Andy's 중국경제 view; 애정과 짜증 공히 "진하게" 느껴진다

신년에 Andy 글을 처음 옮겨본다.

또한 네이버 메일주소로 받은것도 처음이고

이제, 예언가에게 무장을 "armed prophet" 진일보합시다

신기하게 저장된게 없어서 밑줄친걸 옮긴다

 

절절한 느낌이다

중국에 대한 애정이느껴지기도 하면서 한편 "비관론자의 소외감" 같은 것도 느끼게 되는가?

 

어차피, 적절한 버블은 선행 투자를 위한 기여를 하고

어차피, 적당량의 군불은 지펴야하는법이라면

그 논리를 제공하는 아이디어들을 이렇듯 "미워할 disgusting"것 까지야 없지 않겠나

하여간 중국의 기본 그림을 그린다는 차원에서 정리해 본다. 

 

 

Slimming the government, empowering the people, Andy Xie

 

No more dividends;

The favorable demographic trend has cut China's dependency ratio to one of the lowest in modern history.

The debt crises in the West signals the end to China's trade boom.

The good, the bad, and the ugly;

The overall overcapacity could be one third, much greater than either in the US at the end of the 1920s or in Japan in 1992

Easy money usually leqads to speculation, asset bbbles and corruption or rent-seeking.

   Stock markt rose five times between 2005~2007.

   The land price rose over thirty times in the booming decade.

Like in the US and Japan before, the bubbles functioned partly to subsidize investmet.

China's challenges would be as severe as what the US faced in the 1930s or Japan in the past two decades.

The turning point;

East Asian development modl is investment and export-led.

That would require China to scale back investment to below 30% of GDP

2012 is the first year for the adjustment.

In addition to a price bubble, China has an unprecedented quantity bubble. Further, the demographic burst is less than ten years away. All these factors point to a property burst as big as in Japan or Taiwan.

Paying for the past;

Japan kept the bad loans under th rugs for six years after the property bubble began to deflate, because its banking system didn't face liquidity problem. Japan chose to cut investment to sustain its banking liquidity.

In the past, the problem was covered by appreciating land price, which empowered local governments to subsidize businesses.

Growth potential in in increasing productivity;

per capital income is 1/7 of the level in developed economies.

Few people in their prime remain in villages. Urbanization is resuscited as another growth area. Byut, most tier three cities are overbuilt.

If they, who don't know what they are saying, are put in positions of decision making, they would do great harms to the country.

The governemtn should be halved'

image projects, trophy assets,---

Purchasing power must go to the people;

 

-------------------------------------

원문)

Merry Christmas and Happy New Year!

Andy

 

The New Century Weekly

 

Slimming the government, empowering the people

(精兵简政,藏富于民)

 

Andy Xie

December 18, 2012

 

Summary

-------------

2012 is a turning point in China's economic development. The twin dividends from joining the WTO and the favorable demographic trend are over. The economy is struggling because there are no dividends to offset the inefficiencies, such as repetitive investment, rent-seeking, and bubbles, built up during the boom. To stabilize the economy, there must be actions to decrease inefficiencies.

 

China's growth potential is in increasing productivity. The current per capita income is one seventh of the level in developed economies. If the inefficiencies are removed, the per capita income could rise by 50%. To realize further gains, China needs to rely on market force, not government fiat, to allocate investment and to shift spending power to the household sector from the government and the state-owned enterprises. Chinese people are highly competitive in the global economy. If the internal system is not too inefficient, the economy would do well.

 

If China reforms (1) to remove most inefficiencies, (2) to shift to market force for capital allocation, and (3) to cut taxes and fees to shift spending power to the household sector, China's economy could become the biggest in the world in a decade. If China stays with wasteful investment to support demand temporarily and feed rent-seeking activities, China would head to financial crisis and currency devaluation.

 

The key to economic restructuring is to shrink the government. The rising fiscal revenues have fed the rapid growth in government payrolls. In an administrative power-centered economy, over employment in government leads to rampant government interventions in every corner of the economy. The rent-seeking activities become the dominant force in how the economy behaves. This is why China must slim the government for the economy to succeed.

 

No more dividends

-------------------------

Two powerful forces have driven China's growth in the past decade. The favorable demographic trend has cut China's dependency ratio to one of the lowest in modern history. China's baby boomers were born between 1950-75. The one-child policy in the past three decades has amplified the natural demographic trend, making today's dependency ratio unusually low. Also, the labor participation rate of China's women is similar to men's. It is partly due to low household wealth. That force may be reversing too. From now onwards the dependency ratio is likely to rise. The demographic tailwind is turning into a headwind.

 

After China joined the WTO one decade ago, multinational companies shifted production to China from Europe, Japan, and the US. The redistribution of manufacturing capacity triggered a surge in China's share in global trade. This tailwind is responsible for the rapid growth in bank deposits and money supply. The fixed exchange rate amplified the impact of trade boom on money supply.

 

The debt crises in the West signals the end to China's trade boom. When their factories moved to China, they resorted to debt to sustain their living standard. As long as the market was willing to go along, the debt-driven consumption continued, which in turn fed China's export boom. As the debt bubbles burst, so does their spending power. This is why China's export boom is over.

 

The good, the bad, and the ugly

------------------------------------------

Favorable demographic trend doesn't automatically turn into economic growth. Most Latin American countries missed the opportunity. India could do the same. East Asian economies like Japan, Korea and Taiwan experienced similar forces before and successfully seized the opportunity. China has followed the East Asian model and experienced similar successes as well as similar problems.

 

The WTO and demographic tailwinds meant strong monetary growth. China used part of the money to build up a supporting infrastructure for manufacturing successs. Transportation, energy, and telecommunication systems have become highly developed. Multinational companies can operate in China as in developed economies while enjoying low labor cost. The competence in building up infrastructure made it possible for the economy to benefit from joinging the WTO and favorable demographic trend. The exports rose by 20% per annum in the decade after joining the WTO, which catapulted the country to the number one spot in global trade.

 

Whenever money is plentiful, wasteful spendings are inevitable. In the 1920s, the US businesses over-invested in new technologies and led to massive overcapacity, which precipitated the subsequent Great Depression. In the 1980s Japanese businesses over-invested too and paid too much for trophy assets abroad. Its economy has stagnated for two decades. China has done the same. Over-capacity is everywhere. The overall overcapacity could be one third, much greater than either in the US at the end of the 1920s or in Japan in 1992.

 

Easy money usually leads to speculation, asset bubbles, and corruption or rent-seeking. China's stock market rose five times between 2005-07. The land price rose over thirty times in the booming decade. In some cities it went up 100 times. The asset bubbles amplified the feeling that money was easy to come, which decreased resistance to wasteful investment or rent-seeking activities.

 

Like in the US and Japan before, the bubbles functioned partly to subsidize investment. For example, China's stock market has declined in the past decade even though the nominal GDP rose four times. Japan's stock market is as low as three decades ago. After the 1929 crash the US stock market didn't reclaim the peak for two decades. China's fixed investment has been close to half of GDP for many years, much higher than Japan's or the US's during their peak years. It suggests that China's challenges would be as severe as what the US faced in the 1930s or Japan in the past two decades.

 

The turning point

-----------------------

East Asian development model is investment and export-led. The investment boom is made possible by the export boom, because over investment model needs excess liquidity from export to sustain. Hence, if the export boom ends, the investment boom is certainly ending. The limiting condition is exchange rate. During the boom, the fixed exchange rate turned the export boom into a monetary boom. It does the same on the way down. If the domestic political system insists on pushing investment despite export stagnation, it would lead to a currency collapse. This occurred to Korea and Thailand in 1997.

 

Southeast Asia, Korea and Taiwa lost their export boom because China became more competitive. China's export boom is ending because its customers face bankruptcy. This is a unique situation because China is so big relative to the world. In terms of per capita income or export per person, China's levels are less than half of the levels when Korea and Taiwan had a similar challenge.

 

China's exports rose twice as fast as global trade and four times the global economy in the past decade. The chances are that the export would rise less than 10% in the coming decade. That would require China to scale back investment to below 30% of GDP.

 

The most important part of the turning point is land price going into a down channel. While many cite statistics and anecdotes to support the property bubble continuing, the facts on the ground are that the bubble is deflating. In some cities, the property market has collapsed. In most cities the prices have dropped significantly. Unlike the stock market, the property market takes time to adjust, possibly five to six years. 2012 is the first year. When it's all over, the land price could drop by 80% in many cities and property price by half.

 

The long-term future for China's property market is extremely dire. In addition to a price bubble, China has an unprecedented quantity bubble. Further, the demographic burst is less than ten years away. All these factors point to a property burst as big as in Japan or Taiwan.

 

Paying for the past

-------------------------

Waste and bubbles are inevitable during an economic boom. When it's over, paying for the past mistakes can be quite complicated. In particular, the asset quality in the banking system deteriorates sharply after the boom. Because the banking asset quality could be hidden, the problem may be covered up for many years. The problem came out in Southeast Asia because the region faced a liquidity crisis. Japan kept the bad loans under the rugs for six years after the property bubble began to deflate, because its banking system didn't face liquidity problem. Japan chose to cut investment to sustain its banking liquidity.

 

China's non-financial sector debt is over two times GDP. It doesn't include underground lending. If that is included, the level could be 2.5 times. This is very high for a developing country. Mature economies have 2-2.5 times GDP of non-financial sector debt. They could have such levels of debt because their household wealth levels are higher. At China's $6,000 per capita income level, no other countries could be found with the same debt level, including the East Asian economies when they went into debt crises in 1997.

 

China's debt is skewed toward businesses and local governments. Mature economies tend to have 50-70% of GDP in business debt. China's is twice as high. Moreover, China's business profitability is about half of the global average. It means that the debt burden is four times. This is why China's stock market is so weak despite the economic boom. This is China's achille's heel. The business debt is not comparable to its earnings capacity. It will inevitably lead to large amounts of bad loans. In the past the problem was covered by appreciating land price, which empowered local governments to subsidize businesses. The businesses could borrow more on appreciating land value to stay liquid. As the land market reverses, the problem becomes exposed. It requires the government to deal with the ban loans as soon as possible. Otherwise, the banking system could freeze up for years.

 

 

Growth potential is in increasing productivity

----------------------------------------------------------

Even though the twin dividends are over, China still has plenty of growth potential. The current per capita income is one seventh of the level in developed economies. China's relative income was probably higher towards the end of the 1930s. Considering that ethnic Chinese are among high income group in developed economies, it doesn't make sense for China's income to be so low relative to the world. If so, it means that the country's system, not the people, is the problem.

 

The recent debates on the growth potential tend to focus in the wrong areas. Many try to bring up demographic dividend again, ignoring the fact that few people in their prime remain in villages. Urbanization is resuscitated as another growth area. But, most tier III cities are overbuilt. Their properties under construction would take many years to absorb. The discussion on where to find growth reflects arrogance on its participants. Economic growth ultimately comes from productivity increase, not investment per se or more workers. Productivity growth depends on constant optimization of capital and labor by market forces. The price mechanism is the greatest human invention. It turns collective wisdom into improving productivity.

 

If a few people can identify where growth comes from in the second largest economy in the world, they would surely be much smarter than Warren Buffett. If they are, they would be making billions for themselves rather than working for the government or some thinktanks. The people who talk where the economy could grow in future don't know what they are saying. If they are put in positions of decision making, they would do great harms to the country.

 

The government size should be halved

----------------------------------------------------

An expanding government is the root cause for many economic ills in China. More people in the government, more pressure for rent-seeking. As administrative power, not the rule of law, dominates the economy, the rent-seeking pressure inevitably changes the economic structure into one for its convenience. Making bubbles, pumping up image projects, and increasing taxes and fees on the people are some of the inevitable consequences. As long as the government remains so large, the pressure for bringing to it more money always exists. If one tax is cut, another one may come to replace it.

 

The beginning of the property bubble deflating is decreasing government revenue, as land sales revenue drops. This is the main reason behind the push for property tax. While property tax is appropriate under certain conditions, they are not there in China. For example, property tax should occur if property is really owned. China's property title is for 70 year usage. Second, property tax revenue should go into local usage like education. China's property tax is likely to support existing government spendings in investment. Some argue that the tax is for controlling speculation. That is not correct. The right tool for controlling speculation is capital gains tax. There is one already. If it is not enough, it could be raised. The real purpose of the property tax is to feed the government.

 

This is why China's economic reforms are unlikely to succeed without changing the governing structure. The most important benchmark is in the number of people in the administrative system. Many government agencies have seen their payrolls increasing by ten times in the past fifteen years. To make the government effective and constructive, the government size needs to be cut by half or more. This is obviously difficult to achieve. But, China's future depends on it.

 

In the short term, the government could cap its expenditures to the current levels for five years. Also, the SoEs should cap their investment for the same period. As long as these objectives are met, the government sector would shrink relative to the economy, making it more efficient overtime.

 

Purchasing power must go to the people

------------------------------------------------------

China's household consumption is about one third of GDP. It is low because labor income accounts for a bit over 40% of GDP. Gray income is probably 10% of GDP. Most money in China goes to the government and state-owned enterprises. Companies go to them for demand and profit. As their spendings are not efficiency-driven, their suppliers are not either. This is why, even though China is the second largest economy in the world, it doesn't have many competitive companies to speak of.

 

Efficient companies rise when they meet sustainable and efficient demand. When the money is spent by the people for their needs, the demand created is sustainable. Companies that compete for it successfully will last. China's household consumption should be above 50% of GDP, similar to that in other developing countries. It requires labor income at 65% of GDP, also a normal level. These goals can only be met if the government and SoE's share in the economy goes down. In the short term, the government could cut income and consumption taxes by Rmb1 trillion. Such a downpayment could increase demand for industries with overcapacity and boost market confidence in China's future.