Here is a new four part series from Aljazeera. After centuries of western dominance, the world’s centre of economic and political weight is shifting eastward. In just 30 years, China has risen from long-standing poverty to being the second largest economy in the world – faster than any other country in history. Part four below entitled “Made in China” focuses on China’s economic role in the world is growing at a record pace, and it is also now a key player in world politics. The country has no doubt become a global manufacturing giant, but how will it deal with issues on the home front such as increase in pollution and water shortages? Although it has been confronted with tough environmental problems, efforts are being made to solve these. To view other episodes click the link – China Rising
Here is a clip I got from the Tutor2u A level economics blog. From Channel 4 news in the UK it takes you through what some of the 10 million residents in Shinjiazhuang live through – China’s most polluted city. Forced to wear masks every day there are some real concerns especially for the owner of an upmarket apartment block which is situated beside a coal-fired power station.
Gross ‘World’ Product – total GNP of each country
Gross ‘World’ National Income – this is GDP plus net remittances from abraod. That is money which is earned abroad and sent back to family members minus remittances sent out of the country. In some developing countries this can amount to some 10% of GDP.
The actual figures:
Gross ‘World’ Product – US$63,242bn – 2010
Gross ‘World’ National Income – US$76,296 – 2010
PPP = Purchasing Power Parity which focuses on establishing a value of the goods and services that can be purchased using one unit of each currency.
Sone interesting things to note from the table:
- 48% of world output occured in just 5 nations
- Of those 5 nations they have 44.7% of the world’s population
- In 2010 China, India, Brazil, Turkey and Indonesia all increased their percentage contribution to global production.
- Italy and the UK experienced the greatest fall in (0.2%) in their contribution to global output.
- Although China is approaching the USA with regard to global output but is lagging when you consider GDP/Person
Regional Break-up of global GDP from the above table
Asia and Oceania – 30.9%
North and Central America – 23%
Europe – 21.4%
South America – 3.6%
Africa – 0%
Source: Updated Economics 2013 Edition
Here is a recent chart from The Economist. This is the first data on inequality to come out of China for 12 years – remember 0=perfect equality and 1=perfect inequality (all the income is earned by one person). It seems that poorer countries like South Africa, Nigeria and Brazil have benefitted from growth over the last few years but it hasn’t trickled down to lower income groups. As well as being better off Japan and Sweden seems to be more equal societies as opposed to India and China where most people are equally poor.
Another very useful clip from Paul Solman of PBS News. China has for quite a few years now gone down the route of government planning to keep economic activity buoyant. Assumptions have been made that in 10 years time there will be 200 cities in China with over 1 million people and 8 being over 10 million. However a recent blog post showed that there are ghost towns in certain areas of China with empty housing estates.
An example of artificially creating growth, as well as building host cities, is have a 7 year old bridge (built to last for 40 years) blown up and rebuilt. This generates jobs for construction industry including contractors for different aspects of the bridge. This likens to Keynesian policy where J.M.Keynes said that you should dig holes and fill them in to keep people employed. The Soviet Union found that central planning is good at mobilising resources, but is not good at sustaining innovation, or incentives that promote long-term growth. What China needs is more domestic consumption and move away from a reliance on government investment projects and export revenue. As ever Paul Solman explains things well.
From the Australian Markets Weekly:
The Chinese indicators released on Sunday showed further signs of recovery, with better than expected outcomes for industrial production and retail sales. Industrial production rose 10.1%yoy in November (median 9.8%) from 9.6%, continuing to trend
higher after the 3-year low of 8.9% seen in August. Retail sales were up 14.9%yoy in November (median 14.6%) from 14.5%. Meanwhile inflation was subdued, up just 0.1% in November and 2.0%yoy (median 2.1%), meaning the PBoC has room to stimulate the economy further if growth unexpectedly slows again.
You might have seen this photograph in the NZ Hearld or The Independent newspaper in the UK. The motorway is in the province of Zhejiang and the couple were not satisfied with the compensation offered to them by the Chinese authorities and decided to stay put – known as ‘nail householders’ referring to how difficult it is to remove a nail from wood.
There was a similar situation in 2007 when a Chinese developer dug around a house in Chongqing city as the resident refused the amount of compensation offered for its demolition. One of the reasons for both these actions is that private individuals must agree before their property is demolished. In 2007 the National People’s Congress (NPC) passed a “property law” which is seen as a historic breakthrough to protect private property to an equal degree as public and collective property. This is the first time in modern China that private property has been protected by law.
“Clearer, enforceable property rights are essential if China’s fantastic 30-year boom is to continue and if the tensions it has generated are to be managed without widespread violence.” The Economist March 8 2007
Tomorrow sees the hand over of power within the Chinese political system and corporate strategists at multinationals are anxious to know China’s new leaders agenda. It seems that Jiang Zemin – China’s ex-leader – has stopped reforms which have implications for Asia and the rest of the world. Some of outgoing President Hu Jinto’s young leaders have been dumped from the seven-man Standing Committee which drives Chinese economic policy – they were to continue the economic reform of China. Their ousting looks like a victory for the Chinese traditionalists who claim that strict control of banks and key industries protected China from the GFC in 2008. However one has to debate this argument when you consider that China bounced back from the GFC by implementing the following policies that created growth:
* Fiscal stimulus to the value of 16% of GDP
* Credit growth at 30% each year
* Investment 49% of GDP in 2011
The World Bank has warned that China’s export-led growth implemented 30 years ago is now outdated. As Andrew Evans-Pritchard stated in the Daily Telegraph (UK) China has already picked its low hanging fruit of state-driven industrialisation.
Stagnation lies in wait if the country clings to the dirigiste (central planning) model.
China and the Lewis Point
Arthur Lewis pointed out that with the expansion of the modern sector of a low-income country, the “unlimited labour supply” (from the rural sector’s labour surplus) would disappear and as a result the country will enter into a phase of faster real wage increase. China has reached this point as the surplus of cheap labour form rural areas has started to subside. Manufacturing wages have been rising by 16% a year for the last decade but more worrying is that it has been outstripping productivity. The competitiveness of the Chinese economy must now come from innovative enterprise and free thinking, something that has been difficult to encourage within the political system.
There is nothing envitable about China’s economic fate. Whether it succeeds or fails is entirely a political choice , and one that is being made before our eyes. Daily Telegraph
Some figures for September show that the Chinese economy is tentatively starting to come out of its slowdown.
Exports rose to 9.9%
GDP for Q3 rose by 7.4%
CPI – 1.9%
The CPI figure is encouraging in that it gives the Peoples’ Bank of China plenty of room to ease monetary policy if they need to as the Inflation target rate is 4%. They have also pumped an additional US$42.15bn into the economy in order to stimulate growth. According to the National Australia Bank (NAB) the use of these measures appears to be the preferred method of monetary easing ahead of the start of the Communist Party Congress which starts on 8 November, where a new leadership team is set to be installed. The installation of the new leadership team could pave the way for a cut to the reserve requirement ratio and for fiscal stimulus. Many commentators envisage a soft landing for China.
The table below from the Australian Markets Weekly (Published by National Australia Bank) shows the fiscal position of euro-zone and other developed nations. As you can see the PIIGS (Portugal, Ireland, Italy, Greece, Spain) of the euro-zone countries have very high gross debt to GDP levels except for Spain. Japan has the highest but is also the only economy involved in fiscal loosening – see column 4. Notice the severity of tightening in some euro-zone countries as austerity measures start to be implemented. It does seem a little strange that Australia’s tightening in fiscal policy is greater than that of the UK and the US and not that far from the IMF‟s estimate of “austerity” announced for Italy.
The memo items are also of interest in that they show the nominal GDP, debt and budget balance in $USbn. In nominal GDP you have USA, China, Japan, Germany as the leading economies by output levels. China overtook Japan this year.
The Business Insider website ran a story about a currency manipulator that is bigger than China. They are referring to Israel whose holdings of foreign currency is 61% of GDP compared to 45% in China. The chart below shows the Bank of Israel’s (BoI) foreign currency reserves, which have ballooned since early 2008 when the central bank began buying up dollars and selling shekels. By selling shekels and buying US dollars the Bank of Israel hopes to make its exports more competitive by maintaining a weaker currency. March 2008 was he first time since 1997 that the Bank intervened in the foreign exchange market. However markets are of the opinion that the BoI run a dirty float policy on the exchange rate and speculate as to what its intervention price is. Some suggest that the price that they are aiming for is approximately 3.8 shekels per dollar.
Although this is an interesting article I do wonder how a small economy like Israel’s can be of any serious threat to the US manufacturing sector. Also I would suggest that reserves of 61% of GDP in Israel is a lot smaller than 45% of GDP in China. The actual figures are below:
China: $7.26 trillion 45% = $3.27 trillion
Israel: $245.95bn 61% = $1.65bn
However, all this accusation of the US calling China a currency manipulator is interesting when you consider other countries e.g. Israel and Switzerland are doing something similar. For the US, having a trade deficit is a function of it simply consuming beyond its means. The exchange rate matters with which country you incur the trade deficit with. If China’s goods became more expensive (with the Yuan allowed to appreciate) the US would probably keep on borrowing more money. From a Chinese perspective why should it have to stop fixing its exchange rate to the US$ when the US keeps on borrowing money and getting into further debt.
It is important that you are aware of current issues to do with the New Zealand and the World Economy. Examiners always like students to relate current issues to the economic theory as it gives a good impression of being well read in the subject. Only use these indicators if it is applicable to the question.
Indicators that you might want to mention are as follows:
The New Zealand Economy
The New Zealand economy expanded by 0.6 percent in the June 2012 quarter, while economic growth in the March quarter was revised down slightly to one percent. Favourable weather conditions leading to an increase in milk production was a significant driver of economic growth over the June quarter. The current account deficit rose to $10,087 million in the year ended June 2012, equivalent to 4.9 percent of GDP. Higher profits by foreign-owned New Zealand-operated banks and higher international fuel prices were factors behind the increase in the deficit during the year. Unemployment is currently at 6.8% but is expected to fall below 6% with the predicted increase in GDP. Annual inflation is approaching its trough. It is of the opinion that it will head towards the top end of the Reserve Bank’s target band (3%) by late next year.
The Global Economy
After the Global Financial Crisis (GFC) the debt-burdened economies are still struggling to reduce household debt to pre-crisis levels and monetary and fiscal policies have failed to overcome “liquidity traps”. Rising budget deficits and government debt levels have become more unsustainable. The US have employed the third round of quantitative easing and are buying US$40bn of mortgage backed securities each month as well as indicating that interest rates will remain at near zero levels until 2015. Meanwhile in the eurozone governments have implemented policies of austerity and are taking money out of the circular flow. However in the emerging economies there has been increasing inflation arising from capacity constraints as well as excess credit creation. Overall the deleveraging process can take years as the excesses of the previous credit booms are unwound. The price to be paid is a period of sub-trend economic growth which in Japan’s case ends up in lost decades of growth and diminished productive potential. The main economies are essentially pursuing their own policies especially as the election cycle demands a more domestic focus for government policy – voter concerns are low incomes and rising unemployment. Next month see the US elections and the changing of the guard in China. In early 2013 there is elections in Germany. The International Monetary Fund released their World Economic Outlook in which they downgraded their formal growth outlook. They also described the risk of a global recession as “alarmingly high”.
With the CIE A2 Paper 4 exam approaching I thought it would be useful to update what is happening in the BRIC countries – remember developing countries is a popular area that is examined. I was very fortunate to attend the Tutor2u 10th Anniversary Conference in June this year where one of the keynote speakers was Jim O’Neill of Goldman Sachs who coined the acronym in a 2001 paper entitled “Building Better Global Economic BRICs”.
The BRIC’s are struggling hard to ease policies and maintain economic growth in the face of a slowing global economy not of their own making. Although you might think that these rates are high in a developed nation for these 4 developing countries growth rates need to be maintained at much higher levels in order to keep apace with the factors of production that are coming on stream.
One of the reasons for the slowdown is the economic situation in Europe and the downturn on the USA followed by their own uncertainty associated with the coming fiscal cliff. There are also consequences of the BRIC slowdown are on the commodity market. BRIC countries were the reason behind the economic growth in the past decade, which meant they had a great affect on commodity prices. As economic growth decelerates rapidly in these countries, so does energy and commodity demand. Downward pressure on oil prices and other key commodities, such as copper, are likely to continue until one can be sure that the growth trend in the emerging market countries is moving higher again. We are not at that stage yet. BRIC nations, in their own
Other reasons for the growth slowdown is the ever worsening economic situation in Europe, followed closely by the general lack of economic leadership and market confidence coming from the aging industrial countries. One cannot, however, lay all of the economic challenges in the BRIC countries at the doorstep of Europe’s debt crisis and the massive policy uncertainty associated with the coming fiscal cliff in the US.
BRIC currencies represent high-risk, high- return carry trades, due to the near-zero level of interest rates in the U.S., Europe and Japan compared to the much high rates in the emerging market world. When BRIC currencies start to appreciate it will be a sign of confirmation of two important new trends.
1. A necessary, but not sufficient, condition for BRIC currency appreciation is that the global deleveraging process is abating.
2. To complete the scenario, economic growth and the ability to attract capital needs to return to the BRICs.
Source CME Group Market Insights – 25th July 2012
BRIC’s in 2011 – Source: The Economist – 29th Sept 2012
You will no doubt have seen the Keynes v Hayek Rap which was produced by econ stories. Now the debate turns to the Chinese economy – which of these economist’s policies is more prevalent? The Economist Free exchange column addressed this issue recently.
In order to maintain the level of economic activity in an economy Keynes believed in investment spending to maintain aggregate demand and employment. However, Hayek believed that investment spending might be directed in the wrong areas and would leave the economy poorly coordinated and workers stranded in the wrong jobs. Economist Andrew Batson has argued that Hayek seems to be gaining the upper hand in the battle of ideas as China is now keen to avoid the Hayek malinvestment even if there is less aggregate demand and growth which Keynes favoured. As mentioned in previous posts there has been huge investment in China in areas that normally stimulate growth in downturns – eg. creation of new cities or infrastructure projects.
There are others that say the Chinese economy has areas of its infrastructure that need to be developed. Cities like Beijing and Shenzen are congested and need investment spending on them. Although Hayek believed that malinvestment would result in a worse downturn what is different in China is that their high investment is backed by even higher savings. This means that investment projects don’t need to generate high returns in order pay back external creditors. According to The Economist the real cost of malinvestment is with the empty shopping malls, vacant apartments etc when there are poor medical facilities and overcrowding in housing. Might a more market approach be a better driver of the economy rather than that of central planning?
Dambisa Moyo is an international economist who writes on the macroeconomy and global affairs and has recently published the book “Winner Take All: China’s Race for Resources and What It Means for the World”. I had the privilege to listen to Dambisa Moyo talk at the Tutor2u conference in June this year.
So, how is China’s approach to securing resources different from its western counterparts:
1. China has befriended countries that are in the axis of the unloved. These countries have largely been ignored by major western economies includes countries in Africa, South America and Eastern Europe. A number of these countries have natural resources.
2. They have spent huge amounts of money on securing these resources and to some people they are paying too high a price.
3. They are a price setter for many resources like coal and copper. It is the main buyer so is able to influence the price it pays for natural resources.
Below is an interview with CNN.
Here is a great image from The Economist showing the competitiveness and GDP per person. New Zealand comes in at 25th in Global Competitiveness ranking – see red arrow on graph. Notice that Switzerland is the top country followed by Singapore with Finland in third place. Amongst the emerging economies China is top with Brazil in second place.
The most striking fall is the United States, which has dropped in the rankings for four years in a row. It is now seventh. The rankings are based on criteria such as institutions, infrastructure, financial systems, flexible labour markets, economic stability, innovations and public services. Plotting the scores against GDP per person reveals an unsurprising correlation: competitiveness brings wealth, but rich countries can most easily afford to provide the conditions for it. They can squander competitiveness too.
With industrial production down and significantly less pressure on inflation the Chinese authorities are in a good position to throw some more fuel on the fire. The National Australia Bank reported that China’s Industrial Production for July rising by 9.2%yoy, down from 9.5% last month and below the median forecast of 9.7% – see graph below.
However this growth is not bad when you think of other primary producing countries. Furthermore the CPI rose by only 1.8% this year (July yoy) and down from 6.5% in 2011 so there is little pressure in this area.
The worry for China is their trade balance which has dipped. This was very disappointing export growth coming in with a rise of 1% over the past year, down from 11.3% last month and way below the median forecast of 8.0%. There was a big fall in exports to Europe, down by 16.2% over the past year (-1.1% in June). Exports to Italy are down by 35.8%. There was also a significant pull back in exports to the USA rising by 0.6%, down from 10.6% in June. Exports to the rest of Asia were better but have slowed everywhere. For Australia, exports rose by 8.5% yoy, down from 18.6% yoy last month. Meanwhile, imports slowed to 4.7%, from 6.3% last month and below the market forecast of 7%. Imports from Australia into China fell by 9.7%yoy, down from a rise of 1.7% for June.
Just completing the Unit 6 of the A2 course and updating my notes on the current issue of debt hangover from the Global Financial Crisis. The FT recently reported that there are worrying signs of private sector credit in emerging economies.
Turkey Brazil Russia - private sector credit in year to April 2012 up 20%.
China – private sector credit in year to April 2012 up 15%.
Poland – private sector credit to GDP 49%
This is seen as inevitable if an economy is going to grow but there needs to be investment in capital which will ultimately increase a country’s productive capacity and long-term development. However a lot of this borrowing has gone into consumer goods rather than capital infrastructure projects. This is especially worrying in Brazil as the transport system needs a major overhaul if it is going to cope with the demands of the Olympic Games in 2016. According to the FT misdirected credit can produce two damaging consequences:
1. When too much money is directed into the housing market bubbles can occur – subprime for instance and more recently China.
2. Poor credit allocation can harm economic growth, both in the short and in the long term.
Although China and Brazil has loosened monetary policy this needs to be accompanied by a process that ensures it is directed to where it is most needed. Jeffrey Sachs in his book “End of Poverty” talked about how a country needs six major kinds of capital:
1. Human capital: health, nutrition, and skills needed for each person to be economically productive
2. Business capital: the machinery, facilities, motorized transport used in agriculture, industry, and services
3. Infrastructure: roads, power, water and sanitation, airports and seaports, and telecommunications systems, that are critical in-puts into business productivity
4. Natural capital: arable land, healthy soils, biodiversity, and well-functioning ecosystems that provide the environmental services needed by human society
5. Public institutional capital: the commercial law, judicial systems, government services and policing that underpin the peaceful and prosperous division of labor
6. Knowledge capital: the scientific and technological know-how that raises productivity in business output and the promotion of physical and natural capital
Figure 1 shows the basic mechanics of saving, capital accumulation, and growth. We start on the left-hand side with a typical household. The household divides its income into consumption, taxation, and household savings. The government, in turn, divides its tax revenues into current spending and government investment. The economy’s capital stock is raised by both household savings and by government investment. A higher capital stock leads to economic growth, which in turn raises household income through the feedback arrow from growth to income. We show in the figure that population growth and depreciation also negatively affect the accumulation of capital. In a “normal” economy, things proceed smoothly toward rising incomes, as household savings and government investments are able to keep ahead of depreciation and population growth.
Source: The End of Poverty: How we can make it happen in our lifetime by Jeffrey Sachs (2005).
Since January 2010 there has been a significant increase in the importance of China to New Zealand’s trade balance. 13% of NZ’s exports are now estined for the Chinese market (see graph) and it is estimated that by 2020 it will overtake Australia as our number one destination. According to the BNZ New Zealand’s annual exports to China are already 25% larger than that to the EU, almost 50% more than that to the US, and more than 4 times the value of exports to the UK.
The June trade figures were higher than expected when you think of the global issues especially in Europe and the US and the strength of the NZ$. However I suppose we really export water in that grass growth and agricultural produce determines our trade balance.
For many years China has been trying to guarantee resources for its growing economy. The FT in London recently looked at the Chinese mining company Citic Pacific which has invested huge funds into the Sino Iron mine in Western Australia. Originally hatched in 2006 the level of expenditure has gone significantly higher than expected – from US$2bn to US$7.1bn today. However some have suggested that a US$10bn will ultimately be the cost and this is especially prevalent in that they are two years behind schedule.
It seems that Citic Pacific have put down too much money to pull out – barriers to exit. China imports about 60% of its iron ore and the Sino Iron mine is an attempt by the Chinese to break away from the dependency of foreign suppliers, which Chinese steelmakers accuse of driving prices too high. However Chinese companies have found it difficult to adjust to the foreign working conditions compared to the protected environment in China. Chinese enterprises are often unprepared for the rigours of foreign competitors especially with regard to employment laws and the nature of contracts. China’s mining plans involve the use of Chinese labour as they are cheaper and have a higher productivity. However, overseas labour laws and visa requirements make the use of Chinese labour all but impossible. In Australia truck drivers can earn US$2000,000 a year with three-home housing, free home leave. By seeking control negotiations can become confrontational.
The Chinese were desperate for iron ore when the demand for steel was very high. However Chinese developers realise now that the demand for steel has dropped and prices have fallen. In 2010 China imported less iron ore than the previous year and by 2011, higher interest rates and strict restrictions on property and construction continued to put downward pressure on steel prices. Also for Citic Pacific miscalculations over currency have played a role in increasing costs. The AUS$ has appreciated over the life of the project and controversial hedges that Citic bought went wrong causing a $2bn loss.
Yesterday official GDP figures out of China showed that growth has slowed to 7.6% for the second quarter. This was predicted but as building and infrastructure development accounts for 55% of China’s GDP growth this has a significant impact on demand for iron ore which is a key ingredient in steel.