.....Why nobody is exploring this, except for Gillian Tett, is quite odd. Nevertheless, nobody was paying attention to the fractures in the Japanese model in the 80s anyway so it makes its quite predictable.
Who wants to admit the golden goose has cancer of the cloaca?
WHAT WOULD EDDIE DO? MAAAATE! Share a cot with Milton?
China May Never Get Rich SEPT 4, 2015 8:00 AM EDT By Noah Smith
China is already the world's largest economy by some measures, such as purchasing power parity. It's clear, however, that the country's growth is slowing. Growth dipped from roughly 10 percent to about 8 percent in 2012, and is falling again amid the current slowdown.
When the country recovers from its slump, how much more expansion can we expect before it settles down into a nice, slow, steady pace like every other fast-growing "miracle" country eventually does?
That leaves open the big question of how wealthy China will become relative to developed nations such as Japan, France or the U. S.
These rich nations occupy what economists call the technological frontier. Economies at the frontier have already exhausted all the cheap and easy opportunities for catch-up growth. They can no longer readily absorb foreign technology, or move unproductive farmers into cities, or use high saving rates to accumulate capital (this latter opportunity disappears because maintaining capital becomes more expensive as you get more of it). Their growth rate is essentially limited to the pace at which the human race invents new technologies.
But not all countries at the frontier are equal. Even among rich, slow-growing nations, substantial differences in living standards exist. Japan, South Korea, France, Germany and the U.K., for example, have per capita gross domestic product of only about 75 percent to 85 percent of the U. S. Most economists believe that this gap is caused by differences in institutions, or the broad rules that govern the economy. For example, heavy regulation in Europe or implicit subsidies to unproductive corporations in East Asia, are often cited as holding these economies back from full convergence with the U.S.
So what about China? How good are its institutions? Brad DeLong, economic historian at the University of California-Berkeley, asks this question in a recent article. As is common, DeLong begins by assuming that China's institutions are fundamentally similar to those of the rich countries around it -- Japan, South Korea and Taiwan:
A great deal of China supergrowth always seemed to me to be just catch-up to the norm one would expect, given East Asian societal-organizational capabilities. China had been far depressed below that norm…by the paranoid Mao Zedong.
But thanks to its communist past and its government's resistance to westernization, China's system of property rights looks nothing like the systems in Japan, South Korea, or Taiwan. It might be that China has invented a totally new system that will do just as well as -- or even better than -- the system that successful countries have been using for centuries now. But that's an outside chance. The safe bet is still that China's strange system will hold it back. DeLong writes:
[China] has had its own system of what we might call industrial neofeudalism...Chinese entrepreneurs have protection via their fealty to connection groups within the party that others do not wish to cross...Such a system should not work...The evanescence of [property rights] should lead [elites] into the same shortsighted rent-extraction logic that we have seen played out over and over again in Eastern Europe, sub-Saharan Africa, Southeast Asia, South Asia and Latin America.
Weighing these factors, DeLong comes to a stark conclusion -- China has only five years of rapid growth left. Since China's per capita GDP is now only about a quarter of the U.S. level, five years of 7 percent growth -- with the U.S. growing at 2 percent -- would leave China at less than a third of America's standard of living by the time it slows down.
That almost certainly seems too conservative. We need to take into account the effects of economic agglomeration. Agglomeration means that companies invest where there are large markets, and workers move to where they have job opportunities. This snowball effect, once started, is hard to stop. China's poor property rights will probably hold it back -- as will its large size and resource limitations -- but 30 percent of U.S. per-capita GDP is overly pessimistic. I'd look for China to do at least as well as Malaysia, which now is at about 45 percent of U.S. GDP.
That would mean China has more than a decade of 7 percent growth left, once it recovers from its recession.
That said, there are already signs that China's institutions are beginning to hold it back. In the wake of the country's dramatic stock market crash and the slow deflation of its real estate bubble, zombie companies are starting to appear across the landscape. Zombie is the term for companies that are not really profitable, but that survive on a continuous stream of cheap loans from banks that can't afford to let the companies fail. Banks do this because if the companies fail, the banks fail, and the banks are both systemically important and politically well-connected. The government provides the final link in the chain, by bailing out banks, by keeping interest rates low, and by providing subsidies to some of the zombies.
This kind of trap ensnared the Japanese economy after its own bubble burst in the early 1990s. It took more than a decade before the administration of Prime Minister Junichiro Koizumi finally forced the big banks to cut most of their zombies loose.
But when Japan was attacked by zombies, it was at a much higher level of income (relative to the U.S.) than China enjoys today. In other words, China is hitting Japan-type institutional problems at a much earlier development level than Japan.
That is an early indicator that DeLong and other economists are probably right about China. The system of political-party-based property rights is better than nothing, but it isn't going to make China rich. China is still so poor that it isn't done growing for a while, but when it stops, it's probably not going to be a rich country.
That's why barely millionaires Chiners are willing to lever up and buy an overpriced shitbox in Canada or Australia. What price to breathe fresh air for the rest of your life? A million? Two million?
Fuckin hell if I you told me I can has 10 million in Australia but had to breathe through a tail pipe, you bet your ass I'll pay 9 million to relocate to another country where I can breathe clean oxygenated air. Nah. I said quite as much 4 months ago. And if a forum poster like me has thought it, you bet your ass other professional writer already has. You just haven't found the articles.
China's rise to power in the last 10 years is nothing more than money printing gone berserk.
This is not unprecedented. America did the same trick in the 1950's and 1960's. They printed dollars like crazy and bought up European companies. They were able to do this under the guise of gold to dollar parity and convertibility. Europeans were happy to accept dollar payments for their companies because of the perceived power of the USA (they did after all rebuild Europe after WW2), but it's just excess amounts of dollars printed by US banks.
What happened next was the Germans, French, and Italians cashed in their gold at Fort Knox. Nixon had to suspend dollar to gold convertibility (the Nixon Shock: http://en.wikipedia.org/wiki/Nixon_Shock) because there was not enough gold for every dollar. The Bretton Woods system was dismantled. Our currencies have been floating ever since.
Japan did the same trick in the 1980's. They bought up Rockefeller Centre, Universal Pictures, Columbia Pictures, Pebble Beach Country Club with printed Japanese money.
The Chinese have been doing the same in the last 10 years, although they're only able to acquire businesses that the West don't want. These are unprofitable companies like the sale of Volvo by Ford to Geely, the sale of IBM's PC business to Lenovo as PC hardware sales are declining, the sale of Motorola by Google to Lenovo, etc.
Overall, there is a reticence to sell to China because of national security issues as the Chinese government has significant ownership of Chinese companies doing the acquisition.
What there is not reticence is in the area of real estate, particularly in the Singapore, HongKong, Canadian, and Australian markets, the last of the bubbles to pop. Canada and Australia in particular have significant investor visa programs that let this hot money buy up real estate, although both countries are starting to dismantle these programs.
But we don't have to wait for the Chinese to stop buying for the bubble to pop. Any country that prints like crazy eventually will have problems inside their countries before currency dealers get wiser. Currency dealers don't have perfect information. They don't have the information on how much money Central Banks are printing. But as I said, countries implode before currency dealers and bond traders get the wiser.
It happened to Japan when their stock market tanked. It happened to the USA in the 1970's with stagflation. It will happen to China soon. Their manufacturing is in decline. Steel output is in decline. Property market crashing. They've converted the bad loans in their bank's books to CDO's (the same ones that caused the 08 crisis). Now they are trying to inflate their stock market as a last ditch effort to appease their bankrupt middle class.
Anybody who believes that a low cost, low margin manufacturing country will rise to take on the world is a fool.
Real growth happens with real income, productivity, and technological gains. China doesn't have the preconditions. All they have is balance of payment surplus from slave labor low-cost manufacturing which they use to mask their money printing adventures.
The communist party has no legitimacy and is gasping for air. They hinged their legitimacy on growth and jobs, which are evaporating. They are in for interesting times. Richard Werner would like a word with you:
Sure, well spotted and you're perhaps thinking outside the box.....which these days doesn't really mean very much. As for Werner, that kind of illustrates my point. Experts only really after the fact and nobody really listens to Werner anyway. In the suburbs, most people would think he's a composer of classical music.
Really this is a debate about the adaptability of China's economy, within the supposed confines of its supposedly static political regime. - 35 years ago China was moribund under Maoist statism, and then Deng Xiaoping happened - For the next 20 years the conventional wisdom was that, while current growth was spectacular, there was still too much reliance on outmoded debt-laden SOEs, which would inevitably generate a crash. That never happened. - Then there was an "unsustainable" trade surplus with the US, which had to end in tears. That never happened. - Now there are supposedly insurmountable difficulties in moving from an agrarian/manufacturing economy to a higher-value-added services-oriented economy. Why?
No, I think I am going to have to disagree with Gillian Tett on this one.
The similarities between China and Japan are superficial. Saudi Arabia is also an export economy, and it is nothing like Japan.
The Japanese have their Zaibatsu and Keiretsu, the Koreans have their Chaebol, but the Chinese are still a warlord society. They haven't had a Joseon or a Tokugawa to homogenize and nationalize their culture.
The Japanese and Koreans exploited their cultural homogeneity to convince the corporations to co-operate and form cartels with complex cross holdings to defend against hostile takeovers from foreign firms, and their populations to bear down and limit their consumption for "the good of the country". Try convincing the Chinese to do that. Nope, they will be packing a suitcase with as much cash as they can stuff in it and fleeing to a long prepared bolt hole overseas, like they have been doing for 800 years now.
The Japanese tried to defend stock prices because they saw it in the national interest to defend their corporations against foreign takeovers. The Chinese are trying to defend stock prices so the corrupt can suck as much wealth out of the peasantry as possible before it all goes tits up.
I think you probably need to focus on the points that Tett raises, but I do agree with the points you make. Whether or not that means China will avoid what happened in Japan is still not really thought about. Of course, there is no reason why that necessarily has to happen.
- Now there are supposedly insurmountable difficulties in moving from an agrarian/manufacturing economy to a higher-value-added services-oriented economy. Why?
Because the world only buys the cheap plastic crap from China.
For everything else where quality and reputation is wanted at a premium, the world buys Japanese American, European, or even Korean. Even Chinese themselves don't buy the expensive stuff from China. Eugh!
Because the world only buys the cheap plastic crap from China.
For everything else where quality and reputation is wanted at a premium, the world buys Japanese American, European, or even Korean. Even Chinese themselves don't buy the expensive stuff from China. Eugh!
Meh, look at how far Japanese-brand cars have come in 50 years, or Korean-brand cars have come in 20. There's no real impediment to China doing the same.
Meanwhile, we're already buying services from the newer bits of the Chinese economy. My primary employer has an 9-figure IT consolidation project underway, led by Germans, but with most of the code written in China. Considering the global reach of the German integrator, I doubt it's the only such project.
The biggest mistake China made is building their military early in their stage of development.
South Korea, Japan, and Taiwan minimised military spending as a percentage of GDP and relied on the US for national defense, knowing military spending will drain their capital.
They spent their capital on R&D to move away from low wage labor. They didn't spend it on tanks and bombs and jets and ships.
As a result, they built up significant IP that the Europeans and Americans don't have.
China has to steal and hack their way to IP.
Stupid China just wasted their capital on condominiums and QE and military.
20 years of growth and they have nothing to show for it except jets and ship and roads and airports and condos.
China being a communist country relies on military power to ultimately keep power. The Peoples Liberation Army has an oath to the Communist Party not the Chinese people, Party first people second. To keep the party in power China needs a strong military to fend of both domestic and foreign threats.
The primary aim of the PLA for the next 10 years is to builds it military to the point where it can invade Taiwan and prevent US intervention. In 2005 China created a law where if it thought all chance of reunification with Taiwan was lost it would resort to military force, if Taiwan declares independence or appears to be making moves in that direction military force can be used. This is Chinese law. To the Chinese Taiwan is like the Rebel south was to the US in the civil war. To let Taiwan become independent would be seen as a great loss to the Party and would almost certainly result in a coup or revolution. On the same hand a failure of by China to win the war to reclaim Taiwan would also be seen as a catastrophic defeat with similar consequences. The CCP know this and as a result most of the military build-up and modernization is directed at forces to invade Taiwan and prevent the US from successfully intervening.
Securing Taiwan for China would be like handing China a huge aircraft carrier which would breach the first island chain. It would also result in a huge loss of prestige for the US and many to question US resolve in its many other Alliances. China aims to make any US intervention as costly as possible there by deterring US involvement. I recall the Japanese had the same idea with kamikazes during WWII, except the US absorbed the losses and just kept coming.
For the moment China is not yet strong enough to guarantee success of this operation as the US is simply to powerful, let alone with Japan, South Korea, Singapore, Australia and perhaps many other nations of Asia joining a coalition to defend Taiwan against a Chinese invasion. In 10 years China may have such local superiority in numbers this calculus may change. However I doubt it, I do not think any invasion of Taiwan can be successful long term unless the US is completely removed from Asia first. The Japanese tried the one as well, did not work out to well and the Japanese military at the time was superior in some aspects and a far more potent threat with its Navy and air force.
What do most authoritarian governments do when faced with economic crisis which may be a threat to governments authority to rule. Create an international incident or a foreign military adventure to distract the population and stoke nationalistic sentiment.
What is ironic is what caused the Chinese to begin this massive modernization program. It was the utterly devastating power the US displayed during the First Gulf War with its high tech weapons obliterating the Iraqi Military. Keep in mind at this time Iraq had the worlds 4th largest Army and some of the most sophisticated and heavily defended airspace in the world. It was also a model of the Soviet Army with doctrine and tactics. So when the US dismantled it with such ease and little losses it was a huge shock to the Chinese leadership which was based on the same models. No longer was a mass Army of millions enough doe defence with massive amounts of tanks and artillery. The US military would simply pick them off with ease from range after gaining air superiority which it would with its stealth bombers and fighters taking out key infrastructure, blinding there own fighters from fighting effectively.
This is what triggered the Chinese to totally change direction and spend up big on military modernization. To in effect become a smaller US military. That is what they are part way to doing now.
What is ironic is what caused the Chinese to begin this massive modernization program. It was the utterly devastating power the US displayed during the First Gulf War with its high tech weapons obliterating the Iraqi Military. Keep in mind at this time Iraq had the worlds 4th largest Army and some of the most sophisticated and heavily defended airspace in the world. It was also a model of the Soviet Army with doctrine and tactics. So when the US dismantled it with such ease and little losses it was a huge shock to the Chinese leadership which was based on the same models. No longer was a mass Army of millions enough doe defence with massive amounts of tanks and artillery. The US military would simply pick them off with ease from range after gaining air superiority which it would with its stealth bombers and fighters taking out key infrastructure, blinding there own fighters from fighting effectively.
This is what triggered the Chinese to totally change direction and spend up big on military modernization. To in effect become a smaller US military. That is what they are part way to doing now.
That sounds almost sensible. Where did you plagiarize it from?
“Talk sense to a fool and he calls you foolish.” - Euripides
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