Chinese Economics Thread

[PUFF_DRAGON]

My man, consumption share of GDP is not everything. Its one thing to have a for example 60% share of a gdp of 1 trillion and another to have 40% share of a gdp for 15 trillion

Percentages themselves are not the only figure that matter. As the economy grows then it is more difficult to change and retain a 60% consumption share without very drastic reforms. And consumption is not everything, manufacturing also plays a significant part

This is a complex matter and it doesn't help when you are comparing figures between now and 2000 when China's economy was tiny. You might as well talk about different countries in this case

In China's case, which is an upper middle income country, it is indeed everything actually. Household consumption is basically a proxy for household income be it through direct wages or government social services/welfare. There is a reason why boosting household consumption is at the top of the latest Five Year plan.

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No country ever, aside from the OPEC oil kingdoms and other oil nations, have broken through the middle income trap without re-balancing to above 50% consumption share of GDP. The implicit reasoning for this has been discussed ad nauseam in developmental economics, namely that without higher wages/government transfers to household incomes, you cannot actually provide the incentives for domestic human capital to develop further so that they can actually occupy the higher tiers of the global value/supply chain.

You are right that it is complex. You are wrong however, that it is not everything. It is indeed pretty much everything for this Five Year Plan, which you should read.

 

[vincent]

To reach convergence with 2000 AD levels let alone OECD average levels, China would need to shift something like 2% of GDP to households every year for the rest of this 5 year plan cycle. This is not an insignificant movement and financial liberalization will make this harder, dramatically so if the American and British educated folks do it the way they learned it at Harvard or OxBridge.

Consumption level in OECD countries is supported by debt. Have you look at Western countries' level of debt lately?

 

[spring2017]

foreign reserve to do what? wipe ass with?
what can you buy with "foreign reserve" that the RMB cannot?

can't buy jet engines because "muh security." Can't buy EUV because "muh security?"

In international market, few accept RMB for payment, so you need to use foreign reserve to buy goods/technology from the international market.

"The Capitalists will sell us the rope with which we will hang them." Few years ago, China could have bought jet engines and EUV with those $1 Trillion. Even today, China can use $1 Trillion to buy technology, or hire 10,000 best scientists/engineers from all over the world... Even RBI needs hard currency, not RMB...

Frankly, buy anything (use your imagination here...) is better than letting Chinese capitalists take them abroad...

 

[PUFF_DRAGON]

Some additional comments on why household consumption is important.

1) Examine the Expenditure formula for GDP = Consumer Spending + Net Investment + Net Government Spending + Net Exports

As we all know, China's top GDP driver is investment. What is not mentioned however is that Investment must be implicitly funded with household savings with how fractional reserve banking systems work. Attempts to increase household spending without raising government income transfers to households or wages in the economy effectively mean that the PRC will need to push households to buy on debt or save less, both of which reduce the deposit base for investment, putting more stress on a debt system already loaded with NPLs.

2) Upgrading through the value chain is expensive for households. It is completely unsustainable to expect Chinese households to upgrade their skills and perform 996 type jobs for basically the same pay as their forbears adjusted for cost of living increases. This is what is happening right now due to China's stagnant and far too low share of household consumption and massive property bubble; it is the core reason why Sang, Diaosi, and Involution are the top pop intellectual innovations of 21st century China.

Liberalizing the capital account will not increase incomes, that is not how it has worked in the west or anywhere really. It often even reduces household income. It will definitely however, raise real estate and other asset prices, which will spark further unrest and popular immiseration.

 

[voyager1]

O

In international market, few accept RMB for payment, so you need to use foreign reserve to buy goods/technology from the international market.

"The Capitalists will sell us the rope with which we will hang them." Few years ago, China could have bought jet engines and EUV with those $1 Trillion. Even today, China can use $1 Trillion to buy technology, or hire 10,000 best scientists/engineers from all over the world... Even RBI needs hard currency, not RMB...

Frankly, buy anything (use your imagination here...) is better than letting Chinese capitalists take them abroad...

And it is also not good on holding them. Better to invest all these dollars in various sectors. We all know that the US will increasingly ban China from accessing its products, so time to spend these dollars on something good now while China has time

 

[PUFF_DRAGON]

People in OECD countries consumption level is supported by debt. Have you look at Western countries' level of debt lately?

Yes, that is because western countries have suppressed wages for decades and focused on the capital account. When I look at the thinking in this thread, where people argue that China should internationalize its financial system and liberalize it, that is exactly where this leads.

You do remember that that is what I am responding to right?

Allowing foreigners to skyrocket the cost of already stupidly expensive real estate and other Chinese investment asset is completely at odds with the current FYP's goal of boosting household consumption and wages, unless you literally verbatim follow the Anglo-Saxon approach of just telling everyone to max out their credit cards and bank credit.

 

[vincent]

Yes, that is because western countries have suppressed wages for decades and focused on the capital account. When I look at the thinking in this thread, where people argue that China should internationalize its financial system and liberalize it, that is exactly where this leads.

You do remember that that is what I am responding to right?

Allowing foreigners to skyrocket the cost of already stupidly expensive real estate and other Chinese investment asset is completely at odds with the current FYP's goal of boosting household consumption and wages, unless you literally verbatim follow the Anglo-Saxon approach of just telling everyone to max out their credit cards and bank credit.

Restricting capital account has nothing to do with consumption

 

[PUFF_DRAGON]

Restricting capital account has nothing to do with consumption

It has quite a bit to do with consumption. If you think for about five minutes about the relationship between investment, savings, and household spending, it should be obvious why.

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This paper is an empirical study done into the matter if you don't want to think that through though. Basically speaking, liberalization of capital account intrinsically increases income inequality, i.e assigning it to the rich.

Now if you know anything about micro-economics or the Keynesian concepts of discretionary vs mandatory spending, then you'd know that rich people spend less of their income on goods and services and invest more of it into financial products and assets. The rising investment by the rich and foreigners on assets like land, real estate, natural resource,s etc raises downstream prices for the middle and lower class, reducing their real spending in a negative feedback loop. Ergo, rising inequality following from capital account liberalization intrinsically reduces consumption.

BTW this is what has happened in the Anglophone west for like the past 40 years. So unless you want to blatantly reject reality and claim that capital account liberalization won't also cause the same downstream effects as it did in like every other rich country ever, your claim has no legs.

 

[AndrewS]

In China's case, which is an upper middle income country, it is indeed everything actually. Household consumption is basically a proxy for household income be it through direct wages or government social services/welfare. There is a reason why boosting household consumption is at the top of the latest Five Year plan.

Please, Log in or Register to view URLs content!

No country ever, aside from the OPEC oil kingdoms and other oil nations, have broken through the middle income trap without re-balancing to above 50% consumption share of GDP. The implicit reasoning for this has been discussed ad nauseam in developmental economics, namely that without higher wages/government transfers to household incomes, you cannot actually provide the incentives for domestic human capital to develop further so that they can actually occupy the higher tiers of the global value/supply chain.

You are right that it is complex. You are wrong however, that it is not everything. It is indeed pretty much everything for this Five Year Plan, which you should read.

I actually see technological upgrading and productivity increases as the driver of household consumption.

Think about it.

China arguably has a surplus of educated human capital.
We can also see intense competition from individuals competing for any sort of higher paying job.
That already drives individuals to choose more education, better training, to gain more experience etc etc

What is lacking are those higher-value added industries and jobs which can support higher wages.

And remember there are many countries which have a high share of household consumption, but they still remain poor.
So I agree that higher levels of consumption spending are better, particularly for lower-income earners.
But a high share of household consumption does not automatically mean additional incentive for human capital to upgrade itself.

---

But in comparison, when a country has a high level of R&D spending, it should be impossible to remain poor.

China is still a middle-income country, but Chinese R&D spending is at 2.4% of GDP now
Only prosperous developed countries make it to this level of R&D spending.
In comparison, every other low-income or middle-income country is stuck at half of China's level.
And importantly, we see Chinese R&D spending still growing fast.

So what does this mean?

Chinese companies can leverage world-class technology development at a lower cost than their counterparts in Europe and the USA.
Then they can develop new technologies for less money AND find ready customers in the vast Chinese market.

So Chinese companies should be able to catchup and then compete with foreign rivals on a global basis.

Rank the countries below by % of GDP on R&D spending and then tell me if you agree with this logic.

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[voyager1]

China is already leading in R&D among its peers in the "middle-income" category.
People worry too much about this kind of stuff

It just takes time to let all the kinds of policies, R&D to take effect. But when they do, the economy and tech will rocket!

Like a huge ship, while it is difficult to change course, but when it does change, it carries such momentum behind that it will steamroll everything on front of it