Broke Down Engine

There are a number of interesting tidbits in a recent article on China’s economy in The Economist. One of them is this:

For well over a decade, China has been the engine of global growth. But the blistering pace of economic expansion has slowed.

The first sentence makes me lament the state of contemporary journalism. There are ways that could have been expressed with facts and figures. Instead, the editors chose vague generalities, spiced with opinion. That a few sentences previously they bought into the 7% growth that the Chinese authorities are reporting despite solid arguments that China’s growth rate is closer to 3% doesn’t help.

“Engine”, “global”, and “growth” are interesting words. Is that actually what happened? Or did Chinese subsidy to increase industrial capacity result in a buying spree and bubbles in commodity exports by countries like Brazil and Australia? We may never know.

But I loved their reaching into the not-so-distant past and bringing this up:

“WHAT if we could just be China for a day?” mused Thomas Friedman, an American columnist, in 2010. “…We could actually, you know, authorise the right solutions.” Five years on, few are so ready to sing the praises of China’s technocrats.

It points out how greatly the Internet has changed things. When nothing every really vanishes whether you’re a politician or a celebrity journalist your old excesses can come back to haunt you. Will it incline Tom Friedman to moderate his effusive praise of authoritarians? It would make an interesting study and we can only hope.

When I read this:

China has a semi-fixed currency and semi-porous capital controls. Partly because a stronger dollar has been dragging up the yuan, the People’s Bank of China (PBOC) has tried to abandon its loose peg against the greenback since August; but it is still targeting a basket of currencies. A gradual loosening of capital controls means savers have plenty of ways to get their money out.

A weakening economy, a quasi-fixed exchange rate and more porous capital controls are a volatile combination. Looser monetary policy would boost demand. But it would also weaken the currency; and that prospect is already prompting savers to shovel their money offshore.

I wondered whether the authors remembered why the Chinese authorities started pegging the yuan to the dollar in the first place? Back in the early 90s after a series of disastrous inflations the Chinese authorities despaired of managing their currency in a way they found satisfactory so they decided to rely on the greenback.

More recently they had to have “semi-porous capital controls”. Otherwise they couldn’t get their own money out of the country in time. Those multi-million dollar houses in British Columbia, California, and Florida don’t buy themselves, you know.

When they write this:

The problem is that the expectation of depreciation risks becoming a self-fulfilling loss of confidence. That is a risk even for a country with foreign-exchange reserves of more than $3 trillion. A sharply weaker currency is also a threat to China’s companies, which have taken on $10 trillion of debt in the past eight years, roughly a tenth of it in dollars. Either those companies will fail, or China’s state-owned banks will allow them to limp on. Neither is good for growth.

what they haven’t mentioned is that when 70% of businesses and nearly all of the big ones are state-owned “Chinese companies” is just the Chinese government under another guise.

I’ve now presented three opportunities The Economist might have seized on to disambiguate the data: how important China has actually been to global growth, the amount of capital that has fled China into real overseas assets, and the role of SOEs in total Chinese corporate debt. But that would have taken reporting and stuff. It only takes two sentences to say “Don’t worry. China will be just fine” but I guess they had a 1,000 word hole to fill in the last issue.

My own view is that over a 30 year period China has used its currency and capital controls as a sort of siphon, exporting inexpensive manufactured goods and importing employment. Meanwhile, we and the Europeans, except for Germany which was busy building Chinese factories, imported the goods and de-industrialized. Over the last half dozen years China has built enormous industrial capacity, over-capacity by practically any measure. How we’re all going to pry ourselves out of this fix I don’t really know. No one seems particularly eager to relive the last 20-25 years, taking every decision and doing the opposite.

The people who’ve really been injured in all of this are people in poor countries other than China who’d like to use the model used by Japan, South Korea, and China to pull themselves up by our bootstraps. But now there’s all that Chinese overcapacity without enough Chinese, European, or American consumption for them do to that.


I see that Barry Ritholz had about the same reaction that I did, expressed considerably more tersely.

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    When nothing every really vanishes whether you’re a politician or a celebrity journalist your old excesses can come back to haunt you. Will it incline Tom Friedman to moderate his effusive praise of authoritarians?

    Unlikely. Friedman has a real hard-on for the Chinese Communist Party. Remember how effusive he was about how China was much more awesome than the USA during the Olympic games in China? When it comes to the CCP, Friedman is a schoolgirl crushing on Elvis, The Beatles and Sinatra all at once.

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