Chinese Economics Thread

[Blitzo]

In my view, the tangent of the conversation about up-skilling and robotics viz a viz economic productivity improvement is completely missing the core nature of the conversation on changing demographics and an aging population. It is about the fiscal burden of a diminishing ratio of working population to retirees and the preparedness of fiscal policies in meeting these challenges beside the social issues of the problem.

On the contrary, I believe the future economic productivity of a nation is central to any discussion about the potential macro socioeconomic impact of an ageing demographic.

The whole reason the "getting old before getting rich" prospect is considered a poor outcome, is that without the wealth of an economy behind it, it will be impossible for a govt to carry out any policies to assist the ageing part of the population, via welfare or other social interventions because one simply doesn't have the money.

There are all sorts of other factors involved as well of course, such as whether a govt is willing to carry out a policy in the first place, as well as the behaviours of the elderly citizens themselves (the reason that the Chinese population has such a high savings rate relative to many other nations is exactly because many are saving for retirement due to currently spotty welfare), and factors like general wealth distribution, and the urban/rural mix etc.... but underlying all this is the core issue of whether a nation has the economy to even allow for welfare and social interventions to be conducted in the first place.

That's why automation and the skill of the future work force is such an important discussion about China's economy as a whole, and its relation to how China may be able to deal with future demographic challenges, whatever form or intensity they may arise in.

 

[vesicles]

I believe there is a new term in China called "biting the old". It means young generation does not have the money and has to "borough" money from their parents. It has become a wide spread phenomenon, where older generation has become the financial crutch for their kids.

So now the problem at hand is not how the younger generation can take care of their parents, but how the older generation can stop spoiling their kids and let them be independent.

So I wouldn't worry about the seniors in China. They can take care of themselves and have been doing that. And China is also improving pension for retirees.

 

[vincent]

In my view, the tangent of the conversation about up-skilling and robotics viz a viz economic productivity improvement is completely missing the core nature of the conversation on changing demographics and an aging population. It is about the fiscal burden of a diminishing ratio of working population to retirees and the preparedness of fiscal policies in meeting these challenges beside the social issues of the problem.

You seem to have pretty strong opinions about China and like to do a lot of analysis about China. Just curious, have you ever lived in China?

 

[Equation]

You seem to have pretty strong opinions about China and like to do a lot of analysis about China. Just curious, have you ever lived in China?

Nah, Brumpy is just grumpy about China doing so well without adapting to his version of "values".

 

[Blitzo]

Nah, Brumpy is just grumpy about China doing so well without adapting to his version of "values".

Let's not make this personal, despite whatever differences in opinion that may exist between each other...

 

[antiterror13]

I can't find the best thread for this interesting post. So Moderators, please move it if you think there is a better place. Thank you.

SamuraiBlue, you may want to make some comments and challenge with your theory ... welcome

Helicopter Money Is Putting the Yen's Value at 'Great Risk': Noguchi

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Ex-MOF Yukio Noguchi says helicopter money already happening
BOJ stimulus not raising investment, spending, prices, he says
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Yukio Noguchi, a former Ministry of Finance official whose business books are best sellers, envisages a scenario in which a failure of Japan’s economic stimulus could drive the yen to weaken beyond 300 per dollar.
Yukio Noguchi in 2006. Photographer: The Asahi Shimbun via Getty Images
Yukio Noguchi in 2006. Photographer: The Asahi Shimbun via Getty Images
“If these fiscal and monetary policies continue, the yen’s value is at great risk,” the 75-year-old professor at Tokyo’s Waseda University said in an interview on May 11. “If you base your thinking on the efficient-markets hypothesis, you can’t predict a level for the currency. But, if the nation’s economic strength weakens, it is possible the yen could drop to 300, or 500, or 1,000 to the dollar.”
Growth has stagnated for a decade despite fiscal and monetary stimulus efforts that left the government with a debt burden that is the highest in the world, at about 2.5 times the value of the nation’s economic output. Noguchi believes the Bank of Japan is already financing fiscal spending, providing so-called helicopter money. That echoes comments by billionaire bond investor Bill Gross, who said the likely endgame was for the BOJ to forgive sovereign debt.

The problem with the extremely cheap money is that it gets channeled into unproductive areas, and allows “zombie companies” to continue to stay in business, said Noguchi, who has a Ph.D. in economics from Yale, and is currently an adviser at Waseda University’s Financial Research Institute in Tokyo. Even so, this stimulus hasn’t been effective, and capital investment, wages, and prices aren’t rising, he said.
For more on how Japan is paid to borrow.
“Japan is already doing helicopter money, as Bernanke describes it,” said Noguchi, whose economics books and life-hacking scheduler have sold millions of copies in Japan. “That’s what’s happening now under the BOJ’s asset purchase policy, with banks buying longer-maturity bonds and immediately selling them to the BOJ.”
Even with debt worth about 9.7 million yen ($88,000) per person in 2014, according to the IMF, the government is currently considering whether to postpone a tax increase which is meant to help pay for Japan’s rising social security costs. Lawmakers are also proposing using the current low interest-rate environment to issue more bonds.
Prime Minister Shinzo Abe has decided to delay the sales tax increase planned for April 2017 based on the global economic slowdown and the impact of last month’s Kumamoto earthquake, the Asahi newspaper reported.
Paid to Borrow
Japan is now being paid to borrow, as the BOJ’s massive purchases of bonds push down yields and drive up prices of the nation’s debt. And the cost to insure that debt has declined to 33 basis points on Thursday, the lowest since September 2014, according to CMA data.
While the yen’s more than 20 percent depreciation against the dollar since late 2012 when Prime Minister Shinzo Abe came to power has been integral to the central bank’s efforts to revive inflation, Noguchi argues that it has hindered growth in consumer spending. The dollar was at 109.88 yen on Friday morning in Tokyo.
“The reason consumption isn’t growing is that real incomes haven’t risen, and this is due to the weak yen since the Abe government came to power,” he said. “In the long-term, it is of course better if the yen strengthens.”

 

[Brumby]

You seem to have pretty strong opinions about China and like to do a lot of analysis about China. Just curious, have you ever lived in China?

How is it relevant to the discussions?

I don't have much interest on China or spend much time on this subject. I comment to counter what IMO are propaganda like comments or far out assertions that in my view are misrepresentations on specific subjects.

If you must know, I have worked in China long before probably some of you on this forum were born or were still in diapers.

On the contrary, I believe the future economic productivity of a nation is central to any discussion about the potential macro socioeconomic impact of an ageing demographic.

The whole reason the "getting old before getting rich" prospect is considered a poor outcome, is that without the wealth of an economy behind it, it will be impossible for a govt to carry out any policies to assist the ageing part of the population, via welfare or other social interventions because one simply doesn't have the money.

The conversation effectively centres around two propositions, sustaining economic growth (your premise) but absent on policies needed to address the structural shift in demographics. Productivity improvement might facilitate the prospect of economic growth as a rising tide does lift all boats, it however does not directly address the issues associated with an aging population.

The CCP’s model of “capitalism with Chinese characteristics” is that it leaves the country woefully underprepared in dealing with an entirely foreseeable phenomenon. When China launched its reforms in 1979, the same year as the one-child policy was introduced, there were around seven working persons for every retiree. The current ratio is about five for every retiree. 2015 represented a significant turning point, because it marks the start of an inevitable trend of more people leaving the workforce than entering it. By 2035, there will be 2.5 working persons for every retiree in China, which means that 40% of the population will be of retirement age then – as opposed to less than 20% now.

The graying of China is inevitable, the issue is whether it can do so “gracefully,” so that the elderly can enjoy a decent living standard when they retire and receive the healthcare and other services they require. This is where the culpability of the government’s model of “capitalism with Chinese characteristics” comes in. The country’s policies since the mid-1990s had been in achieving rapid growth rates. However, a much bigger economy will not cushion the impact of a fast-aging demographic for China, due to a number of reasons.

First, inefficient state-owned enterprises dominate all industrial segments of the economy outside of export manufacturing. These sprawling companies survive on cheap capital, massive subsidies, favourable tax policies and regulatory protection. The result is that over half of all domestic financial savings are allocated to the SOEs. In contrast, China’s household income as a proportion of GDP has declined from about 50% in 2000 to just above 40% today, while private domestic consumption as a proportion of GDP has declined from just under 50% to just over 30% over the same period. The consequence is that state-affiliated corporate sector has been the primary beneficiary of China’s economic policies over the past 15 years when the people needed to accumulate household wealth before they became old.

The gains of the corporate state at the expense of the household sector are entrenched through related policies, such as what economists term the “financial repression” of households. Since there are few investment alternatives by individuals besides speculating on real estate or in the stock markets, their savings are deposited in state-owned banks that offer extremely low interest returns (an average of 1.5% over the past decade.) State-owned banks extend the majority of the loans at below-market rates to SOEs, which use the funds for capital projects or to pay back the interest from existing loans. The result is that the country’s struggling households have been subsidizing the investments of the bloated and inefficient SOEs.

Secondly, only around 15% of workers, mainly those in the SOEs, have some form of pension. But even these state-backed pensions are largely unfunded and may well amount to 40% to 50% of GDP. For the majority of people, more than half are likely to depend overwhelmingly on their children to support them in their old age. This will put significant pressure on the disposable income of future generations that would otherwise be used to underpin the transition towards a consumption-led economy. Even now, more than half the living expenses of the average rural retiree is met by family transfers, while that for urban retirees is one quarter.

The Fifth Plenum offered little indication that the CCP intends to abandon the state-dominated model. Policies are being fine-tuned that are intended to help SOEs become more efficient rather than reducing their economic role, which helps them to become even more dominant. SOEs are to take the lead in China’s “indigenous innovation” drive in strategic sectors, meaning even more cheap capital, subsidies and tax credits being given to the state-owned companies. Such policies may drive economic growth but will perpetuate the imbalance in wealth creation and will in effect exacerbate the problem.

 

[Blitzo]

The conversation effectively centres around two propositions, sustaining economic growth (your premise) but absent on policies needed to address the structural shift in demographics. Productivity improvement might facilitate the prospect of economic growth as a rising tide does lift all boats, it however does not directly address the issues associated with an aging population.

The CCP’s model of “capitalism with Chinese characteristics” is that it leaves the country woefully underprepared in dealing with an entirely foreseeable phenomenon. When China launched its reforms in 1979, the same year as the one-child policy was introduced, there were around seven working persons for every retiree. The current ratio is about five for every retiree. 2015 represented a significant turning point, because it marks the start of an inevitable trend of more people leaving the workforce than entering it. By 2035, there will be 2.5 working persons for every retiree in China, which means that 40% of the population will be of retirement age then – as opposed to less than 20% now.

The graying of China is inevitable, the issue is whether it can do so “gracefully,” so that the elderly can enjoy a decent living standard when they retire and receive the healthcare and other services they require.

I generally agree with you up to this point in your reply, at least in terms of the demographic numbers

This is where the culpability of the government’s model of “capitalism with Chinese characteristics” comes in. The country’s policies since the mid-1990s had been in achieving rapid growth rates. However, a much bigger economy will not cushion the impact of a fast-aging demographic for China, due to a number of reasons.

First, inefficient state-owned enterprises dominate all industrial segments of the economy outside of export manufacturing. These sprawling companies survive on cheap capital, massive subsidies, favourable tax policies and regulatory protection. The result is that over half of all domestic financial savings are allocated to the SOEs. In contrast, China’s household income as a proportion of GDP has declined from about 50% in 2000 to just above 40% today, while private domestic consumption as a proportion of GDP has declined from just under 50% to just over 30% over the same period. The consequence is that state-affiliated corporate sector has been the primary beneficiary of China’s economic policies over the past 15 years when the people needed to accumulate household wealth before they became old.

The gains of the corporate state at the expense of the household sector are entrenched through related policies, such as what economists term the “financial repression” of households. Since there are few investment alternatives by individuals besides speculating on real estate or in the stock markets, their savings are deposited in state-owned banks that offer extremely low interest returns (an average of 1.5% over the past decade.) State-owned banks extend the majority of the loans at below-market rates to SOEs, which use the funds for capital projects or to pay back the interest from existing loans. The result is that the country’s struggling households have been subsidizing the investments of the bloated and inefficient SOEs.

Secondly, only around 15% of workers, mainly those in the SOEs, have some form of pension. But even these state-backed pensions are largely unfunded and may well amount to 40% to 50% of GDP. For the majority of people, more than half are likely to depend overwhelmingly on their children to support them in their old age. This will put significant pressure on the disposable income of future generations that would otherwise be used to underpin the transition towards a consumption-led economy. Even now, more than half the living expenses of the average rural retiree is met by family transfers, while that for urban retirees is one quarter.

The Fifth Plenum offered little indication that the CCP intends to abandon the state-dominated model. Policies are being fine-tuned that are intended to help SOEs become more efficient rather than reducing their economic role, which helps them to become even more dominant. SOEs are to take the lead in China’s “indigenous innovation” drive in strategic sectors, meaning even more cheap capital, subsidies and tax credits being given to the state-owned companies. Such policies may drive economic growth but will perpetuate the imbalance in wealth creation and will in effect exacerbate the problem.

This rest part of your post, is where the big unknown lies.

There are so many factors at play and so many factors that may change between now and the future, including the economic transition, the role of private vs public industry, the role of worker education and the role of automation in economic productivity, urban/rural transition, wealth distribution, not to mention a myriad of government policies itself, which are all likely to experience substantial change, that projecting that far out in significant detail is difficult to say the least.

I personally quite agree that the demographic transition will definitely cause some challenges that the govt will have to deal with.
How well they will be able to deal with it, and the amount of firepower they will have to deal with it, are separate matters entirely... and that is why the issue of economic productivity and the future economy is so important and why I discussed it last page. There are obviously other important factors as well that I listed in my last paragraph, but I think economic productivity is one of the more important ones that we are able to have a chance of trying to project by half a decade or even a decade.

 

[Preux]

Does China Matter?
By

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About the Author:
Gerald Segal is Director of Studies at the International Institute for Strategic Studies in London and co-author, with Barry Buzan, of Anticipating the Future.

MIDDLE KINGDOM, MIDDLE POWER

Does China matter? No, it is not a silly question -- merely one that is not asked often enough. Odd as it may seem, the country that is home to a fifth of humankind is overrated as a market, a power, and a source of ideas. At best, China is a second-rank middle power that has mastered the art of diplomatic theater: it has us willingly suspending our disbelief in its strength. In fact, China is better understood as a theoretical power -- a country that has promised to deliver for much of the last 150 years but has consistently disappointed. After 50 years of Mao's revolution and 20 years of reform, it is time to leave the theater and see China for what it is. Only when we finally understand how little China matters will we be able to craft a sensible policy toward it.

DOES CHINA MATTER ECONOMICALLY?

China, unlike Russia or the Soviet Union before it, is supposed to matter because it is already an economic powerhouse. Or is it that China is on the verge of becoming an economic powerhouse, and you must be in the engine room helping the Chinese to enjoy the benefits to come? Whatever the spin, you know the argument: China is a huge market, and you cannot afford to miss it (although few say the same about India). The recently voiced "Kodak version" of this argument is that if only each Chinese will buy one full roll of film instead

Aye I remember him well, alas he is no longer with us (he died in the same year of cancer). It would be amusing to see how he wriggles out of that one in the year 2016.

Then again, comrade Gordon Zhang of the SFB masterfully evaded his coming collapse of China deadline collapsing again. And again. So no doubt Segal will think of something.

 

[Equation]

Still retirement and cost of living are still far more affordable in China than in the US for decades to come. Health care cost in America are skyrocketing to no end, therefore more and more retires will not be able to afford it. As for SOE vs. private corporation, don't forget the many failed US corporations and banks that sucked up tax payers money in the trillions of dollars that caused the 2008 debacle.