Recent stats have shown a brisk recovery of China’s economy. GDP growth achieved 7.9% in the second quarter of 2009. And according to figures quoted in this week’s the Economist, fixed investment surged by 35%, car sales rose by 48%, purchases of homes by 80%, and the stock market’s value rose by more than 80% since its low last November. The huge stimulus seems to be very effective.
This is good news for both the world and China. In fact in China, the significance is massive. The population is so accustomed to robust growth (many of whom have seen nothing but growth in their life) that besides trusting the government’s stimulus would work, many are blindly convinced that China would continue the road of growth for eternity. Voicing doubt in the stimulus and economic growth is like saying Sarah Palin is cool in a liberal gathering. I found an extreme example of the sentiment when reading a high profile economist’s blog where he is called a ‘traitor’ in the comments. Andy Xie is a Chinese economist who used to hold prominent positions in Morgan Stanley. Now he is an independent economist who observes China’s economy with a sobering and critical eye. He can often be seen talking about how overheated the stock and property markets are.
In his most recent blog post titled ‘Here we go again’(written in English), Andy Xie pointed out that Chinese banks are force-feeding the economy with liquidity (especially into the property and stock markets). And he warns that throughout history a lending boom is inevitably followed by a crisis and China can’t escape it. His voice stands out from a sea of economists who go with the official line. This is has attracted angry internet users to label him as a ‘traitor’. To them, Andy Xie is a like a party pooper, but in the most heinous form. I find this to be shocking and bewildering. How is an economic judgment related to betraying one’s country? Apparently, some people not only take things personally, they take it nationalistically. Besides displaying the ideological leanings of the extreme ‘natizens’ (nationalistic netizens), it also reflects a paradoxical attitude towards history. For a country which takes so much pride in its long history, people also have a selective attitude that only picks the glorious part and disregards the rest. Rather than learning from history, we ignore it. And eventually, history will kick our bottocks.
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July 23, 2009 4:35 pm
A lot of monetarist economists wouldn’t really find a problem with what China is doing. One of the biggest aggravators in turning a recession into a depression is tight monetary policy. I follow an excellent monetarist economics blog that generally would think there isn’t a problem with this (and I believe in loose monetary policy during recession as well). He even did a great post on the Chinese Yuan after his blog got picked up on Netease.
If you are a follower of economics and monetary policy, you should definitely give it a read. The reality is that we still haven’t agreed on what caused the first great depression and it shows today in the varied responses on what to do in the face of global recession.
July 23, 2009 8:28 pm
sometimes it’s a patriotic duty to criticise your own country, as Chesterton opposed Britain involvement in the Boer War:
“A man who says that no patriot should attack the Boer War until it is over is not worth answering intelligently; he is saying that no good son should warn his mother off a cliff until she has fallen over it.”
the same can be said about the economist that criticizes China’s economic policy.
July 27, 2009 2:10 am
I had hoped this recession would force correction of the large, unsustainable imbalances that have developed in the world economy – primarily between the large deficit countries (US et al) and their large surplus counterparts (China, Japan, Germany). But, government policies instead are re-enforcing it, making it likely we will all experience an even bigger adjustment later. This adjustment likely will be very painful for both the surplus and the deficit countries when it finally does happen.
The US private sector has increased its savings rate a tad, but probably not enough to make a big difference. And, public sector debt has exploded.
At the same time, China is mirroring the role the US played during the Great Depression. In that timeframe, the US was a surplus nation, and in order to spur growth, the government implemented policies to support its export industries and to hinder imports. China is doing much the same now according to most reports. Anything that suppresses demand and/or promotes growth of supply capacity will in turn shrink imports and grow exports. The Chinese government continues to do both these things, even thought exports already make up 40% of its economy. Not much of China’s fiscal stimulus is being used to spur demand, and a chunk of it is being used to increase capacity. Per the car sales increase number you posted, unit car sales have increased due to a temporary tax incentives and subsidies incenting consumers to pull forward the purchase of small cars, but car maker revenues and profits have actually fallen during this timeframe.
If the Chinese government was serious about reducing the countries dependence on export markets, there is a very simple step it could take: distribute a portion of the $2 trillion of foreign currency reserves it has accumulated to the populace, especially the 800 million peasants and migrant workers who have benefited the least from government policies, and who are still among the poorest people in the world. Say, $1000 to each and every person. In addition to putting money in people’s pockets, it would raise the value of the yuan, making everyone richer in absolute terms.
But, needless to say, that isn’t going to happen, just as it has never happened in Japan. Export industries would lose the de facto subsidy they receive that is required to enable them to compete against Vietnam, India, Cambodia, etc. As a result, unemployment would rise. So, instead, the Chinese government continues to accumulate US Treasuries at a torrid pace, despite its constant stream of rhetoric against the dollar’s standing as a reserve currency. It needs to do so in order to continue to suppress the value of the yuan and keep those 800 million peasants and migrant workers satisfied with working for $100/month or less towards building products for people in other countries and providing inexpensive services to wealthy city dwellers.
July 27, 2009 5:24 am
Ignoring lessons from history is not just a Chinese problem, it’s a problem everywhere. Being a contrarian especially during times of fear, uncertainty and doubt (e.g., the US between 2001 and 2005), can get one labeled unpatriotic, declared a loon, etc.
Some economists in 2005 (could be a few years earlier) foresaw the US housing bubble and the mainstream press in the US never bothered to listen to them. Those who did and took action either made money or didn’t lose as much of their nest egg as others did.
December 23, 2009 5:05 am
While this topic can be very touchy for most people, my thought is that there has to be a middle or common ground that we all can find. I do treasure that you’ve added relevant and intelligent commentary here though. Thank you!
February 1, 2010 12:23 pm
Awesome blog post, thanks for keeping me busy!