There was a 'debate' on yesterday's Newsnight on BBC2, featuring the eternally insufferablePaxo, some horrible American diplomat lady and two economists (who were both of Chinese extraction, not sure if that's relevant). The debate was, superficially, about whether China* will be the economic superpower of the 21st century, the fact that the country has built up over $2 trillion in foreign currency reserves, yadda yadda, on which, inevitably, Paxo and the American lady had nothing new to add.
As we all well know, China's population is about 1.3 billion, and when faced with stupendously unimaginably big numbers like $2 trillion or 1.3 billion, it's always helpful to divide one by t'other. What it boils down to is that each Chinese citizen has a savings pot of $1,500, i.e. bugger all in the grander scheme of things. That's dealt with the basic maths.
As further background, there was an article in today's FT that said that China has been accumulating foreign currency reserves (three quarters of which are in US bonds) at the rate of $300 billion a year in recent years, which is about seven per cent of their nominal GDP, or alternatively, they've accumulated currency reserves equivalent to half a year's GDP over the last decade or so.
One of the economists made an interesting point (I can't find it in the clip). He argued that part of the reason why China constantly intervened in the currency markets to keep its currency down, was not just an insane mercantilist export subsidy, it was because a quarter of Chinese still work in agriculture (a surprisingly large figure, but appears to be correct). If they allowed their currency to appreciate, then their markets would be flooded with food produced far more cheaply by Americans, Canadians, Australians and a lot of the small farmers would be out of work.
A couple of caveats; allowing your currency to float freely and lifting import barriers are two separate issues; and the Americans subsidise their food exports, but glossing over those, this is a ver-e-ery interesting train of thought...
1. Let's imagine that China is not a "country" but a large conglomerate, with 1.3 billion shareholders and about 1 billion employees/slaves, does it not strike anybody that it is stupendously badly run (not to mention all the human rights abuses, mass corruption etc)? The workers get treated like shit and the shareholders get no return on their investment (although the senior management team, the Communist Party members, may be living the high life).
2. Like the congolmerates of yore, they make the fatal error of using the profitable side (manufacturing and exporting) to subsidise the unprofitable bit (agriculture).
3. And like paternalists the world over, they think that 'saving' is in and of itself A Good Thing, and that forcing people to 'save' (by paying them artificially low wages) is therefore also A Good Thing (a bit like the crap in the UK with forcing people to save for a pension - all that happens is, they still haven't paid off the mortgage by the time they retire and the Stock Market is just a big Ponzi scheme). Wrong, pay people their full wages, free up the markets, liberalise planning laws and people will invest of their own accord, and probably in far better investments that US bonds.
4. What sort of a cretinous policy is it to not only subsidise your own exports (i.e. give money to richer countries like the USA, Europe), but then instead of investing the the meagre profits back in China to improve people's lives - whether in housing, new factories, combine harvesters, environmental stuff, safety measures in coal mines - they lend it all back to the USA again?
5. China had to invest in USD, i.e. lend it to the USA, to keep their currency low of course. But as and when they withdraw that money, they will find that the USD relative to the Chinese currency will fall, and the value of US bonds will fall, so they'll be lucky if they get back half what they invested. So basically, every Chinese factory worker has been slaving away 24/7 for a decade and the best he can hope for is the equivalent of $750? That's his performance related bonus? That's his return on investment?
6. In summary, in a decade, economists and management consultants will be holding up China as a good illustration of how not to run an economy, and Mercantilism (or 'State Capitalism') will hopefully be popped in the drawer labelled 'Failed economic ideologies' along with Socialism and Corporatism (and, if I have my way, Home-Owner-ism), and we'll wonder why people ever saw them as a potential 'global economic powerhouse' etc. A bit like we'll be wondering why anybody was so daft as to believe in global warming.
* I shall follow custom and refer to The People's Republic of China as "China", as opposed to The Republic of China, or "Taiwan", the civilised bit that has a low corporation tax rate and proper Land Value Tax.
A grim document
16 hours ago
19 comments:
In a few years time, we may be back to an era of several Chinas (plus Taiwan). Perhaps Singapore could take over one and run it properly.
You are assuming that the aim of Chinese policy is to make their people wealthier. Of course, the real aim is to make China more powerful.
So they pay their workers a pittance, and use the money instead to buy US bonds. This keeps the Chinese currency low, and leads to American manufacturing slowly moving to China. Once this process is complete, they will let their currency slowly appreciate. At that point, the US will be forced to buy their manufactures (because the US will have no industry left), but now at a much higher price. This will pauperise the US, and utterly destroy American power.
Of course, the US government is complicit in this, by running the huge State deficit that lets the Chinese pursue this policy.
The only hope of avoiding this disaster is if the US government comes to its senses and stops borrowing.
Interesting way of looking at things. I'm not sure the great and the good will click onto your way of thinking as quickly as you think.
Look how long Bernie Madoff managed to take them all for mugs. I have a theory that people in positions of great power and authority tend to be a bit naive.
Forget chancellor; you should be the Governor of the bank of England
D, that's a better idea.
AC "they pay their workers a pittance, and use the money instead to buy US bonds. This keeps the Chinese currency low, and leads to American manufacturing slowly moving to China. Once this process is complete, they will let their currency slowly appreciate..."
Sure, that's what they think they can achieve. But didn't Japan try this? It went very well for a few decades but look at them now, they are just another first-world-also-ran, like the UK, the USA etc.
S-L, some of my wild predictions will turn out to be correct. The question is: which ones?
UWM, that'd do nicely as a retirement job.
I doubt that it is relevant to look at any aspect of the Chinese economy on a per capita basis. Mr Woo in his fields is not only of no relevance to the grand plan of the Beijing State machine he also has no capacity to exert influence on that machine.
China makes things. Lots of thing. With low overheads. Whatever it does with US (or any other) government bonds will not undo its current position as a mass producer of things people want to buy. The acquisition of bonds is a by-product of the profits from selling alarm clock radios, coffee makers, battery operated boyfriends and all the rest of it. There is no sign of those profitable activities abating, so any set-back in trading fancy big-money items will only be temporary.
Mainland China today appears to be mirroring Hong Kong in the 1970s.
I think you need to learn the difference between making something and owning something. Just because something is made in China, it doesn't follow that it's owned by China. Once I buy it, it's mine.
So much for Nixon's ping-pong diplomacy and trying to open up China to American capitalism.Ditto destroying Communism in Eastern Europe.They have just opened up Western economies to competition from huge low-wage State enterprises or in USSR's case ex-State enterprises which cannot be resisted.
We would have been better off if the Eastern blocs had stayed as
self-contained trading blocs that did n't affect western production ,but free market fundamentalists over here would n't let it lie as well-known geo-politician Vic Reeves rightly observed.
on the initial agriculture point, what about India ? the % of agricultural workers there is even higher - 60% (sic)*(1) - because a very large part of this is subsistence farming
the authorities are very keen to keep them on the land*(2) because they have absolutely no idea what to do if they were all to turn up at the gates of the cities
- - - -
*(1) or should that be Sikh ..? (sorry)
*(2) or indeed export them: in the long-running world trade negotiations India's demands include several hundred million work permits abroad for their rural 'workforce' ...
TFB, yeah, but for whose benefit is China run? For its employees, its shareholders or the Party 'elite'?
PI, I think most people understand the difference.
DBC, the West is almost certainly better off for this, the question is, how much better off are the Russian or Chinese people? We've done far better out of this than they have.
ND, good point, but you can't look at India as one big plc, as you can with China.
Since your basic point seems to be anti mecantilism (a position I completely endorse) what about applying the same analysis to those other well known mecantisilist and protectionist countries and blocs, for example, Germany, France, the EU (ex UK - just) and the worst of the lot, the alledged heart of the free trade world, the US of A.
L, sure, but look at living standards in (West) Germany, the govt might control everything to the n-th degree, but people have short working hours, nice flats/houses, nice holidays, good healthcare and education etc.
I cannot possibly estimate how much better or worse off they would be if they abandoned Rheinland Capitalism - for some reason the experiment has worked in Germany. Different mentality, I suppose.
China shoyuld not be treated as 1 economic unit. Some of the hinterland provinces are about as reformed as Burma & growing as slowly whilse Shengzhou province, the bit beside Hong Kong has as free a market as HK ever had & is growing at nearly 20% (partly fueled by immigration from the hinterland). I also think the party is not be blamed for the fact that they are poorer than us & 1/4 are still on the land - they started at 95% & they used to regularly starve to death.
Nonetheless I accept their economy, growing at 10%, is not optimaly run. Imagine if it was without parasitic mandarins. Imagine if ours was.
NC, "China should not be treated as 1 economic unit..."
Yes, that's why I described it as a conglomerate, with two distinct divisions under common control.
MW 10.34. The experiment has only worked - so far. The experiment is not over yet and there are signs that it is going wrong. The cost of the experiment has been met by two groups; the local population having to pay more for everything and foreign countries accepting Germany's unemployment.
I have a vague theory that the Germans are still working under a guilt complex and that the only reason that they remain loyal to the EU and the Euro is a hangover from causing so much misery and death in the 20th Century. Once they get over this...? The trigger for that could be a UK referendum on membership of the EU. They'd still want to sell to us, whatever France, or rather the French ruling elite, thinks. The French wouldn't be at all happy at us putting two fingers up to the EU and buggering off, for the same historic reasons as Germany. The French want the EU because they still fear countries to their East and West and use the EU, by deploying their particular brand of deceitful and entirely self interested diplomacy, to manipulate the Germans guilt complex and our sense of fair play and honesty and fair dealing and the rule of law. If the French try and use the EU to stop Germans from trading with us that could cause an almighty row. If it was me I'd immediately ressurect EFTA and ask the Germans if they'd like to join.
I am surprised that Mark is so sanguine about the terms of trade: it is not "we" who have done well out of it.It is homeownerist governments.
Homeownerist parties refuse point blank to pay decent wages and keep the over-mortgaged masses happy with dangling the hard to realise (in financial terms) prospect of unearned capital gains in housing in front of them.It is therefore absolutely necessary to have dirt-cheap imports of manufactured goods because they can't be made anywhere near where they are boughtin homeownerist economies since this would involve distributing purchasing-power through wages,something they have tried in the past , but have found too difficult and have just given up on.
The anti-Home-onanist credo (promulgated by WHORE or the World Home Onernist REsistance,motto "Home-onanism or Whore the choice is yours") should surely include very firm proposals(00h er) about keeping up (it gets better)wage levels so that communities can purchase the goods they produce.(Without recourse to cheap foreign labour N.B the first proper Labour manifesto[ of 1906] contains eloquent words about land value taxation but also complaints about Chinese labour being used in the mines,presumably in South Africa.So we have in effect managed to revive a neo colonialist coolie system without the fag of moving the poor suffering Chinese over here-but our workers qua workers are being just as disadvantaged as before.)
DBC, sure, China's behaviour has disproportionately benefitted home-owners who don't intend to trade up and landlords in the UK*, the US etc. (because a lot of China's surplus cash helped fuel the house price boom).
But the 'average' Brit has benefitted by considerably more than $750 per person, unlike the long-suffering Chinese. I was trying to look at it from their point of view.
* Especially those who followed Fred H's advice and sold up in late 2007, tee hee.
Never in the history of the world has communism worked. Why on earth would people think that China somehow bucked the trend?
Capital allocation decisions in China are MORE centralised now than under Mao.
They're fucked. I'm sticking to my prophecy that China will be wracked by civil war within 5 years (while the desert reclaims Dubai).
Kauser, I agree, but I am not sure waht will trigger it. At the moment the Chinese ruling elite are keeping a lid on unrest by buying off the population with toys and Macdonalds and the less fortunate with subsides. This means that they will probably run out of money (like Gordon Brown!), and that may be the trigger. I read somewhere that China could break up into lots of smaller states. It's certainly too big to govern as it is. Any thoughts?
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