Hitting China's Wall

[Ray]

Hitting China's Wall

All economic data are best viewed as a peculiarly boring genre of science fiction, but Chinese data are even more fictional than most. Add a secretive government, a controlled press, and the sheer size of the country, and it's harder to figure out what's really happening in China than it is in any other major economy.

Yet the signs are now unmistakable: China is in big trouble. We're not talking about some minor setback along the way, but something more fundamental. The country's whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be.

Start with the data, unreliable as they may be. What immediately jumps out at you when you compare China with almost any other economy, aside from its rapid growth, is the lopsided balance between consumption and investment. All successful economies devote part of their current income to investment rather than consumption, so as to expand their future ability to consume. China, however, seems to invest only to expand its future ability to invest even more. America, admittedly on the high side, devotes 70 percent of its gross domestic product to consumption; for China, the number is only half that high, while almost half of G.D.P. is invested.

How is that even possible? What keeps consumption so low, and how have the Chinese been able to invest so much without (until now) running into sharply diminishing returns? The answers are the subject of intense controversy. The story that makes the most sense to me, however, rests on an old insight by the economist W. Arthur Lewis, who argued that countries in the early stages of economic development typically have a small modern sector alongside a large traditional sector containing huge amounts of "surplus labor" — underemployed peasants making at best a marginal contribution to overall economic output.

The existence of this surplus labor, in turn, has two effects. First, for a while such countries can invest heavily in new factories, construction, and so on without running into diminishing returns, because they can keep drawing in new labor from the countryside. Second, competition from this reserve army of surplus labor keeps wages low even as the economy grows richer. Indeed, the main thing holding down Chinese consumption seems to be that Chinese families never see much of the income being generated by the country's economic growth. Some of that income flows to a politically connected elite; but much of it simply stays bottled up in businesses, many of them state-owned enterprises.

It's all very peculiar by our standards, but it worked for several decades. Now, however, China has hit the "Lewis point" — to put it crudely, it's running out of surplus peasants.

That should be a good thing. Wages are rising; finally, ordinary Chinese are starting to share in the fruits of growth. But it also means that the Chinese economy is suddenly faced with the need for drastic "rebalancing" — the jargon phrase of the moment. Investment is now running into sharply diminishing returns and is going to drop drastically no matter what the government does; consumer spending must rise dramatically to take its place. The question is whether this can happen fast enough to avoid a nasty slump.

And the answer, increasingly, seems to be no. The need for rebalancing has been obvious for years, but China just kept putting off the necessary changes, instead boosting the economy by keeping the currency undervalued and flooding it with cheap credit. (Since someone is going to raise this issue: no, this bears very little resemblance to the Federal Reserve's policies here.) These measures postponed the day of reckoning, but also ensured that this day would be even harder when it finally came. And now it has arrived.

How big a deal is this for the rest of us? At market values — which is what matters for the global outlook — China's economy is still only modestly bigger than Japan's; it's around half the size of either the U.S. or the European Union. So it's big but not huge, and, in ordinary times, the world could probably take China's troubles in stride.

Unfortunately, these aren't ordinary times: China is hitting its Lewis point at the same time that Western economies are going through their "Minsky moment," the point when overextended private borrowers all try to pull back at the same time, and in so doing provoke a general slump. China's new woes are the last thing the rest of us needed.

No doubt many readers are feeling some intellectual whiplash. Just the other day we were afraid of the Chinese. Now we're afraid for them. But our situation has not improved.

http://www.nytimes.com/2013/07/19/o...l=1&adxnnlx=1374658263-1fPOPYFxafBakxcMIWik/A

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If At market values — which is what matters for the global outlook — China's economy is still only modestly bigger than Japan's; it's around half the size of either the U.S. or the European Union. then why the huge hype?

 

[Ray]

In China and U.S., Mutual Distrust Grows, Study Finds

BEIJING — Americans view China in a markedly less favorable light than two years ago, and Chinese attitudes toward the United States have also soured, a sign that the two countries are drifting apart at the level of public opinion, according to a Pew Global Survey to be released on Thursday.

The survey showed that since 2011, China's approval rating in the United States has dropped 14 percentage points to 37 percent, the lowest rating for China in any region in the world. Negative attitudes toward the United States among the Chinese rose to 53 percent, a nine-point increase.

The deep skepticism toward China in the United States reflected the persistent worry that China's fast-growing economy, even though it is slowing, threatens jobs in a weak American economy, said Bruce Stokes, the director of Pew Global Economic Attitudes, in Washington.

But opinion makers in China, and Chinese people familiar with the United States, gave far broader reasons than pure economics for China's sinking image.

They cited China's portrayal of itself as a newly confident and rich power on the world stage, a posture that seems threatening to Americans and Europeans. Some Chinese pointed to what they regarded as consistently negative coverage of China in the American news media. China's suddenly testy relations with some of its neighbors, including Japan, probably contributed to the unease, they said.

In the United States, in particular, Chinese personal wealth has been on conspicuous display, generating bitterness, they said. And Chinese corporations — most recently Shuanghui International, which made a $4.7 billion bid for the United States' biggest pork producer, Smithfield Foods — are causing consternation about Chinese ownership of brand-name American assets, they said.

Another development that is breeding American resentment, they said, is the Chinese elite's practice of sending its children to top American schools and universities, in some cases crowding out American applicants with fewer resources.

"It is understandable that Americans and others are nervous about China when it talks about itself as a great power or a major power," said Rui Chenggang, a prominent interviewer of world leaders on CCTV, China's state-run television. "It's understandable that when people see what is happening between China and Japan and neighboring countries, and they see military exercises, that they are nervous."

Mr. Rui said he believed that concern was misplaced. "All the world thinkers who have decades of experience in China, from Henry Kissinger to Robert Zoellick, say China will be preoccupied by its domestic challenges, like environmental pollution, unemployment among college students and nonperforming loans," he said.

The Pew results arrive as already bumpy economic and military relations between Washington and Beijing have been damaged further by the revelations of Edward J. Snowden, the former intelligence contractor who last month leaked details of the National Security Agency's sweeping surveillance of foreigners and Americans.

The survey was conducted in March and April in 39 countries, well before the impact of Mr. Snowden's actions could be measured. The disclosures about the extent of American cyberespionage have received scornful coverage in China's state-run news media and have fanned distrust of the United States on China's Weibo, a popular microblogging platform.

In the United States, Pew interviewed 1,002 people by phone from March 4 to March 18. In China, Horizonkey conducted the survey from March 4 to April 6, with personal interviews of 3,226 people in 12 cities. Pew later bought those results. Both surveys had a margin of sampling error of plus or minus four percentage points.

With a focus on the intensifying rivalry between the United States and China, the results have piqued widespread interest within the American government. This week, in advance of the survey's release, Pew briefed State Department officials.

Over all, the United States was regarded more favorably in the world than China, with a median 63 percent to 50 percent. America was believed to respect the personal freedoms of its people far more than China, with large majorities in Germany, France and Spain saying individual freedoms were ignored in China, the poll said.

China was viewed most favorably in Africa, with a 72 percent approval rating, followed by Asia and Latin America, at 58 percent. China's approval rating in Europe was 43 percent.

China's low approval rating in the West correlated with the recent findings of Tao Xie, a professor of political science at Beijing Foreign Studies University.

In a paper in the current issue of The Journal of Contemporary China, published by a British company, Professor Tao wrote that people in poor countries admired China's economic success, while those in the West had negative feelings about China's political system that trumped its economic achievements.

"In developed, Western countries, people care more about values and political rights," Professor Tao said in an interview. "Regardless of how cozy a relationship the German leader, Chancellor Merkel, has with the Chinese leaders, at the popular level in Germany attitudes to China are not going to change."

Professor Tao's article, "What Affects China's National Image? A Cross-National Study of Public Opinion," was rejected by Chinese academic publications because it criticized the Confucius Institutes that the Chinese government has opened in many countries, he said. The article said the institutes, designed to project soft power, had failed to reverse China's "rather negative image" in most of the countries where they operated.

China's image abroad, particularly in the United States, faces two major hurdles, said Hung Huang, a prominent media commentator in Beijing.

First, the American news media have given unfair coverage of China, said Ms. Hung, who has lived in the United States and is now an American citizen. Second, she said, the Chinese government bungled its efforts to present China to the world, even as billions were spent on language-training institutes and electronic billboards in Times Square.

"The Chinese government is probably the worst government at PR," she said. "I don't think the Ugandan government can do any worse."

A Chinese businessman, Victor Gao, who is director of the China National Association of International Studies, a group affiliated with China's Foreign Ministry, said China presented itself in ways that were hard to understand. "The government calls itself Marxist, but that doesn't match the definition in the dictionary," he said.

The survey results that showed the United States was losing favor in China were not persuasive, Mr. Gao said. "Many Chinese don't like the policies of the United States government, but they don't equate the policies of the government with the people."

For example, he said, Chinese parents like to send their children to American schools. "They know America is innovative," he said.



http://www.nytimes.com/2013/07/18/world/asia/in-china-and-us-mutual-distrust-grows-study-finds.html

 

[Ray]

Liberalizing Interest Rates Remains a Challenge for China

HONG KONG — As a rookie at the central bank in Beijing during the early days of China's economic transformation, Joe Zhang considered it a foregone conclusion that the government would soon loosen its grip on interest rates.

It was the mid-1980s, and Chinese policy makers had been keeping a close watch on the United States, which was phasing out the mandatory caps on bank deposit rates that had been in place since the Depression.

In China, Mr. Zhang said, "the discussion in the government was quite serious. It was about liberalizing all interest rates within four to five years."

"The Path to Interest Rate Liberalization," the thesis he wrote in 1986 at the People's Bank of China graduate school, ''did not stand out in any way, because that was an accepted topic," said Mr. Zhang, who is now an independent corporate adviser based in Hong Kong.

Nearly three decades later, China still struggles with the issue of interest rates. The new prime minister, Li Keqiang, has made liberalizing rates a priority.

On Friday, the central bank scrapped the floor on lending rates, freeing banks to issue loans as cheaply as they wished, a modest development that pointed to the challenges ahead. The full liberalization of rates, if it does take place, would be a partial but significant shift in the growth model that has come to define China's rise in the last decade.

Analysts said eliminating the floor on lending rates (mortgage loans remain regulated) was a sign that Beijing was moving forward with promised overhauls. But the practical effect on lending would be minimal, given that almost 90 percent of loans in China are made at or above the benchmark rate.

Policy makers stopped short of removing the ceiling on deposit rates, which analysts say would have much broader repercussions for the profitability of the country's giant banking industry and for the continued access of politically influential state-owned enterprises to low-cost financing.

"Removing lending rate restrictions is an important symbolic move, which signals the government's intention to move forward with interest rate liberalization," Wang Tao, an economist at UBS in Hong Kong, wrote in a research note. ''The next and more important step is, of course, the ceiling on deposit rates. The central bank considers the removal of the deposit ceiling as the most critical yet most risky move in interest rate liberalization."

Because China's capital account is still largely closed and the cross-border movement of money remains tightly regulated, China's savers have limited options for managing their personal finances. As a result, household deposits tucked away in banks have doubled during the last five years, and stood at 42.9 trillion renminbi, or about $7 trillion, as of May.

That trove — equal to 83 percent of gross domestic product last year — has been a low-cost source of financing for state-run banks, which they have tapped to issue loans, mainly to state-owned companies. At the current one-year benchmark rates set by Beijing, banks pay ordinary depositors a maximum of 3 percent annual interest on their savings, and — before the announcement Friday — were required to charge borrowers a minimum rate of 6 percent interest on loans. (Banks are allowed to offer a small premium on deposits, and before the floor was scrapped had also been permitted to give a discount on loan rates.)

Analysts said the tensions over interest rate overhauls highlighted a crucial aspect of China's growth: The increased use of low-cost and abundant credit has bolstered state companies and fueled an unprecedented surge of investment, all made possible only by effectively holding ordinary Chinese savers hostage to low or even negative returns.

Measures to shift that balance in favor of ordinary savers — like doing away with the control of interest rates — are consistent with Mr. Li's stated goal of getting China to switch from reliance on investment to a more consumer-driven growth model. But accomplishing this would require Mr. Li to take on powerful vested interests at the state-owned companies that dominate huge swaths of China's economy.

Liberalizing interest rates is not just a matter of making the financial system more efficient, it represents ''a path toward greater social justice," Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington who has been studying the Chinese economy since the 1970s, wrote in a March essay published in the China Economic Quarterly.

To emphasize his point, Mr. Lardy highlights how real average interest rates, or household deposit rates as adjusted for consumer price inflation, were negative for the decade that the President Hu Jintao and former Prime Minister Wen Jiabao were in power. In other words, Chinese savers effectively paid the banks to store their money, and the value of their wealth was eroded.

That situation needs to be reversed if China is to rely more on consumer demand for its growth, and the new leadership under President Xi Jinping and Mr. Li, who took office in March, appears to recognize the need to push through changes despite the opposition they are likely to encounter, Mr. Lardy said.

''Even the vested interests understand that the legitimacy of the party and its continued rule depend on delivering reasonably rapid economic growth. Ultimately they are likely to cede some of the outsized benefits they have gained from the current growth model, rather than block reform and risk losing all."

Mr. Zhang, the junior central banker, left the People's Bank of China in 1989 after a three-year stint to study economics overseas.

After a long career as an investment banker in Hong Kong, he ended up working from 2011 to 2012 as a "shadow banker" in the southern city Guangzhou, making small loans to mom-and-pop borrowers. The loans were later repackaged as interest-bearing securities, or so-called wealth management products, and sold to investors who were in search of better interest rates than they were getting on their bank deposits.

Mr. Zhang remains hopeful that China will free up interest rates. And current policy makers have a deep understanding of the issue. Back in the '80s, one of the people who sat in a cubicle near Mr. Zhang's, in separate department that handled interest rates, was Shang Fulin. Today, Mr. Shang is the chairman of the China Banking Regulatory Commission.

http://www.nytimes.com/2013/07/22/b...allenge-for-china.html?pagewanted=2&ref=china

 

[libindi1989]

Hello ray，long time no see！i still want to grab your ass。