Chinese Economics Thread

Blackstone

Brigadier
China is on its way to reform and transform its economy from manufacturing and investment based to consumption and innovation based, says one Forbes financial reporter.

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By Jonathan Woetzel

A widely held Western view of China is that its stunning economic success contains the seeds of imminent collapse. This is a kind of
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, which colors academic and think-tank views of the country, as well as stories in the media.In this analysis, China appears to have an economy unlike others—the normal rules of development haven’t been followed, and behavior is irrational at best, criminal at worst.

There’s no question, of course, that China’s slowdown is both real and important for the global economy. But news events like this year’s stock-market plunge and the yuan’s devaluation versus the dollar reinforce the refrain, among a chorus of China watchers, that the country’s long flirtation with disaster has finally ended, as predicted, in tears. Meanwhile, Chinese officials, worried about political blowback, are said to ignore advice from outside experts on heading off further turmoil and to be paranoid about criticism.

My experience working and living in China for the past three decades suggests that this one-dimensional view is far from reality. Doubts about China’s future regularly ebb and flow. In what follows, I challenge five common assumptions.

1. China has been faking it.

A key tenet of the China-meltdown thesis is that the country has simply not established the basis for a sustainable economy. It is said to lack a competitive, dynamic private-enterprise structure and to have captured most of the value possible from cheap labor and heavy foreign investment already.

Clearly, China lacks some elements of a modern market economy—for example, the legal system falls short of the support for
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in advanced countries. Nonetheless, as China-economy scholar Nicholas Lardy recently pointed out, the private sector is vibrant and tracing an upward trend line. The
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in industrial output continues to drop steadily, from 78% in 1978 to 26% in 2011. Private industry far outstrips the value added in the state sector, and lending to private players is growing rapidly.

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In fact, much of China’s development model mirrors that of other industrializing and urbanizing economies in Asia and elsewhere. The high savings rate, initial investments in heavy industries and manufacturing, and efforts to guide and stabilize a rapidly industrializing and urbanizing economy, for example, resemble the policies that Japan, South Korea, and Taiwan followed at a similar stage of their development. This investment-led model can lead to its own problems, as Japan’s experience over the past 20 years indicates. Still, a willingness to intervene pragmatically in the market doesn’t imply backwardness or economic management that’s heedless of its impact on neighboring economies and global partners.

Furthermore, China’s reform initiatives since 2013 are direct responses to the structural changes in the economy. The new policies aim to spur higher-value exports, to target vibrant emerging markets, to open many sectors for private investors, and to promote consumption-led growth rooted in rising middle-class incomes. Today, consumption continues to go up faster than GDP, and investors have recently piled into sectors from water treatment to e-commerce. These reforms are continuing at the same time China is stepping up its anticorruption drive, and the government hasn’t resorted to massive investment spending (as it did in 2008). That shows just how important the reforms are.

2. China’s economy lacks the capacity to innovate.

Think tanks, academics, and journalists alike maintain that China has, at best, a weak capacity to innovate—the lifeblood of a modern economy. They usually argue as well that the educational system stomps out creativity.

My work with multinationals keen on partnering with innovative Chinese companies suggests that there’s no shortage of local players with a strong creative streak. A recent McKinsey Global Institute (MGI) study describes areas
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here. Process innovations are propelling competitive advantage and growth for many manufacturers. Innovation is at the heart of the success of companies in sectors adapting to fast-changing consumer needs, so digital leaders like Alibaba (e-commerce) and Xiaomi (smartphones) are emerging as top global contenders. Heavy investment in R&D—China ranks number two globally in overall spending—and over a million science and engineering graduates a year are helping to establish important beachheads in science- and engineering-based innovation.

3. China’s environmental degradation is at the point of no return.

To believe this, you need to think that the Chinese are content with a dirty environment and lack the financial muscle to clean things up. O.K., they got things wrong in the first place, but so did most countries moving from an agrarian to an industrial economy.

China is spending heavily on abatement efforts, as well. The nation’s Airborne Pollution Prevention and Control Action Plan, mandating reductions in coal use and emissions, has earmarked an
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to target regions with the heaviest pollution.That’s just one of several policy efforts to limit coal’s dominance in the economy and to encourage cleaner energy supplies. My interactions with leaders of Chinese cities have shown me that many of them incorporate strict environmental targets into their economic master plans.

4. Unproductive investment and rising debt fuels China’s rapid growth.

To believe this, you would have to think, as many skeptics do, that the Chinese economy is fundamentally
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—too many roads, bridges, and buildings. In fact, as one economist has noted, this is a misperception created by the fact that the country is just very big. An eye-popping statistic is illustrative: in 2013, China consumed 25 times more cement than the U.S. economy did, on average, from 1985 to 2010. But adjusted for per-capita consumption and global construction patterns, China’s use is pretty much in line with that of South Korea and Taiwan during their economic booms.

China’s rising debt, of course, continues to raise alarms. In fact, rather than deleveraging since the onset of the financial crisis, China has seen its total debt quadruple, to $28.2 trillion last year, a
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found. Nearly half of the debt is directly or indirectly related to real estate (prices have risen by 60% since 2008). Local governments too have borrowed heavily in their rush to finance major infrastructure projects.

While the borrowing does border on recklessness, China’s government has plenty of financial capacity to weather a crisis. According to MGI research, state debt hovers at only 55% of GDP, substantially lower than it is in much of the West. A recent analysis of China’s financial sector shows that even in the worst case—if credit write-offs reached unprecedented levels—only a fairly narrow segment of Chinese financial institutions would endure severe damage. And while growth would surely slow, in all likelihood the overall economy wouldn’t seize up.

Finally, the stock-market slide is less significant than the recent global hysteria suggests. The government holds 60% of the market cap of Chinese companies. Moreover, the stock market represents only a small portion of their capital funding. And remember, it went up by 150% before coming down by 40.

Rumors drive the volatility on China’s stock exchange, often in anticipation of trading by state entities. The upshot is that the direct impact on the real economy will most likely be some reduction in consumer demand from people who have lost money trading in shares.

5. Social inequities and disenfranchised people threaten stability.

On this one, I agree with the bears, but it’s not just China that must worry about the problem. While economic growth has benefited the vast majority of the population, the gap between the countryside and the cities is increasing as urban wealth accelerates. There’s also a widening breach within urban areas—the rich are growing richer.

Urban inequality and a lack of access to education and healthcare are not problems unique to China. People here and in the West may find fruitful opportunities to exchange ideas because the pattern across Western economies is similar. Leaders of the central government have suggested policies to improve income distribution and to create a fair and sustainable social-security system, though implementation remains a matter for localities and varies greatly among them.

In short, China’s growth is slower, but weighing the evidence I have seen, the sky isn’t falling. Adjustment and reform are the hallmarks of a stable and responsive economy—particularly in volatile times.

Jonathan Woetzel is a director in McKinsey’s Shanghai office, as well as a director of McKinsey Global Institute.
 

delft

Brigadier
No it's not the one has nothing to do with the other. Buy America act only applies when federal funding is involved. So the Chinese company was able to obtain an advantage in pricing due to lower labor cost. All transit factories in the US including Japanese are knock down factories by the way.
Labour cost is lower in the Chinese plant mostly, perhaps wholly, because that plant is much newer and much more efficient that comparable US plants. Investment is much of US industry has been neglected for a long time.
 

plawolf

Lieutenant General
Labour cost is lower in the Chinese plant mostly, perhaps wholly, because that plant is much newer and much more efficient that comparable US plants. Investment is much of US industry has been neglected for a long time.

Its not just per hour labour costs, but the entire attitude of workers as a whole. Its a cultural thing.

I don't have any first hand experience of US workers, but British construction workers are a joke compared to Chinese workers.

Compared to the Chinese, British workers are lazy, spoilt, unmotivated and selfish.

I blame much of that on the Unions to be honest. There are plenty of hard working, honest and capable British workers, but the culture created and fostered by the Unions just doesn't like such people, because they show the rest of the work force up.

The Unions absolutely hate any hint at performance based compensation, and fight tooth and nail against it. That means that most of the time, wages are negotiated through collective bargaining, and there is zero incentive for anyone to work hard.

If anything, there is often strong, informal pressures for hard working workers to "cool it" from fellow workers or even Union bosses.

Apparently British workers are held in decent regard by the rest of Europe and America, so I expect them all to be of a similar standard.

All of this means that not only does each hour of western labour cost more compared to Chinese, it takes significantly more man hours to get the same job done in the west compared to China.
 

solarz

Brigadier
Its not just per hour labour costs, but the entire attitude of workers as a whole. Its a cultural thing.

I don't have any first hand experience of US workers, but British construction workers are a joke compared to Chinese workers.

Compared to the Chinese, British workers are lazy, spoilt, unmotivated and selfish.

I blame much of that on the Unions to be honest. There are plenty of hard working, honest and capable British workers, but the culture created and fostered by the Unions just doesn't like such people, because they show the rest of the work force up.

The Unions absolutely hate any hint at performance based compensation, and fight tooth and nail against it. That means that most of the time, wages are negotiated through collective bargaining, and there is zero incentive for anyone to work hard.

If anything, there is often strong, informal pressures for hard working workers to "cool it" from fellow workers or even Union bosses.

Apparently British workers are held in decent regard by the rest of Europe and America, so I expect them all to be of a similar standard.

All of this means that not only does each hour of western labour cost more compared to Chinese, it takes significantly more man hours to get the same job done in the west compared to China.

Absolutely agreed. Here in Toronto, we started construction on a short subway extension back in 2011, and completion has just been postponed to 2018. In Shanghai, between 2008 and 2010, they completed 5 new lines!
 

texx1

Junior Member
It seems yuan's internationalization is preceding nicely despite what doomsayers were predicting after the recent devaluation.

Yuan Overtakes Yen as World's Fourth Most-Used Payments Currency

China’s yuan overtook Japan’s yen to become the fourth most-used currency for global payments, shrugging off a surprise devaluation to rise to its highest ranking ever and boosting its claim for reserve status.

The proportion of transactions denominated in yuan climbed to a record 2.79 percent in August, from 2.34 percent in July, according to a Society for Worldwide Interbank Financial Telecommunications statement on Tuesday. It was second for global issuance of letters of credit by value with a 9.1 percent share, compared with 80.1 percent for the U.S. dollar.

The report comes as the International Monetary Fund prepares to conduct a twice-a-decade review of its Special Drawing Rights basket, which currently comprises the U.S. dollar, euro, yen and the British pound. China has been pushing the yuan’s case for inclusion, which Standard Chartered Plc estimated could trigger as much as $1 trillion of inflows into the currency. The People’s Bank of China on Aug. 11 devalued the yuan reference rate by 1.9 percent and switched to a more market-oriented fixing, spurring a 2.6 percent slide in the currency in August.


"The data are positive for the probability of the yuan getting into the SDR basket," said Nathan Chow, an economist at DBS Group Holdings Ltd. in Hong Kong who predicted in January that the currency would surpass the yen in global usage this year. "It shows that the so-called devaluation in August, which wasn’t massive in value, hasn’t driven people away from using the yuan."

The dollar, euro and British pound remained the top three currencies, with the share of payment volumes at 45 percent, 27 percent and 8.5 percent, respectively, according to the report. The yuan earlier this year had already become Asia’s most-active currency for payments to China and Hong Kong, Swift said in the statement. Singapore remains the top clearing center after Hong Kong, it added.

IMF staff members said in a report in August that the yuan trails other currencies in metrics the fund tracks in determining the SDR basket. Key indicators to qualify include the share a currency makes up of official reserves, international banking liabilities and global debt securities, as well as its use in foreign-exchange markets. Last year, the yuan ranked seventh for share of official reserves, behind the four SDR members as well as the Australian and Canadian dollars, according to the IMF.

China is trying to increase the yuan’s usage around the world as it looks to reduce the dollar’s dominance of global trade. The People’s Bank of China has appointed yuan-clearing lenders in 10 countries including South Africa and Argentina in the past year and opened the local bond and currency markets to overseas central banks.

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Equation

Lieutenant General
Its not just per hour labour costs, but the entire attitude of workers as a whole. Its a cultural thing.

I don't have any first hand experience of US workers, but British construction workers are a joke compared to Chinese workers.

Compared to the Chinese, British workers are lazy, spoilt, unmotivated and selfish.

I blame much of that on the Unions to be honest. There are plenty of hard working, honest and capable British workers, but the culture created and fostered by the Unions just doesn't like such people, because they show the rest of the work force up.

The Unions absolutely hate any hint at performance based compensation, and fight tooth and nail against it. That means that most of the time, wages are negotiated through collective bargaining, and there is zero incentive for anyone to work hard.

If anything, there is often strong, informal pressures for hard working workers to "cool it" from fellow workers or even Union bosses.

Apparently British workers are held in decent regard by the rest of Europe and America, so I expect them all to be of a similar standard.

All of this means that not only does each hour of western labour cost more compared to Chinese, it takes significantly more man hours to get the same job done in the west compared to China.

I don't think it has to do with Western construction workers are lazy (not all of them) but rather the general contractors and construction companies tends to over stretch the schedule date for completion therefore requiring more money from the paid clients, especially Federal contract jobs.

Absolutely agreed. Here in Toronto, we started construction on a short subway extension back in 2011, and completion has just been postponed to 2018. In Shanghai, between 2008 and 2010, they completed 5 new lines!

Perhaps they ran into some over costs such as materials, scheduling, and obstacles they didn't expected. I don't know.
 

plawolf

Lieutenant General
I don't think it has to do with Western construction workers are lazy (not all of them) but rather the general contractors and construction companies tends to over stretch the schedule date for completion therefore requiring more money from the paid clients, especially Federal contract jobs.

I did say in comparison to Chinese workers ;).

To be honest, wholly reimbursable contracts are the exceptions rather than the normal these days precisely because of the problem of contractors stretching jobs out.

Most modern contracts are on a fixed price or measured basis, meaning the construction company is either paid one lump sum, or paid a certain amount of money per unit of work done.

In either case, it makes no sense for companies to stretch timetables as that just needlessly increases their costs while doing nothing to boost their revenue.

From what I know of the industry, labour disputes are a major cause of project delays in western countries, where Unions stage walk outs or overtime bans or other similar non-sense over petty and inconsequential things, and often effectively hold companies to ransom.

Saying that, I don't think China's current labour force, especially for menial workers, everything is quite right either, as their are far too many cases of workers getting cheated out of pay, or being made to work in unsafe or simply bad conditions.

I think the key to efficiency and success is all down to balance. In the west, the laws and rules favour Union far far too much. They need to be reigned way back so they become a means for workers to protect themselves against bad employers, rather than as a means for bad employees to extort and harass good employers as it does far too often now.

Conversely, in China, workers does need a little more bargaining power and protection against bad employers.
 
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