China's possible economic futures - New economy drives growth, stagnation or crisis
by noreply@blogger.com (brian wang) from NextBigFuture.com on (#2C4XE)
Three financial scenarios were published in a Financial Times article and reviewed by economist and analyst Michael Pettis.
SCENARIO 1: THE "NEW ECONOMY" WILL DRIVE GROWTH
In the first scenario proposed by the Financial Times-clearly the best-case scenario-the focus is on growth in consumption-related and "new economy" sectors in China. If these sectors continue growing at current rates, according to those who expect this to be the most likely outcome, they can soon replace the old, contracting sectors of the economy as the main source of demand that drives economic activity and keep growth rates high.
Pettis agrees there are certainly good things happening at the micro level in the Chinese economy, we cannot ignore the macro if these create growth constraints.
Nextbigfuture notes that there is the possibility of positive returns from the One Belt One Road investments in other countries.
Where Pettis really disagree is with Dehn's Financial Times scenario is with characterization of savings. Dehn seems to have confused China's total savings with the personal savings of Chinese households, a common mistake even among economists, but a mistake nonetheless and especially egregious in the case of China. Dehn seems to think that China saves nearly half its GDP because Chinese workers save nearly half their paycheck, and that because it is relatively easy to induce workers to cut back on their savings, the country can easily rebalance demand toward consumption.
Leaving aside that as uncertainty rises we should expect the household savings rate in China to rise, as it has been doing, and not fall, this characterization of savings fails to understand that changes in household savings preferences almost don't matter. Contrary to what Dehn claims, it is not at all the case that at roughly 50 percent of GDP, China has the highest savings rate in the world-and the lowest consumption rate, which is the same thing-because when the average Chinese worker receives his RMB 100 paycheck he immediately puts half of it into his bank account. The average worker of course puts in a lot less than that, and more importantly, it isn't the average worker that drives China's high savings rate. The reason China has the highest savings rate in the world is because when the average Chinese worker produces RMB 100 of goods and services, he only gets a paycheck of roughly RMB 50, of which roughly RMB 15 is put into his bank account. The rest of the roughly RMB 35 in savings has nothing to do with household saving and instead comes from businesses and government entities.
Chinese households are not able to consume a substantial portion of what they produce, in other words, simply because they are paid too low a share of what they produce. The constraint on consumption growth is not the savings preferences of the Chinese household. It is the very low share of GDP Chinese households retain.
This is why a surging "new economy" cannot generate enough growth over the medium and long term without some mechanism that drives up household income growth, any more than will improvements in supply-side efficiency. GDP growth cannot be maintained while investment growth decelerates unless consumption growth accelerates, and consumption growth cannot accelerate to anywhere near the extent that it must unless the growth in household income accelerates.
Read more
SCENARIO 1: THE "NEW ECONOMY" WILL DRIVE GROWTH
In the first scenario proposed by the Financial Times-clearly the best-case scenario-the focus is on growth in consumption-related and "new economy" sectors in China. If these sectors continue growing at current rates, according to those who expect this to be the most likely outcome, they can soon replace the old, contracting sectors of the economy as the main source of demand that drives economic activity and keep growth rates high.
Pettis agrees there are certainly good things happening at the micro level in the Chinese economy, we cannot ignore the macro if these create growth constraints.
Nextbigfuture notes that there is the possibility of positive returns from the One Belt One Road investments in other countries.
Where Pettis really disagree is with Dehn's Financial Times scenario is with characterization of savings. Dehn seems to have confused China's total savings with the personal savings of Chinese households, a common mistake even among economists, but a mistake nonetheless and especially egregious in the case of China. Dehn seems to think that China saves nearly half its GDP because Chinese workers save nearly half their paycheck, and that because it is relatively easy to induce workers to cut back on their savings, the country can easily rebalance demand toward consumption.
Leaving aside that as uncertainty rises we should expect the household savings rate in China to rise, as it has been doing, and not fall, this characterization of savings fails to understand that changes in household savings preferences almost don't matter. Contrary to what Dehn claims, it is not at all the case that at roughly 50 percent of GDP, China has the highest savings rate in the world-and the lowest consumption rate, which is the same thing-because when the average Chinese worker receives his RMB 100 paycheck he immediately puts half of it into his bank account. The average worker of course puts in a lot less than that, and more importantly, it isn't the average worker that drives China's high savings rate. The reason China has the highest savings rate in the world is because when the average Chinese worker produces RMB 100 of goods and services, he only gets a paycheck of roughly RMB 50, of which roughly RMB 15 is put into his bank account. The rest of the roughly RMB 35 in savings has nothing to do with household saving and instead comes from businesses and government entities.
Chinese households are not able to consume a substantial portion of what they produce, in other words, simply because they are paid too low a share of what they produce. The constraint on consumption growth is not the savings preferences of the Chinese household. It is the very low share of GDP Chinese households retain.
This is why a surging "new economy" cannot generate enough growth over the medium and long term without some mechanism that drives up household income growth, any more than will improvements in supply-side efficiency. GDP growth cannot be maintained while investment growth decelerates unless consumption growth accelerates, and consumption growth cannot accelerate to anywhere near the extent that it must unless the growth in household income accelerates.
Read more