Ambrose Evans-Pritchard has a great post about the recent sluggishness in Chinese consumption. Imports from certain countries are down, internal freight is declining, with property values and energy usage also slipping.
There is a widespread misunderstanding that China’s households can easily come to the rescue by cranking up spending because they have the world’s highest savings rate, and consumption is just 36pc of GDP.
Prof Michael Pettis from Beijing University puts that one to rest. The Chinese do not have a much higher personal savings rate than other East Asians. The reason why consumption is so low is that wages are low, the worker share of GDP is low, and the whole economy is massively deformed and tilted towards excess investment.
This is deeply structural. It cannot be changed with a flick of the fingers, and contains the seeds of its own destruction.
China is a marvellous country. I wish them the best. But they have not found the secret formula for perpetual uber-growth.
No such formula exists.
There’s been a lot of talk in the last year or two about the potential for a slowdown in the Chinese real estate sector, and implications for the broader economy. Part of the problem, as Evans-Pritchard points out, is that the data that China releases regarding internal events is often spotty or contradictory. Given that constraint, and the fact that the end result of an investment glut might be worse than a “normal” contraction, how confident do you feel that an expansionary fiscal policy in 2008-2009 resolved intrinsic risks?
The problem with a “too small” stimulus is that you get an initial economic boost, but when the stimulus expires the economy slumps back down, as indeed happened in mid 2011. Ideally a stimulus employs some idle labor, stops it from depreciating, and tides those workers over until they can look for other jobs in fundamentally better economic conditions. Those last few words are important. If conditions are not improving soon, the ability of the stimulus to “buy time” for those workers isn’t worth much. The workers get laid off from the government projects and their reemployment prospects are no better than to begin with. We end up having spent a lot of money to postpone our adjustment problems, rather than achieving takeoff.
While China is obviously not the US, especially in terms of political constraints or moderately-liquid assets needed to attempt additional stimulus as a response, the answer to the question should probably be “not very.”