Is China’s economy a cause for concern?

The University of Birmingham's Director of the Business School, Professor David Dickinson reports on how he views recent developments in China's economy.

A sensible comment that touches on a number of issues that this blog has talked about in recent posts.

The Birmingham Brief

Is China’s economy a cause for concern?

Questioning China’s remarkable economic performance over the last 30 years seems to fly in the face of wisdom honed by decades of double digit growth. However, it is perfectly possible to explain China in the context of standard models of economic growth. Immigration of low-wage labour into the Eastern seaboard along with transfers of capital from Chinese Diaspora in Hong Kong, Taiwan and further afield, created the conditions for the ‘miracle’.

This does not imply that China has not been an economic success story but puts the emphasis on standard factors rather than some special Chinese characteristics. China’s policy-makers have been generally clever (or perhaps are fortunate to be able) to take a long-term view. They have also been sensible to limit the degree of economic liberalisation to the areas that will promote real economic growth. They have also given rein to the entrepreneurial instincts of the Chinese.

However, times are troubling for the country and its policy-makers. Wages are rising, as are commodity prices, pushing up price inflation. The rich and dynamic regions have suffered unemployment and migration of workers back to their hometowns, although the continued revival of global demand post 2008 has reversed the trend. There has been a stock market bubble and more recently all the evidence of a real estate price bubble. Policy-makers have taken sensible measures to cool the economy but the pressure has yet to subside.

The real problem is that China’s economy is unbalanced for its long-run stability. The real exchange rate is kept artificially low despite recent appreciation. The financial sector is still very limited in scope creating the stampede of wealth into whatever asset is perceived to be the one to deliver high (and self-fulfilling) profits. Wages are continuing to rise and the reliance on low value-added manufacturing industry is not the basis for sustainable growth.

To be sure China’s policy-makers play a clever game. They are securing their long-run access to commodities through diplomacy and aid-giving in Africa (although recent events in the Northern part of the region may have caused them to re-assess the stability of some of the countries with which they do business). They recognise the importance of developing human as well as physical infrastructure in moving the economy to higher value-added industries. They are also aware of the inequalities that are being created as a result of the geographical concentration of growth.

Movement to higher value-added industries requires building human capital which takes time. As people’s human capital becomes greater they typically want the freedom to think for themselves. The export of Chinese students to universities in developed countries is one way of achieving domestic human capital growth and the policy to create world-class universities in China is another (longer-term) mechanism. But increasingly we are living in a world where human capital is mobile and high quality people will choose carefully where to pursue their careers.

So are Chinese policy-makers willing and able to face the next stage of liberalisation of the economy and society for the country to move forward? Increasing the choices open to Chinese consumers through relaxing exchange rate restrictions, further opening of the financial sector, enhancing protection of intellectual property, giving free rein to innovative thinking and allowing more freedom of speech are some of the things required. We should all be considering the way in which Chinese policy-makers will react in the next few years since the success of the global economy is tied inextricably to the success of the China.

Professor David G Dickinson, Birmingham Business School

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Martket integration in China

Hot on the heels of my last post signalling the end of market capitalism in China as we know it as part of "socialism 3.0" comes a paper looking at China's market integration from a more academic perspective.

Market Integration in China

Qingqing Chen
Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Chor-ching Goh
World Bank

Bo Sun
Board of Governors of the Federal Reserve System - Division of International Finance - International Banking and Finance Section

Lixin Colin Xu
affiliation not provided to SSRN


April 1, 2011

World Bank Policy Research Working Paper No. 5630

Abstract:
Over the last three decades, China's product, labor, and capital markets have become gradually more integrated within its borders, although integration has been significantly slower for capital markets. There remains a significant urban-rural divide, and Chinese cities tend to be under-sized by international standards. China has also integrated globally, initially through the Special Economic Zones on the coast as launching grounds to connect with world markets, and subsequently through the accession to the World Trade Organization. For future policy considerations, this paper argues that its economic production needs to be spatially concentrated, and its social services need to be spread out to the interior to ensure harmonious development and domestic integration (through inclusive rural-urban transformations and effective territorial development).

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Socialism 3.0 - the beginning of a new China?

China is a country of many contradictions. On the one hand it is a single party communist state and on the other hand it has the most ruthless capitalist ethos I have witnessed.

My reading is that the period of all out capitalism is drawing to an end. China has done what it needed to do to catch up, import technologies and learn learn learn.

The result has been rising inequality and rising discontent.

Enter stage left "Socialism 3.0".

The Diplomat gives a good summary of the rise of the "new left" in China. This development is exactly what I would have expected. Is this development good or bad for world trade and development? Time will tell.

Socialism 3.0 in China [The Diplomat]

But while Bo’s Chongqing has become a capital for China’s New Left, it’s not the only model competing for the attention of China’s top leaders. Liberals and globally oriented modernizers have also drawn inspiration from local governments, especially reformist policies pursued by the governments of Shenzhen and Guangdong Province.

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So what exactly do New Left thinkers believe the next wave of Chinese socialism is going to look like?

For a start, they say, it’s going to be a lot less like capitalism. They call for a major re-entry of the state into the economy, and point to Chongqing as proof that a large public sector can co-exist with a dynamic market. Over the past few years, as Chongqing has become a popular destination for factories relocating from the more developed coastal provinces, where wages and costs are rising, its GDP has grown by about 14 percent a year—much faster than the national average–providing fodder for left-wing academics to cast it as a model for growth.

The political scientists of the New Left are using Chongqing, which has encouraged the expansion of state-owned enterprises, to respond to the economic argument shared by many market-oriented Chinese economists that state investment ‘crowds out’ private enterprise (guo jin min tui).

However, Cui Zhiyuan, a Qinghua University professor who has spent much of the last year conducting field research in Chongqing, argues that in Chongqing ‘It’s not the state crowding out private enterprise…In fact, the state and the market develop together (guo jin min ye jin).’

Wang agrees, citing the growth of private activity in the city, which has outpaced state investment. In fact he dismisses the idea of crowding out, writing ‘This kind of idea not only has absolutely no theoretical foundation, but it’s been also been proved absurd by the practical experience of Chongqing…As the state’s absolute role in the Chongqing economy has increased, its proportion of the economy has decreased.’

In the Chongqing model, though, everything links back to the issues of poverty and inequality, and the government of Chongqing has turned the market profits of state-owned enterprises toward traditional socialist projects, using their revenue to fund the construction of affordable housing and transportation infrastructure. It’s perhaps not surprising then that Bo’s biggest policy hit is the affordable housing initiative for the city’s poorest. The massive construction programme aims to provide cheap apartments to a third of the municipality’s 30 million residents, a programme that has received national attention and clearly impressed the central government, which is rolling out a similar plan at a national level as part of the 12th Five-Year Plan.

Bo has tried to cast his programme as a step past the single-minded focus on GDP that has defined Chinese policy since Deng. ‘It’s not about how many tall buildings you have, it’s how happy people are,’ he argued in a 2009 speech to Chongqing Party members.

These are exciting times for China and these developments should be watched carefully.

The Value of Education - $6.1million

Always one to jump on a bandwagon is one is passing I must report the "Beijing Normal University Professor" quote again.

The Diplomat gives a good summary. This is an interesting blog actually.

I have been talking about the real estate bubble for a while. Who are the bubble-deniers?

We must begin to work out what the fallout from a bubble bursting will be. It could get very ugly very quickly. The key is to understand who the large property speculators are over and above the man in the street (trying to find a wife - see previous story).

The question with this story is what is he really trying to say. I can not quite put my finger on it.

The Value of Education [The Diplomat]

I’d like to share a memorable comment from earlier this month by a professor at Beijing Normal University. The remark is about more than just education – it has quickly become a source of entertainment among Chinese netizens, and even something of a social issue.

On 4 April, a professor at one of the university’s research centres wrote a microblog entry that was presumably meant to offer some encouragement for his students.

‘When you’re 40 years-old, don’t come and see me if your net worth isn’t 40 million yuan ($6.1 million). And don’t tell people that you were my student. To a highly-educated person, poverty means shame and failure.’

The media immediately stirred up some debate on the issue, and many members of the public who responded were quick to argue that by emphasizing money, the professor had taken education back a step or two.

The professor responded that the blog entry was a joke, a defence that prompted even more criticism. Some netizens joked that he clearly has a good grasp of how serious China’s inflation problem is, noting that as his students are mainly in their 20s, by the time they are 40 years-old, 40 million yuan would be equivalent to about 10 million yuan now.

I don’t agree with trying to place a numerical value on education – even if a student becomes a teacher or ends up working in a shop they are still making a valuable contribution to society.

But the comments raise another issue. The professor in question is a senior official at Beijing Normal University’s real estate research centre. The university is meant to be a place for nurturing future teachers, so many are likely left wondering how it ended up specializing in real estate. China’s real estate has been dubbed ‘black gold’, and it seems now that even Beijing Normal University has been ‘polluted’ by the real estate boom.

This isn’t the first time this professor has said something unbelievable. About a year ago, he said that there was no bubble in China’s property market because demand is still high. He is also quoted as saying that people who oppose a ‘revival’ in real estate are ‘hurting national interests’. He added that sceptics about an uptick in the real estate market were ‘anti-humanity’.

The Chinese government, though, is clearly worried that there’s a real estate bubble in parts of China, a view echoed by the IMF. With this in mind, it’s difficult not to wonder what place the rosy views of the professor have at a reputable university. Maybe he’s just trying to make a name for himself. And, if that’s the goal, he’s certainly succeeded. The worrying thing is that there are plenty more like him at Chinese universities.

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Pictures of China in the 1800s

Given China's rapid development it is always useful to look back in time to assess where China has come from to know where it is going.

Rare Photographs of China in the 1800s [Environmental Graffiti]

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Economics of marriage and real estate in China

Economists have long realised that marriage is just a contract like any other.

Given the relative shortage of females, supply and demand suggests that the price of marriage should go up. The price it seems to to "own" an apartment. Given the cost this is pricing many men out of the market.

This is exactly what is happening.

A large number of young, single restless men is never going to be good for political stability.

The upcoming property crash may also kill off a few marriages.

This story teaches us many things - I just need to work out what they are but I think they are important.

For Many Chinese Men, No Deed Means No Dates [NYT]

BEIJING — In the realm of eligible bachelors, Wang Lin has a lot to recommend him. A 28-year-old college-educated insurance salesman, Mr. Wang has a flawless set of white teeth, a tolerable karaoke voice and a three-year-old Nissan with furry blue seat covers.

What will happen if China's overheated real estate market goes bust?

“My friends tell me I’m quite handsome,” he said in confident English one recent evening, fingering his car keys as if they were a talisman.

But by the exacting standards of single Chinese women, it seems, Mr. Wang lacks that bankable attribute known as real property. Given that even a cramped, two-bedroom apartment on the dusty fringe of the capital sells for about $150,000, Mr. Wang’s $900-a-month salary means he may forever be condemned to the ranks of the renting.

Last year, he said, this deficiency prompted a high-end dating agency to reject his application. In recent months, half a dozen women have turned down a second meeting after learning that he had no means to buy a home.

“Sometimes I wonder if I will ever find a wife,” said Mr. Wang, who lives with his parents, retired factory workers who remind him of his single status with nagging regularity. “I feel like a loser.”

There have been many undesirable repercussions of China’s unrelenting real estate boom, which has driven prices up by 140 percent nationwide since 2007, and by as much as 800 percent in Beijing over the past eight years. Working-class buyers have been frozen out of the market while an estimated 65 million apartments across the country bought as speculative investments sit empty.

The frenzy starts with the local governments that sell off land at steep prices, and is frothed up by overeager developers who force residents out of old neighborhoods, sometimes prompting self-immolations among the dispossessed. But largely overlooked is the collateral damage to urban young professionals, especially men, who increasingly find themselves lovelorn and despairing as a growing number of women hold out for a mate with a deed.

Although there are few concrete ways to measure the scope of involuntary bachelorhood, more than 70 percent of single women in a recent survey said they would tie the knot only with a prospective husband who owned a home.

Among the qualities they seek in a mate, 50 percent said that financial considerations ranked above all else, with good morals and personality falling beneath the top three requirements. (Not surprisingly, 54 percent of single men ranked beauty first, according to the report, which surveyed 32,000 people and was jointly issued by the Chinese Research Association of Marriage and Family and the All-China Women’s Federation.)

The marriage competition is fierce, and statistically, women hold the cards. Given the nation’s gender imbalance, an outgrowth of a cultural preference for boys and China’s stringent family-planning policies, as many as 24 million men could be perpetual bachelors by 2020, according to the report.

Zhang Yanhong, a matchmaking consultant at Baihe, one of the country’s most popular dating sites, said many disheartened men had simply dropped out of the marriage market.

“This fixation on real estate has twisted the popular notion of love and marriage,” she said. “Women are putting economic factors above everything else when looking for a mate, and this is not a good thing for relationships or for society.”

The nation’s real-estate obsession is especially noteworthy given China’s relatively recent embrace of home ownership.

The sale of residential property was not allowed until the late 1980s, and even then under a leasehold system that gives buyers 70 years of ownership. Today, about two-thirds of all Chinese under 40 own their own homes, slightly higher than the average for Americans of the same age group.

With few other outlets for investment (those who park their money in a Chinese bank effectively lose money, given low interest rates and high inflation), many families have been plowing their savings into apartments, spurring what some economists describe as a bubble.

Han Han, one of China’s most widely read bloggers, frequently assails the government policies that he and many economists say have contributed to rapidly rising prices.

In an interview, he said one consequence of the single-minded focus on real estate, or on earning the money to make mortgage payments and repay family loans, is that young people have little time for anything else. “We’ve created a generation of young people whose sole ambition is to have a piece of property under their name,” he said.

Like many anxious bachelors, Yang Xuning, 29, a sportswriter from Beijing, said much of the pressure comes from parents who feel taunted by the wealth around them.

He recalls his first meeting with his girlfriend’s parents in Shanghai last winter, when he was asked about his salary and his nesting plans. “I tried to reason with her mother, explaining that it’s not practical to buy something at this stage in our lives but she wouldn’t hear it,” he said.

What will happen if China's overheated real estate market goes bust?

He stood his ground, she stood hers, and a few months later, on the second anniversary of their relationship, Mr. Yang’s girlfriend called it quits.

“A lot of girls, encouraged by their parents, see marriage as a way of instantly changing their status without the hard work,” he said bitterly.

Many women are unapologetic about their priorities, citing the age-old tradition in which men provided a home for their brides, even if that home came with a mother-in-law.

There are also other concerns, including the instability of starting a family in rented premises and the endless badgering of parents.

Status also plays a role, but so, too, do fears that those who put off buying will be priced out of the market indefinitely.

Gao Yanan, a 27-year-old accountant with a fondness for Ray-Bans and Zara pantsuits, said the matter was not up for debate. “It’s the guy’s responsibility to tell a girl right away whether he owns an apartment,” she said. “It gives her a chance not to fall in love.”

With such women on the prowl, even men who do have their own homes have come up with techniques to weed out the covetous and the inordinately materialistic.

Liu Binbin, 30, an editor at a publishing house in Beijing, said he often arrived at first dates by bus, even though he owned a car. “If they ask me questions like ‘Do you live with your parents?’ I know what they’re after,” he said.

Mr. Liu said he went on 20 unfulfilling blind dates until finding a suitable girlfriend last year. He said he knew she was the one after passing the three-month mark.

“The whole time she thought I didn’t own an apartment and she still wanted me,” he said. “Someone like that is rare.”

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