[Premium] Daily commentary: More Chinese stimulus in the works

Yesterday I wrote about Chinese trade growth plummeting. This is having a negative impact on economic growth. The Chinese authorities get that. And so they have decided to boost demand

[Premium] Amid plummeting trade growth, Chinese productivity trends are macro bearish

In recent months, we have seen a precipitous drop in Chinese trade growth. This comes from both the export and the import side. What’s happening? A large part of it is wages. As I indicated two years ago in a post on the Lewis Turning Point, China has already sucked a large portion of the labour out of its countryside villages. And that has buoyed wage growth. However, while the external account is deteriorating, import growth is shrinking along with export growth. So, it is not that the Chinese are buying more stuff from abroad and foreigners are buying less in China. It’s that demand is slowing globally, even in China. Here’s the problem domestically then: malinvestment and financial repression. This article explains why

[Premium] China’s growth is slowing much faster than expected

The latest data out of China will give those expecting a soft landing pause about China’s economic situation. While inflation has come down somewhat of late, so too have industrial output and capital investment. This is creating EM feedback loops which diminish the number of equity, corporate and sovereign plays in this space. Asia in particular should be impacted

Revisiting predictions on China on debt, growth and crisis

In 2006 I started making a number of predictions based on what I thought was the necessary and logical development of China’s growth model. Some of these predictions seemed fairly outlandish, especially to China analysts – Chinese and foreign – who had very little knowledge of economic history or other developing countries, but many of them so far have turned out quite well.

As more and more analysts are beginning to understand the constraints of the Chinese growth model I think it might be useful to list some of these predictions to get a sense of what might be still to come. Perhaps my bet with The Economist has caused me to throw caution to the winds, since a smart economist never makes his predictions explicit, but here they are

[Premium] Tracking My List of Ten Surprises for 2012

I thought now would be a good time to see how my ten surprises for 2012 are tracking as we are nearly a third of the way through the year. I posted these as my first weekly newsletter and these are events that have 1-in-3 odds of happening but which I believe have a more than 50 percent likelihood of occurring in

Euro Zone News Stream Remains Negative

The string of developments has encouraged risk-off behavior. Equity markets are lower. Core bonds are higher. The high beta currencies, such as the freely traded emerging market currencies, the Australian and Canadian dollars, the euro, Swedish krona, and of course, the euro itself, are under strong pressure. The US dollar and Japanese yen are the main beneficiaries

Chart of the Day: Demography, China’s Achilles heel

The Economist: “Over the past 30 years, China’s total fertility rate—the number of children a woman can expect to have during her lifetime—has fallen from 2.6, well above the rate needed to hold a population steady, to 1.56, well below that rate”

On China’s Currency Band Widening Ploy

It is a ploy that would no doubt bring a smile to the faces of Sun Tzu and Machiavelli. First, China is giving up something that it is not really using. Specifically, the current band itself has rarely, if ever been utilized, which is why some observers have scoffed at the suggestion that the band would be widened. If the Chinese officials have shied away from using the fully range that the 0.5% band offers, there is no guarantee the wider band will be explored

China Disappointment Buoys Dollar

China’s Q1 GDP disappointed expectations and market rumors and is the chief driver of the capital markets today. The official measure of growth was 8.1%. The consensus was 8.4% before yesterday’s rumors of a 9% rise made the rounds and helped lift sentiment–seeing equities rally, gains in the dollar bloc currencies and a weaker dollar. All that is in reverse now

The ways China can rebalance

To try to work out what China’s future economic options might be I will begin with two key assumptions. The first is that the fundamental imbalance in China is the very low GDP share of consumption. This low GDP share of consumption, I have always argued, reflects a growth model that systematically forces up the savings rate largely by repressing consumption, which it does by effectively transferring wealth from the household sector (in the form, among others, of very low interest rates, an undervalued currency, and relatively slow wage growth) in order to subsidize and generate rapid GDP growth. As a consequence of this consumption-repressing growth model, Chinese growth is driven largely by the need to keep investment levels extraordinarily high. What’s more, the very high growth rate in investment, combined with significant pricing distortions, especially in the cost of capital, has resulted in massive overinvestment and an unsustainable increase in debt. China cannot slow the growth in debt and resolve its internal economic problems without raising the consumption share of GDP.

My second major assumption is that China must and will rebalance in the coming years – its imbalances, in other words, cannot get much greater and we will soon see a reversal. There are two reasons for saying this, neither of which has to do with the claims being made by Beijing that they are indeed determined to rebalance the economy. The first reason is the debt dynamics. Every country that has followed a consumption-repressing investment-driven growth model like China’s has ended with an unsustainable debt burden caused by wasted debt-financed investment. This has always led either to a debt crisis or to a “lost decade” of very low growth. The second reason for assuming that China will rebalance is because of external constraints. Globally, savings and investment must balance. This means that for any set of countries whose savings exceed investment, like China, there must be countries whose investment exceeds savings, like the US. To put it another way, the world can function with a group of underconsuming countries only if they are balanced by a group of overconsuming countries

The Economist sees (and raises)

The Free Exchange blog at The Economist has accepted my bet, and very cleverly (the bastards!) they have added a second one. For two years I have been arguing that a Chinese rebalancing will require much slower GDP growth rates than we currently think possible and, working backwards from annual consumption growth rates of 7-8%, I have argued that this implies that China’s real GDP growth rate will average not much more than 3% annually over the rest of the decade. So here are the two bets, both on China

China Politics: Reflections from a One Party State

Perhaps because they call themselves Communists, many observers, think the party is homogeneous, but it is not. There are forces of movement and forces of order. A FT columnist recently wrote about the possible threat to the post-Mao consensus. That consensus was not so much on substance as process