
Beijing’s Three Options: Unemployment, Debt, or Wealth Transfers - mooreds
https://carnegieendowment.org/chinafinancialmarkets/77178
======
Nokinside
Unlike liberal democracies, Beijing has more room to act in crisis. China has
extractive institutions that will ultimately be a growth limiting factor, but
I don't see it limiting their crisis responses.

* There will be no political gridlock between left and right that can be solved only with half measures. Decisions are done in small groups of 30 people at most, with several hundred people having some influence.

* They don't have ideological fear of meddling with the markets or private property. It's all about being practical.

Beijing can make mistakes when handling the crisis. After they realize their
error, they can take as big hammer as needed to fix it.

~~~
ekianjo
> It's all about being practical.

The soviets and Mao's regimes had ample powers to do what they wanted, yet it
resulted in mass murder and complete catastrophe at unprecedented scale
because they made very, very poor decisions. Having leverage does not mean it
fits prosperity nor crisis. Look at how soviets encouraged the killing of
Kulaks which led to the great starvation (dozens of millions of deaths) in
Ukraine in the following years.

~~~
Nokinside
Those are examples of ideological action.

Chinese have not been strongly ideological after Deng Xiaoping.

Communist party is more like ruling aristocracy with privileges. Communist
party is using communism the same way as aristocracy used religion to justify
their divine mandate.

~~~
evilturnip
Central decision makers generally cannot predict the outcomes of the decisions
they make because the system is so complex. It's been proven time and time
again that the distributed decisions of millions of individual actors ala a
non-centralized economy results in a more efficient and non-catastrophic
outcome.

Wherever recent history has gone awry is when a few powerful people think they
know what's best for everyone else.

~~~
Nokinside
You have completely wrong image in your mind. We are not talking about fully
centralized command economy.

Just like I said in other comment, Look at the post war economies in Europe,
Japan, Korea etc. Wage controls, price controls, rationing etc. still a market
economy and not a command economy.

------
eksemplar
I don’t get this article. China exceeded their economic growth target for 2018
in April when their economy hit 6.8% growth. Their wages are steadily
increasing. Their internal market is the healthiest of any g20 economy.
Investments both internally and internationally are up and their population
has little dept.

On top of that they haven’t touched retirement age, so they have a lot of
leverage there.

~~~
tsuabing2
> China exceeded their economic growth target for 2018 in April when their
> economy hit 6.8% growth

Wrong. Fake GDP. It's estimated that 1/3 of their GDP is wasteful government
spending. Many of their provinces also have confessed to 20-30% fake GDP, thus
another 1/3 of their gdp is fake.
[https://www.bloomberg.com/news/articles/2018-01-19/this-
is-h...](https://www.bloomberg.com/news/articles/2018-01-19/this-is-how-china-
s-regions-fare-in-the-fake-gdp-data-stakes)
[https://www.investors.com/politics/editorials/new-study-
shin...](https://www.investors.com/politics/editorials/new-study-shines-light-
literally-on-chinas-and-russias-fake-gdp-data/) so we're looking at maybe 1-2%
gdp growth, and maybe their GDP is only about 70% of what they claim (9T vs
13T)

> Their wages are steadily increasing.

Wrong. Chinese graduates salaries have fallen for second year in a row.
[https://www.ft.com/content/fb5865e4-4993-11e7-919a-1e14ce4af...](https://www.ft.com/content/fb5865e4-4993-11e7-919a-1e14ce4af89b).

> Their internal market is the healthiest of any g20 economy

Wrong. Consumer spending growth declined.
[https://www.google.com/search?q=chinese+spending+down&rlz=1C...](https://www.google.com/search?q=chinese+spending+down&rlz=1C5CHFA_enUS745US745)
. Beijing rent increased 25% !!! in july year over year. That's not a healthy
sign of any economy.
[https://www.ft.com/content/6324fc2a-a445-11e8-8ecf-a7ae1beff...](https://www.ft.com/content/6324fc2a-a445-11e8-8ecf-a7ae1beff35b)
. and now we know Chinese consumers are taking on too much personal debt
[https://www.bloomberg.com/view/articles/2018-02-15/chinese-c...](https://www.bloomberg.com/view/articles/2018-02-15/chinese-
consumers-are-building-up-too-much-household-debt)

And did you forget China is about to be hit with tariffs from US on 200B
worth, soon to be 500B? when their economy is export oriented?

> Investments both internally and internationally are up

Wrong. Yuan has lost 12% this year. Chinese stock market has crashed 30% this
year. That's not a sign of increasing FDI. that's FDI leaving and screaming

> On top of that they haven’t touched retirement age

Wrong. Chinese demographics looks horrible, and will reach peak in 2025. Their
population will shrink 1/3 in the next 60 years.

~~~
andygoo
Why government spending is neccesarily wasteful? I would say consumption of
financial services part of GDP which is massive in us is less relevant to
layman that vital services government provides

~~~
village-idiot
Ever heard of Chinese ghost cities? Completely designed and built cities that
could home millions but only hold a thousand or so? That's wasteful government
spending.

[https://www.businessinsider.com/these-chinese-cities-are-
gho...](https://www.businessinsider.com/these-chinese-cities-are-ghost-
towns-2017-4)

------
andygoo
Studying economics for some time, I think economists often ask wrong
questions. So let's say trade war occurs, and china will lose some of its
exports. The main question is not whether savings would decrease or investment
rise, the main question is how all the spare capacity left will be utilised.
Yeah, if it won't be utilised then there will be unemployment, well pointed by
the author. If domestic consumer will consume what was produced for exports,
then consumption would increase and savings would fall. If Chinese will find a
way to use spare capacity to produce something else what is in higher demand
(high tech let's say) then investment would rise. And let me assure you that
strong Chinese government will find a way to use all the freed up
labour/capital resources, so any downfalls would be temporary. On the other
side are democracies like US which don't have that much control over
production side and whose economies are not that robust to shocks that China
may face now.

~~~
baybal2
>The main question is not whether savings would decrease or investment rise,
the main question is how all the spare capacity left will be utilised.

Undifferentiated low end products are more _price_ elastic than brand goods.
China will do fine even if USA will declare a 100% embargo.

Edit: specified that I talk about price elasticity

~~~
andygoo
If they are more elastic it means that demand is more responsive to price
hikes. This is opposite to your conclusion

~~~
baybal2
I mean that Chinese manufactures have an option just to do a slight downgrade
of their undifferentiated mass consumption goods that were previously sold to
America, and sell them to poorer countries, as well as domestic consumer.

This is what happened in 2008. To Chinese electronics industry the crisis was
a blessing in disguise. It saw an unprecedented expansion after it reoriented
from OEM for "rich American co." to selling own products to places like South
Asia, CIS, and African nations.

A bit of explanation:

Pre-2008 industry was very oriented on developed countries with contract
manufacturing of _high premium goods_ secured by branding, marketing, IP
lockdown and such - in other word, niches with very inefficient market and
companies hellbent on profit maximisation. Thus, they had a huuge leeway for
trading unit value for volume which they used to devastating effect.

That was right the time when people in places like Africa realised that $20
Nokla is no worse than low end $100 Nokia, the rest is history.

~~~
andygoo
Fair as long as demand is as elastic as it used to be. Like if everyone has a
phone now it will be harder to sell new phones. And good for pointing out a
critical assumption behind the article - that CA surplus will actually fall as
a result of tariffs, as you showed there is a fifth solution - sell to other
countries, EU for example, US is not the whole world

------
shasheene
As a non-expert, it seems likely that of the 3 options, wealth transfer will
be the main solution to China's debt problems. (It's worth noting, China's
high corporate debt levels are, like Japan's, owed to mainly to domestic
creditors, and I believe also denominated in the local currency.)

In a totalitarian dictatorship, "political opposition from so-called vested
interests" is not that strong a barrier when political and economic stability
is at stake.

I think while some unsustainable debt will continue to be allowed to default,
a lot of debt will eventually be painfully bailed out by taxpayers (both
households and corporations) over time.

This mean lower health, education, and social welfare spending affecting
people who didn't cause the debt problem in the first place. That's just the
unfortunate price of accumulating large amounts of non-productive debt.

~~~
baybal2
There is no Zhu Rongji in current generation of party leaders.

From my personal observations, the leeching of public debt through borderline
fraudulent projects barely ceased under Xi. This is an elephant in the room.
Only the moment they will lift a knife on it, will we be assured that they
began an actual move on that front.

Do you know why Xi raised his hand on his closest supporters in the
reactionary camp he leads - Bo and Co?

He did so because he was too afraid that Bo as a much more charismatic person
will take over the lead of reactionaries from him.

Now, he needs to pay his supporters in the party lavishly in form of state
sanctioned corruption - all kinds of unsupervised small local projects where
money vanish using long lending chains, or simply stratospheric remunerations
for offsprings of party officials employed somewhere in the chain.

~~~
samspenc
Thanks for your analysis. Just to clarify some of your points to readers who
may not be that familiar with Chinese politics.

* Zhu Rongji is the more reformist leader in the late 1990s, and seen as one of the few leaders (maybe along with Zhao Ziyang in the 80s and Wen Jiabao in the 2000s) who may have been favorable for a move towards democracy in China.

* Bo and Co = Bo Xilai and ... Zhou Yongkang? They were arrested in 2012-2013 for plotting a coup against Xi and human rights abuses such as organ harvesting of prisoners of conscience, after a high-ranking security official (Wang Lijun) defected and sought refuge in the US consulate, providing inside dirt on these two party chiefs.

* Xi = Xi Jinping, current Chinese leader.

~~~
justicezyx
Not sure how zhu was viewed as more possible for democracy.

Note that what he did was the most brutal form of autocratic policy making, by
forcing unemployment of millions of workers who are not trained to live in a
different system; was possible because of autocratic government; and his
policy pretty much made the rich out of the ranks of former government
officials just like what happened to the Russian oligarchs.

I am guessing the rich do know how to court the expectations from inside and
outside. And I often hear praises from Chinese people to zhu, while at the
same time none of them suffer during zhu's policies...

------
nkurz
I've tried reading this piece a couple times, but despite the bullet points
and numbered lists, I can't make any sense out of it. I presume this is
because I lack essential background knowledge. Can someone please help explain
the context?

When he says "China's debt problems", what exactly is he referring to?

When he says "there are also only four ways that Beijing can respond", what
are they responding to and what is the goal of their response?

~~~
cinquemb
I'm assuming the debt problems are the corporate defaults on bond payments [0]
for 2018 until July, were close to equal to the entire year of 2016. There's
also consumer debt stuff that's blowing up as well (the whole p2p loan
companies going bankrupt was linked on HN recently).

As for the what are they responding to is the engine for economic growth is
stalling out from knock on effects behind whats going on above, and I can only
speculate that the "goal" of any kind of response will be to maintain some
kind of economic "stability".

[0] [https://www.bloomberg.com/news/articles/2018-07-02/china-
hea...](https://www.bloomberg.com/news/articles/2018-07-02/china-heads-for-
record-defaults-and-downgrades-tip-further-pain)

~~~
nkurz
I appreciate the answer. But I still don't see the connection between the
proposed responses (the first four bullet points) and the stalling of economic
growth. For example, how is "Reduce savings by letting unemployment rise" a
response to slower economic growth, and how does this maintain economic
stability?

~~~
slv77
Letting unemployment rise is the least desired outcome but is what will happen
by default in response to a declining trade surplus. Wide spread unemployment
doesn’t contribute to economic or societal stability and so China will attempt
to avoid that.

The second option is wealth transfer through debt default; or government
forced wealth transfer (taxes or inflation). China’s debt could be brought
down from 300% of GDP to 100% of GDP overnight if creditors simply forgave
2/3rds of debt. That could happen though debt default (debtor bankruptcy) or
taxing creditors and giving it to debtors. Having the bulk of your life
savings disappear tends to make people angry and so China will attempt to
avoid that.

The last option is to kick the can down the road and increase domestic debt
which is what they have been doing for the last 10 years.

------
simplecomplex
Something else will happen, not predicted by the economists.

Economists are impotent at predicting the future effects of monetary policy so
it’d be great if they stopped pretending.

------
baybal2
Such a long article just to state something well known: income growth has
stalled for sure, and industry been contracting.

China is about to hit its Brezhnev era. That's my fear.

But for as long as Yi Da Yi Lu and state contracts rain gold, I see no
personal reasons to worry

~~~
mooreds
I have been reading his blog for years (ever since Calculated Risk, another
great economics blog, pointed to him). He has been beating the same drum the
entire time. His point is that the mechanics of how an economy work at the
macro level reduce to a simple set of equations between investment, savings
and consumption. And that those equations force hard choices that have
political implications.

I have passed some articles to economics professors I know, but haven't heard
whether Pettis' ideas make sense from a theoretical perspective. I know they
make sense to me, a layman.

~~~
bobwaycott
> _And that those equations force hard choices that have political
> implications._

All economic decisions have political implications because all economic
decisions are inherently political. Recall that until recently, we called it
_political economy_ until the Neoclassical school decided they wanted to
pretend to be—and be viewed as—a science.

------
UncleEntity
> Notice that all four paths either raise investment or reduce savings,
> thereby reducing the country’s excess of savings over investment.

Or...a fifth path would be to entice people to convert "unproductive" savings
into investment. If only there were some mechanism where people could tell if
this was a viable route like, say, a market based interest rate.

Quite surprisingly, it turns out that "saving" and "investing" are nearly
synonymous.

------
tomohawk
Missing option: war

------
pishpash
_Put differently, over the longer run, Beijing can only avoid a sharp rise in
unemployment or stagnant wage growth to the extent that it has managed to
achieve significant wealth transfers._

Isn't this exactly what the Communist Party or socialism (fake capitalism)
with Chinese characteristics is supposed to have retained the option to do?

To be more specific, a charitable interpretation of affairs is that Xi or
whoever is engineering Xi's policies has made sharp left turn, and is taking
authoritarian measures to carry out exactly this.

