciflgQM8> --------------------------------snip Simple logic shows that it is nearly impossible for China’s GDP to grow at current rates while rebalancing away from its dangerous over-reliance on exports and debt-fuelled investment. Consider what it means for China<http://www.ft.com/world/asia-pacific/china>to rebalance. Household consumption, at an astonishingly low 35 per cent of GDP, is just over half the global average. Attempts to engineer a rebalancing that lifts consumption<http://blogs.ft.com/the-a-list/2013/07/23/unbalanced-growth-helps-china-avoid-a-slump/>over the next 10 years to, say, 50 per cent – which will still leave it with the lowest consumption share of any large economy in the world – would require consumption growth to exceed GDP growth by close to 4 percentage points every year. So an average annual GDP growth rate of 6 or 7 per cent requires average growth in consumption of nearly 10-11 per cent for a decade for China to rebalance meaningfully. China was not able to achieve such high consumption growth rates even in the best of times, when it and the world were growing much more briskly, and it will prove near impossible for China to manage such high consumption growth under much weaker Chinese and global conditions. The consumption rate is low mainly as a consequence of policies that systematically transferred resources from the household sector to subsidise rapid growth. This forced down the household income share of GDP which, at about 50 per cent, is among the lowest ever recorded in the world. There is no sustainable way to boost household consumption without boosting household income. This suggests that consumption growth of 10-11 per cent requires similar growth in household income. In principle China could have this by paying workers much higher wages and sharply raising the deposit rates paid by banks. But since low wages and cheap capital are at the heart of China’s growth model, raising wages and deposit rates enough to rebalance the economy would cause growth to collapse. Only a continued, and ultimately self-defeating, surge in debt can get household income to grow quickly enough to accommodate both high GDP growth rates and a rebalancing economy. This is why GDP growth rates must drop further. But after many years of annual GDP growth above 10 per cent, it would seem that a sharp drop in GDP growth rates to below 6-7 per cent would clash with the rising expectations of ordinary Chinese. Won’t slower growth lead to social unrest and perhaps political chaos? Not necessarily.
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