Manufacturing, not consumption, key for China’s economy – Victor Shih

 

Victor Shih

China will continue to focus on supporting its manufacturing power, instead of changing to household subsidies, says economist Victor Shih, out of line with many other economists who expect support for consumption, as reported by Al Jazeera. Shih added: “There are 1.4 billion people in China, so comprehensive social assistance would be extremely expensive, especially in a deflationary context.”

Al Jazeera:

Analysts expect the National People’s Congress, China’s rubber-stamp parliament, to again set an annual growth target of about 5 percent when it meets in March.

While many economists have exhorted Beijing to stimulate growth through household transfers, Victor Shih, an expert on the Chinese economy at the University of California, San Diego, expects investment-driven growth to continue to hold sway.

“Marxist ideology, which valorises industrial production, remains the fundamental basis for policymaking in Beijing,” Shih told Al Jazeera.

“In all likelihood, the government will continue to subsidise manufacturing. Consumption, by contrast, is viewed as indulgent.”

Shih added: “There are 1.4 billion people in China, so comprehensive social assistance would be extremely expensive, especially in a deflationary context.”

Shih said Beijing could raise household consumption by urging companies to pay higher wages but that “China’s manufacturing edge is partly based on subdued worker income”.

As such, “higher wages would undermine Chinese exports, which is an important source of output”, he said.

“I don’t think the government will shift budgetary priorities in favour of the Chinese people… which will likely result in a period of economic weakness.”

More at Al Jazeera.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers’ request form.

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Can China deal with debts and property crisis? – Arthur Kroeber

 

Arthur Kroeber

China’s economy is dealing with some tough years, writes leading economist Arthur Kroeber, author of China’s Economy: What Everyone Needs to Know®, in ChinaFile, especially now that it does not have enough tools with debts and the property crisis like it did in the past. “So we need to brace for the consequences of the Xi model: slower growth in China, a big rise in Chinese technology exports, and more protectionism in the rest of the world,” he writes.

Arthur Kroeber:

China’s economic malaise results from a combination of political decisions, structural factors, and policy mistakes. The central reason for it is that Xi Jinping has decided to make national security and technological upgrading—not economic growth—his policy priorities.

The broadening definition of national security, and the increased influence of security interests in economic policy, have soured private investor confidence. The focus on technological upgrading has led to an economic strategy that relies almost exclusively on industrial policy. This means that the government devotes most of its attention to the supply side of the economy: boosting production of semiconductors, clean energy equipment, electric vehicles, industrial machinery, ships, and other products seen as needed to increase the country’s technological capability and self-sufficiency. Virtually no serious effort goes into figuring out how to unlock domestic demand—especially from households, which now save about a third of their income, one of the highest savings rates in the world.

These policies mean that China’s economy will have two faces in the coming years. The chronic shortage of demand will mean disappointing GDP growth—probably 3-4 percent on average over the rest of the decade—and a constant struggle to shake off deflation. But at the same time, its technology-intensive sectors will thrive, thanks to both government support and China’s uniquely competitive manufacturing ecosystem. The result will be persistent high trade surpluses and, probably, a strong wave of protectionism from countries that want to preserve their own industrial capacity.

This policy stance also makes it very hard for China to solve two of its biggest structural problems: the collapsing property market and the huge and growing debt burdens of local governments. The last time China faced a challenge of this scale was the late 1990s, when nearly half of all bank loans went bad. At that time, it responded with a combination of financial engineering to postpone the reckoning of bad debts, well-targeted infrastructure stimulus, and aggressive deregulation of manufacturing and housing which unlocked huge new sources of entrepreneurship and household demand. As a result, China grew out of its problems and by 2010 became the world’s second-biggest economy.

A similar approach today would recognize that deregulation of services—which account for more than half the economy, and all net new employment—is the main path to boosting consumer demand and accelerating economic growth. Too much of the service economy is either in state hands, or burdened by stunting regulations. But such a policy would conflict directly with Xi’s desire to keep the state’s finger on all economic levers. So we need to brace for the consequences of the Xi model: slower growth in China, a big rise in Chinese technology exports, and more protectionism in the rest of the world.

More views of other economists in ChinaFile.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers’ request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.

The ugly face of deflation – Shaun Rein

 

China’s consumers are trading down because of deflation, and are looking for cheap prices, says Shanghai-based business analyst Shaun Rein to CNBC. China’s government is unlikely to use financial support for the economy, he adds, as it finds the current growth of 5 percent quite enough, as its priority is dealing with the gap between the haves and have-nots, not at trying to increase that economic growth.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers’ request form.

Are you looking for more financial experts at the China Speaker Bureau? Do check out this list.

 

Falling pork prices: another red flag for China’s economy – Shaun Rein

 

Shaun Rein

Deflation is on the edge of slowing down China’s economy, and falling pork prices are yet another indication not all is well, says Shanghai-based business analyst Shaun Rein at CNBC. As for the less affluent, China Market Research Group’s Rein observed that they are saving money by ordering less pork, according to CNBC.

CNBC:

Deflation — associated with the decline in prices of goods and services and a sign of a weakening economy — is concerning because consumers may postpone investments or purchases in hopes of prices falling further.

“Aside from falling real estate prices and price cutting across consumer goods, the biggest reason for China being on the verge of deflation is falling pork prices,” China Market Research Group’s Managing Director Shaun Rein said.

China’s consumer price index fell 0.5% year-on-year in November, marking the sharpest slide in three years. …

Affluent Chinese are increasingly considering beef to be a healthier alternative to pork, with 28% of consumers surveyed saying they plan on reducing pork consumption, a study published in February by managing consulting firm McKinsey showed.

As for the less affluent, China Market Research Group’s Rein observed that they are saving money by ordering less pork.

More at CNBC.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers’ request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list.

China's leadership: caught between inflation and deflation - Paul Denlinger

Paul Denlinger

Cooling down inflation, stiff rising wages: China's leadership has a hard time to steer between two evils, writes business analyst Paul Denlinger in Forbes. Things do not look well for the new leaders in 2012.

In effect, Beijing is trying to repeat what the four dragons (Taiwan, South Korea, Hong Kong and Singapore) did when oil prices went up in the eighties: it is trying to move to higher value-added industries. But because China’s production base is so large compared to those economies, it raises another question: Who is going to buy all those nice new Chinese products? The export markets of the US and Europe have largely disappeared after the Wall St. meltdown of 2008, and the new Chinese middle class which was going to become the savior of the world has not yet appeared...

In 2009 and 2010, China looked like a genius for its bold action with a stimulus package and investment in infrastructure. In 2011 though, it looks more like China bought extra time for the US economy to recover and US consumers to start spending again. But waiting for Americans to start spending like before is looking more and more like “Waiting for Godot”. But what about China’s middle class? China already has more than 1M persons with individual net worth of more than US$1M, and Chinese are now the leading buyers of luxury goods worldwide.

In fact, these are the people who have made it, and are now buying real estate in the US, Canada, the UK, and Australia. Many of them feel more secure flaunting their wealth overseas and retiring overseas than in China, because they don’t know how the political winds in China may change...

In 2012, a new leadership will come to power in China. In China, these power transitions are carefully orchestrated so that the new leadership can come into power at the best of times, strengthening the legitimacy of the government and party and showing their power in a positive light.

For the first time in the past 30 years, the stars are not lining up the way they should.

More in Forbes.

Paul Denlinger is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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