How Is China's Export Driven Economy Booming? 44 comments
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How is it that China, which is supposed to be an export driven economy, has been booming? GDP growth is reported at 8% at a time when the rest of the world is still in the dumper or is just starting to climb out. As a result, Chinese exports have fallen off a cliff.
One possibility, of course, is that the data is manipulated. But, more likely, it is the result of a government stimulus which was much greater per unit of GDP than in the U.S. This was done without potential drag from increasing national debt because the stimulus was funded out of surpluses, not on top of accumulated deficits. Saving for a rainy day does have its benefits.
Ellen Brown, at The Web of Debt, says that China's secret for economic success is that the government owns the banks, not the reverse. Ellen writes:
How can China’s stimulus plan be working so well, when ours is barely working at all? The answer may be simple: China has not let its banking system run roughshod over its productive economy. Chinese banks work for the people rather than the reverse. So says Samah El-Shahat, a presenter for Al Jazeera English who has a doctorate in economics from the University of London. In an August 10 article titled “China Puts People Before Banks,” she writes:
“China is the one leading economy where the divide – the disconnect between its financial sector and the world normal Chinese people and their businesses inhabit – doesn’t exist. Both worlds are booming again and this is due to the way the government handled its banks. China hasn’t allowed its banking sector to become so powerful, so influential, and so big that it can call the shots or highjack the bailout. In simple terms, the government preferred to answer to its people and put their interests first before that of any vested interest or group. And that is why Chinese banks are lending to the people and their businesses in record numbers.”
Most of us believe (I know I do) that capitalism and free enterprise can outperform a centrally managed system. However, I want to qualify that in two ways:
- We have been moving away from capitalism for several decades and have arrived in the current situation of socialism for capital losses combined with privatization of capital gains.
- Capitalism works best except when it isn't working.
I connect these thoughts with those expressed by Larry Doyle on his blog, Sense on Cents, who has asked if we have merely papered over the problems embedded in a host of our larger institutions rather than built a foundation for a lasting recovery.
Larry refers to a paper written in March by the Kansas City Fed head, Thomas Koenig, entitled "Too Big Has Failed." Larry says the two underlying issues in the financial crisis have not been addressed and resubmits Hoenig's short list:
- Losses must be identified and realized.
- Management must be replaced.
Until both these steps are taken, true health can not return to the system.
Hoenig echoes economist Allan Meltzer’s view that “capitalism without failure is like religion without sin.
The U.S. has a big anchor dragging behind our economic ship. We have not identified, realized and settled our losses. We have not allowed failed financial system management to be removed by normal free market processes such as Chapter 11 reorganizations. We have not identified losses; accounting rules have been juggled to avoid that. The cartoon below is a mark-up of one I got from Barry Ritholtz, The Big Picture and posted on an Instablog a few weeks ago.
It is not fair to cross out jobs, because we need unemployment to decline to have a lasting and robust recovery. But the drag from crippled banks is potentially even more damaging than a lingering unemployment in the 9-10% range. In fact, without sufficient business credit, a problem discussed a few days ago, reducing unemployment may be hindered. This reminds me of another cartoon about zombie banks.
So China's secret may be more than just one secret. Here is a list (probably incomplete):
- They accumulated a national surplus, not a national debt.
- The government has tight control (de facto ownership) of the banks.
- The banks serve the rest of the Chinese economy, not the other way around.
- The Chinese stimulus was large; the U.S. was much smaller.
- The Chinese stimulus has been much more effectively channeled into employment than in the U.S.
What remains to be seen is the follow through. Can China maintain a high growth rate just on internals or do they need to return to a higher rate of export? If the west experiences a robust recovery through 2010 and beyond, we may not get an answer to that question. If the recovery is weak in the west, or, especially if there is a "W", we may find the answer over the next 18-36 months.
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China has the fastest growing consumer market on the planet. It is a myth that the Chinese do not consume. The fact is that consumption as a % of national income has declined but this is mostly due to the explosion in profits and a relative decline in incomes as a %. They are booming becasue they have massive productivity growth and ample savings to drive investment - which is also booming - they have banks who are able to lend.
the thin they should od/must do is let the yuan appreciate - otherwise they will import inflation as they defacto run the Fed's monetary policy in a less flaxible and open economy.
Folks - get some facts. At least d yourselves a favour and read the flipping Economist. Most of this stuff is in there.
That's all.
China executes three bankers for fraud
September 14, 2004
Beijing - Three former Chinese bankers and one accomplice convicted of fraud have been executed amid vows to crack down on corruption in the banking system, press reports said Tuesday.
And in the US what is it that we did exactly about the bankers? Or does any one here really thinks that billions of dollars were made on the way up and billions more are being made on the way down (by the same people) and there was/is no fraud? And even if there was no fraud isn't the obligation of the government to at the very least investigate to find out what happened and if laws were broken?
"Larry refers to a paper written in March by the Kansas City Fed head, Thomas Koenig, entitled "Too Big Has Failed." Larry says the two underlying issues in the financial crisis have not been addressed and resubmits Hoenig's short list:
1. Losses must be identified and realized.
2. Management must be replaced.
Until both these steps are taken, true health can not return to the system.
Hoenig echoes economist Allan Meltzer’s view that “capitalism without failure is like religion without sin."
_________________________
this is heresy. mr. lounsbury clearly doesn't understand u.s. style capitalism, namely:
1. unlike other countries, the u.s. can have it's cake and eat it too. pain is for those countries who lack a reserve currency. in other words...everyone but us.
2. we don't fire incompetence...we embrace it. we've proven this time and again in both politics and business.
3. most important of all, hank paulson, ben bernake and tim geithner are national heros. we know this because they've all made this point repeatedly in recent months.
as for meltzer's view that "capitalism without failure is like religion without sin...." i think fed chairmen and treasury secretarys, and preachers and rabbis, see failure and sin the same way....something their respective flocks practice far more than themselves.
When did we all agree to let a handful of families run American history for their own benefit, and to extort massive amounts of money from the American consumer? I don't remember ever being asked if that was how we wanted our government to work. I guess that was why Thomas Jefferson worked so hard to limit the powers of the National Bank -- which turned over absolute power to the Eastern Seaboard financial interests.
Maybe we can learn something from China. Maybe the banks should work for us, instead of us working for them.
The truth about China...those three bankers were probably stealing money AND NOT KICKING UP to the proper authorities. China is not what it seems.
On Aug 23 10:48 PM Robespierre wrote:
> I think the real reasons banks don't call the shots can be read here:
>
>
> China executes three bankers for fraud
> September 14, 2004
>
> Beijing - Three former Chinese bankers and one accomplice convicted
> of fraud have been executed amid vows to crack down on corruption
> in the banking system, press reports said Tuesday.
>
> And in the US what is it that we did exactly about the bankers? Or
> does any one here really thinks that billions of dollars were made
> on the way up and billions more are being made on the way down (by
> the same people) and there was/is no fraud? And even if there was
> no fraud isn't the obligation of the government to at the very least
> investigate to find out what happened and if laws were broken?
I can't believe we are so quick to believe that Chinese growth is what they say it is. We KNOW American businesses lie all the time about their own growth; we KNOW the American government lies about economic growth and the real rate of inflation, not to mention foreign and domestic policy; but we pretend we can make intelligent (rational, measurable, scientific) investment decisions based on data provided by China...data that is obviously massaged and skewered by experts.
In the West we have relatively independent media to try to catch the president, congresspeople, and business leaders in their lies. But in China, there is no possibility of independent review. Still, like sheep, we march behind their statistics. I guess if our foreign ETFs go up, then we are willing to believe anything. The bottom line is we believe them as long as they make us money. I guess that's the same way we approach Goldman Sachs also.
Yes; America is being suffocated and plundered now.
Mao was an imperfect response to unbridled greed and colonial plundering of China. The communists (populists) are the Death Angels that lead a country through the underworld toward its rebirth in the light -- as was FDR in the 30's. As probably are the democrats now.
On Aug 23 08:45 PM expat in China wrote:
> Chairman Mao came to power because the banksters on the Shanghai
> Bund where raping the country. Mao was a brutal stepping stone in
> a "capitalist system" where the governing process failed to support
> the citizens and the country from the risk of colonialism. Mao will
> not have to return to China until the next failure of a government.
>
>
> Who is raping America and do we have colonialism in reverse?
>
> I expect an American patriot from some Militia will KILL the wall
> street banksters and send many of the politcals to the farm for reeducation
> and a dose of humility.
Chinese domestic consumption still accounts for about 90% of GDP, so 8% growth is feesible, especially when you look at what they're doing - building brand new cities with populations of 10 000 000 people from the ground up. We tend to forget that as a term GDP measures the total output of all business activity, not just exports to overseas countries.
Now, all is praise and attack the non-majority.
Apparently you haven't watched a "news" show recently, they have elevated our President to rockstar status and anyone that tries to find facts is being called un-American and worse.
I'm SURE it has NOTHING to do with the fact that the big money sits in Czar status with the current adminstration, or the fact that MSM is beholden to advertisers and the biggest advertisers are pharmaceuticals and GE.
On Aug 24 01:34 AM Michael Clark wrote:
> If we have learned ANYTHING from the Cold War and our experience
> with communist governments is that THEY MANAGE THE NEWS TO FIT THEIR
> BEST INTERESTS. Communist governments best interest is their own
> survival. So, anything that makes them look good is fodder for their
> newspapers.
>
> I can't believe we are so quick to believe that Chinese growth is
> what they say it is. We KNOW American businesses lie all the time
> about their own growth; we KNOW the American government lies about
> economic growth and the real rate of inflation, not to mention foreign
> and domestic policy; but we pretend we can make intelligent (rational,
> measurable, scientific) investment decisions based on data provided
> by China...data that is obviously massaged and skewered by experts.
>
>
> In the West we have relatively independent media to try to catch
> the president, congresspeople, and business leaders in their lies.
> But in China, there is no possibility of independent review. Still,
> like sheep, we march behind their statistics. I guess if our foreign
> ETFs go up, then we are willing to believe anything. The bottom
> line is we believe them as long as they make us money. I guess that's
> the same way we approach Goldman Sachs also.
Vietnamese 'drama', on the other hand, is interesting: very human scale. I'm pleased to be away from all the CGI special effects and the violence and cold egoism in American media. The Vietnamese theme is ALWAYS business and government corruption -- and how the decent noble man takes the path of principle, not the path of personal gain. I actually like this. I'm not sure how accurately the local society, high and low, does living up to these ideals, but at least their tv writers and directors are aware of these ideals.
On Aug 24 10:07 AM TeresaE wrote:
> The MSM trying to catch politicians in their lies has ended.
>
> Now, all is praise and attack the non-majority.
>
> Apparently you haven't watched a "news" show recently, they have
> elevated our President to rockstar status and anyone that tries to
> find facts is being called un-American and worse.
>
> I'm SURE it has NOTHING to do with the fact that the big money sits
> in Czar status with the current adminstration, or the fact that MSM
> is beholden to advertisers and the biggest advertisers are pharmaceuticals
> and GE.
On Aug 21 05:25 PM mna wrote:
> Excellent article. The idea that a central government may be able
> to outperform a market economy in certain functions is certainly
> counter intuitive. However the arguments are logical and unbiased,
> and the facts that back up the argument are widely known and held
> to be generally true. This brings up a lot of food for thought.
>
>
> I would venture to say that part of China's strength lies in their
> extremely well educated leaders (scientists and engineers comprise
> the majority of their leadership), who are not hampered (as much)
> by the populist masses. They're able to impose a quick, strong response
> to any external shocks for the good of the system, rather than for
> the (often-short term) good of the voting masses. This is good when
> the leaders are smart, like today. But could easily disintegrate
> and take China back 100 years when a lunatic like Mao gets power
> again.
>
> A system like ours has the advantage that if a mad man like Mao gets
> to power, we can simply vote him out of office. However, the problem
> with our system is that the masses play identity politics and are
> often not aware of the long term consequences of their wishes. Long
> term this results in guarantees to special interest groups and social
> protection from failure. Eventually the system will become so protective
> of failure that we might as well change our name to a socialist republic.
>
>
> At this point, I'm at a loss to say which system might be better.
> A decade ago I would've said unequivocally that the American system
> is the best. Now I'm not so sure...
But the underlying point may be more crucial: For almost a century about 50 nations proved to us it was impossible to run an effective centralized economy. Whatever we may feel about China, no one can question their deft touch in recent years in banking, capital markets and monetary policy have disproven the one sure thing we thought we knew about international economics.
Bottom Line: A centralized economy can effectively compete with capitalism. That is an 8.2 on the Richter Scale.
A S Prisant/COO/Prism Ltd
On Aug 24 01:11 PM Alexander Prisant wrote:
> Two key points here. The author answers half his own question almost
> immediately by noting that deploying stimulus from a huge surplus
> is much more effective than a moderate stimulus from a huge deficit.
>
>
> But the underlying point may be more crucial: For almost a century
> about 50 nations proved to us it was impossible to run an effective
> centralized economy. Whatever we may feel about China, no one can
> question their deft touch in recent years in banking, capital markets
> and monetary policy have disproven the one sure thing we thought
> we knew about international economics.
>
> Bottom Line: A centralized economy can effectively compete with capitalism.
> That is an 8.2 on the Richter Scale.
>
> A S Prisant/COO/Prism Ltd
Although I find your article logical and stimulating, it is unfortunately based on fundamental misconceptions about China, which in my opinion are shared by almost all the academics, economists, and analysts in the West.
Forget about the debate on the transformation of the Chinese economy from export to consumption. That is NOT the true driver of China's economy. Although there is no public data (naturally), some private organization estimates that corruption in China in 2008 alone costed the country about 3.5-8% GDP. THAT IS THE TRUE MAKE UP OF THE ECONOMIC GRWOTH IN CHINA, and the answer to your question as how the country grow. Why the governments at central and all local levels want to build more and more trophy skycrapers, roads, bridges, and convention centers? Because that is how they get ever bigger and bigger size loans from the banks. The bigger the loan size, the bigger the kick-backs and under the table deals. What purposes do these new assets serve is just for a show, and has absolutely no significance. You may think I am native and the numbers are way out of proportion, yet this way of life in the country is known all too well to every Chinese. It is a futile attempt by the western analyst trying to make sense of the Chinese economy with macroeconomic models from the West.
By the way, I find the assertion made by Ellen Brown that the Chinese government puts the interest of the people before any interest group SO LAUGHABLE. Such assertion will even get a good snicker from the government officials themselves, of course only in private settings. Ms. Brown may very well get an invitation to be the honorary chairman of the Beijing Party Member Training School.
One implication I dare to conjecture is that ultimately US will be in one way a beneficiary of the current great stimulus package in China. One outcome of the stimulus in China will be the creation of another large number of shadow millionaire and billionaires. Emphasis on the word "shadow", as they will by no means be the average Chinese people. If you think these new riches will be spending their wealth in China and boost the domestic consumption, you need a serious serious wake up call. Every single one of them knows that if they can make the money this way, they can lose it all in one flash in China. It is again a plain fact in China that the very officials of the party has almost zero trust to the system from which they so richly benefited.
Then where will those new wealth be going? US, Canada, Europe and Australia. Watch out in 3-5 years for the buying of properties at ethnically Chinese heavy cities - Vancouver, San Francisco, Sydney, the increase in foreign students from China attending western schools, and alone with them large bank deposits, etc.
My family inlaws are chinese. they are mid sized manufactorers (employing a few hundred people). They said they have noticed a decrease in overseas sales but the recession hasn't really hurt them much. China's internal economy is becoming more robust and more orders coming internally.
Does anyone else remember that traditionally China has been the economic powerhouse of the world. Possibly we are witnessing the return of this. China has also always been the money sink of the world throughout history.
Its sheer size will dominate. Its people are hungry to succeed and are not lazy. I cannot say the same about my own countrymen..
I agree that China is a regional powerhouse. Chinese products coming pouring in to Vietnam like an undammed river. The Vietnamese laugh about Chinese products being of poor quality. And almost everything in Vietnam that comes from China is 'pirated' from Western products.
I think China has a great culture. It DOES NOT have much practice at being MODERN however, something the West has mastered. China may master it over time. Right now, if you buy 10 products from China, about 2 work. Chinese products are cheap. At the moment, that's all you can say in their favor. But this may change over time -- the quality may go up -- and the prices probably also will go up. Afterall, inflation is what Wall Street and Washington want, even if it enslaves America's working and now non-working poor.
'traditionally China has been the economic powerhouse of the world.'
I've had a chance to take the local version, and I saw plenty of bare feet, although instead of beggars, you had people trying to sell you 'Lo-lex' watches for about 50 cents. I'd be surprised if 2 out of 100 of those watches actually work.
I also had the chance to take a guided tour with the local flavor (no hotel stays, cramped vans and no free water) of some of the scenery in the city (Qingdao) - what surprised me more than anything else was that the admission fee to a local attraction (a simple mountain park) cost a week's wages for the tour guide.
On Aug 25 07:15 AM rick12345 wrote:
> Take a holiday to China sometime. You will not see any hobos, beggars,
> gangbangers, people walking around in bare feet or living in cardboard
> boxes, and the list goes on... Neoclassical economic thinking can
> play a significant role toward improving capitalism, but unfortunately
> it took a world economic crisis to open it to the eyes of leaders
> around the western world.