Journal: The Growth and Decline of the Modern Sector and the Merchant Class in Imperial China

Interesting paper in the most recent Review of Development Economics.  Historically, guns and growth have been close companions.

The Growth and Decline of the Modern Sector and the Merchant Class in Imperial China

 Abstract

This paper offers an explanation of why, in Imperial China, the merchant class expanded and the economy modernized up to the 13th century, and why it entered into decline from the 14th century onward. The modernization of China required the accumulation of public capital and the building of good institutions, upon which a vibrant class of merchants and entrepreneurs could gradually emerge. This class contributed to the enrichment of the society and the emperor, but its activities also weakened the dominance of the emperor and the élite, who would then prefer to block the modernization of China and to restrict the size of the merchant class, putting the economy into long-run stagnation. However, when the emperor faced severe foreign military threats and when he realized that a modern sector improved the defense capabilities of China, he made the opposite choice.

Will China's $23 Trillion Credit bubble collapse - and collapse soon?

The guys over at Zero hedge warn it might. MEGA DEFAULT ahead?  A classic dismal scientist story.

As an economist it is always interesting and useful to read "the worst case" scenario articles.  By now we know very well that black swan events happen and more often that we care to imagine.  In this case  the concern is China's increase in credit from $9 trillion to over $23 trillion in 5 years.

But China has been growing rapidly so it is not a problem right? Not so simple.

I agree with Michael Snyder here (author of the Zerohedge article) - many Chinese companies are in deep - way too deep. 

Other posts have considered local government debt.

The date suggested - 31st January.  Of course this is scaremongering and not a reason to sell everything and buy gold (as many would suggest).

In reality the Chinese government have enough firepower to prevent catastrophic collapse but it might be worth watching the indices carefully on the 31st January.

 The $23 Trillion Credit Bubble In China Is Starting To Collapse – What Next? [Zerohedge]

China's elite and their "offshore" assets

An open secret is that large numbers of Chinese have assets outside of the country and money is leaving China at a significant rate.  Now CBCnew have written a nice article on the subject that is sure to raise some eyebrows.

Things could get ugly. Worth reading in full. My bold.

Offshore assets of China's elite revealed in leaked records [CBCnews]

"Close relatives of China's top leaders have used secretive offshore companies in tax havens that helped shroud the Communist elite's wealth, according to a massive cache of leaked financial records, posing a formidable challenge for President Xi Jinping, the country's avowed anti-corruption leader.

The confidential files include details of a real estate company co-owned by Xi's brother-in-law, as well as British Virgin Islands corporations set up by former premier Wen Jiabao's son and son-in-law, plus dozens of more cases of people tied to high-level officials."

../

 CBC News has exclusive access in Canada to the files, which show that nearly 22,000 people with addresses in mainland China and Hong Kong are involved in offshore dealings in locales such as the British Virgin Islands and the Cook Islands, places usually associated with hidden wealth. Among them are some of China's most powerful men and women — including at least 15 of China's richest, members of the National People's Congress and executives from state-owned companies entangled in corruption scandals.

 

Academic Paper: Sector-Level Productivity, Structural Change, and Rebalancing in China

The future of China depends to large extent to some degree of structural re balancing.  Export driven growth will be harder to achieve in a sluggish global economy.  This new IMF working paper is a province level study that considers productivity in the services sector.  Services have been growing rapidly - this will help GDP growth in the future.  Will the change happen quick enough?

 

Sector-Level Productivity, Structural Change, and Rebalancing in China" 

IMF Working Paper No. 13/240

 

MALHAR NABAR, International Monetary Fund (IMF)


KAI YAN, Yale University



This paper studies structural changes underlying China's remarkable and unprecedented growth in recent years. While patterns of structural transformation across China's provinces are broadly in line with international experience, one important difference is in labor productivity differentials between services and the rest of the economy. Specifically, the gap between labor productivity in the rest of the economy and services has widened across China's provinces as they have moved from low to middle income, which is contrary to the trend observed in cross-country experience. Evidence from a panel of China's provinces suggests that credit and labor market frictions have inhibited labor productivity growth in services relatively more than in the rest of the economy. Reducing these frictions is essential for achieving the next stage of China's development, one in which the service sector will need to play a more prominent role as an engine of growth. The evidence also suggests that improving labor productivity in services will lift the consumption share of GDP, thereby advancing the needed rebalancing of domestic demand in China.

Academic Paper: "Local Government Financing Platforms in China: A Fortune or Misfortune?"

New IMF working paper.  Local government "issues" are a key element of China's future success (or failure).  Bad debts and poor investment decisions need careful examination.  Land to sell is running out.

"Local Government Financing Platforms in China: A Fortune or Misfortune?" 

IMF Working Paper No. 13/243

YINQIU LU, International Monetary Fund

TAO SUN, International Monetary Fund (IMF)


China’s rapid credit expansion in 2009–10 brought local government financing platforms (LGFPs) into the spotlight. This paper discusses their function, reasons behind their recent expansion, and risks they are posing to the financial sector, local governments, and sovereign balance sheet. This paper argues that LGFPs were a fortune for China in the past, but would turn out to be a misfortune if the causes of the rapid expansion of LGFPs are not addressed promptly. In this context, the paper proposes ways to avoid misfortune by: acknowledging and addressing the revenue and expenditure mismatches at the local government level; establishing a comprehensive framework to regulate and supervise local government budgets; ensuring the sustainability of the financial resources obtained from the sale of land use rights; and developing local government bond markets and promoting financial reforms.

The Middle Dream

Lauren Johnston explains "the Middle Dream" on the China Policy Institute Blog. Link.

 A small flavour.

Soon after becoming Chinese President in November 2012 Xi Jinping spoke of his belief that “The Great Revival of the Chinese nation is the greatest Chinese dream”. Attempts to understand the concept of “Chinese dream”, inside and outside of China, have followed extensively since. This post reflects on the evolution of Chinese leaders’ political lexicon since Deng, and finds that Xi’s China dream is a lexical shift, but a policy continuum, allowing for greater aspirational convergence among China’s own poor and rich, and also in China’s foreign relations with developed as well as developing countries.

Reformist leader Deng Xiaoping famously employed the slogan “opening and reform”. Enduring to now have become the commonly used phrase capturing China’s remarkable program of economic reforms since 1979. Lesser-known of Deng’s lexicon however, and directly sharing more in common with the essence of the contemporary Chinese dream, is his 1978 call for the “invigoration of China” (zhenxing zhonghua). In sum, the “invigoration of China” was arguably Deng’s national vision, while “opening and reform” served as the umbrella policy direction that would be used to move the nation toward that vision.

Will the Renminbi Emerge as an International Reserve Currency?

Academic paper published in the most recent issue of World Economy.

Will the Renminbi Emerge as an International Reserve Currency? [World Economy]

Abstract

The global reserve system can be strengthened by increasing the role of alternative currencies. A gradual evolution to a multicurrency system reduces pressure on a single reserve currency issuer from an ever-growing balance-of-payments deficit. It also allows countries to better diversify their foreign exchange holdings. Given the continuing strong economic growth in the China and its growing influence on the world economy, the renminbi will likely emerge as a new international currency. However, this is contingent on the China accepting a more convertible capital account and developing an efficient financial system. Internationalising the renminbi will likely be a gradual and drawn-out process. Simulations show that, with greater convertibility, the renminbi could gradually become an international currency within Asia and beyond – sharing from 3 to 12 per cent of international reserves by 2035.