China's Emergence as a Superpower (till 2014)

[Uboat509]

http://blogs.ft.com/beyond-brics/201...#axzz1y5ZrDqyp

China’s capital flight: to US real estate

Excerpt:



It's not just NY or the US, either. Chinese buyers are buying high-end real estate all over the world. That suggests that controls on capital movement are (predictably) ineffective, and that wealthy Chinese are not entirely confident about the domestic future... but we shall see.

There is a pretty good piece about this here in the Economist. The Chinese are still pretty good about the control of capital within the country but the rich and/or well connected are able to find ways around the capital controls. Under the current system, the government needs to severely limit the places that Chinese citizens can put their money, i.e. Chinese banks. The interest rate that these banks pay to their account holders is controlled directly by the state and is below the rate of inflation which means that it is actually negative in real terms. This is, of course, bad for depositors, who have no choice in the matter, but it is great for banks because it gives them a large buffer of cheap capital. This gives them plenty of cheap money to lend to state champions and local governments. It also allows them to weather the storm when the gross inefficiencies of a centrally planned economy come home to roost.

[Dayuhan]

it is great for banks because it gives them a large buffer of cheap capital. This gives them plenty of cheap money to lend to state champions and local governments.

They also lend it, increasingly and in massive quantities, to the well-connected and extraordinarily wealthy elite that straddles government and "private" enterprise. Crony lending is a huge issue, and nobody has a clue what the banks actually have on their books in terms of bad loans.

Of course the Chinese government can bail out the banks, but whether or not they can bail out the companies that incurred those loans is another question. If a company borrows, builds a dozen skyscrapers that end up empty, and goes bust... ok, the bank cam be bailed out, but the company isn't going to keep building skyscrapers (though the people behind that company, closely connected to those running the banks and those staging the bailouts, will have salted their share away). That means a whole lot of unemployed workers, and a whole lot less demand for steel, concrete, etc.

It will be interesting to see where it all goes and there's absolutely no certainty about outcomes, but anyone who thinks the Chinese have created a superior economic model that's bound to swallow the world is barking at the moon.

[davidbfpo]

The author of this book is on tour, with several speaking engagements in London next week and from emailed invite:

In her new book ‘Winner Take All: China’s Race for Resources and What It Means For The World’, Dambisa Moyo analyses the commodity dynamics facing the world over the forthcoming decades and highlights the central role of China in the global competition for finite resources. Commodity scarcity is being brought to the fore at a time when twenty-five military conflicts around the world are the result of competition over raw materials. Contrary to mainstream political discourse, Moyo shows how this phenomenon does not simply concern oil, but hard commodities such as metals and minerals, as well as soft commodities including timber and food. These resources all permeate our everyday lives – without access to them we cannot power our electricity grids, access potable water, or manufacture the technologies on which we all depend.

Holding cash reserves of over $3 trillion, China is doing what other states cannot afford to do, and undertaking a worldwide commodity shopping spree. This venture is backed by an innovative and symbiotic multilateral economic development approach to resource-rich countries, many in Africa and Latin America, to lock up resources for the future development of Chinese industry and infrastructure. Dambisa Moyo has demonstrates where this is happening, who is trading away their commodities, and the geopolitical effects these actions are likely to have in the future, prompting the overarching question: Is large-scale resource conflict inevitable or avoidable?

Her bio is different, although some here will see the hand of US capitalism:

Dr. Dambisa Moyo is an international economist...Born and raised in Lusaka, Zambia, Dr. Moyo holds a PhD in Economics from St Antony’s College, Oxford University; an MPA from Harvard University’s Kennedy School of Government and an MBA in Finance and BS in Chemistry from American University in Washington DC. She has worked as a Consultant at the World Bank and as an Economist at Goldman Sachs where she worked in debt capital markets and as part of the global macroeconomics team. In 2009, Dr. Moyo was named one of the world’s 100 most influential people by TIME Magazine, and a Young Global Leader by the World Economic Forum.

Additionally, Dr. Moyo serves on the boards of Barclays Bank, SABMiller and Barrick Gold. She has also spoken at organisations including the OECD, World Bank, IMF, Council on Foreign Relations and the American Enterprise Institute. Dr. Moyo contributes regularly to The Economist and Financial Times and has appeared as a guest on CNN, CNBC, Bloomberg, BBC and Fox Business.

Link to Amazon, with one review:http://www.amazon.com/Winner-Take-Al...s=Dambisa+Moyo

[davidbfpo]

Patrick Porter, an Australian strategist teaching in the UK, has an op-ed which considers the role of war generally and whether Asian is the next battlefield:http://www.smh.com.au/opinion/politi...617-20hzt.html

There a couple of sentences that struck me, here is one:

America and China are economically interdependent. The truth is, they really can't afford a major clash. China, by investing so heavily in US Treasuries, has become America's banker. In turn, it relies on American demand for its exports, as the consumer-in-chief to feed its growth.

[Uboat509]

They also lend it, increasingly and in massive quantities, to the well-connected and extraordinarily wealthy elite that straddles government and "private" enterprise. Crony lending is a huge issue, and nobody has a clue what the banks actually have on their books in terms of bad loans.

Of course the Chinese government can bail out the banks, but whether or not they can bail out the companies that incurred those loans is another question. If a company borrows, builds a dozen skyscrapers that end up empty, and goes bust... ok, the bank cam be bailed out, but the company isn't going to keep building skyscrapers (though the people behind that company, closely connected to those running the banks and those staging the bailouts, will have salted their share away). That means a whole lot of unemployed workers, and a whole lot less demand for steel, concrete, etc.

It will be interesting to see where it all goes and there's absolutely no certainty about outcomes, but anyone who thinks the Chinese have created a superior economic model that's bound to swallow the world is barking at the moon.

This is a good summary of the weak points of state capitalism. State Owned Enterprises (SOE) and state champions get plenty of government support in the form of cheap money and favorable legislation but that can only help a business that is competitive. Propping up uncompetitive businesses simply because they are owned or favored by the state just drains the governments coffers for little or no return. Anyone who has been to the Department of Motor Vehicles in the US knows that the state is poor at encouraging productivity and that includes state owned/supported commercial ventures. This is also true of innovation as government bureaucrats have little incentive to innovate and innovators outside of SOEs or state champions cannot compete for resources. By themselves these things put the lie to the "superiority" of state capitalism but the rampant corruption that accompanies state capitalism frankly obliterates the myth.

[Fuchs]

This is a good summary of the weak points of state capitalism. State Owned Enterprises (SOE) and state champions get plenty of government support in the form of cheap money and favorable legislation but that can only help a business that is competitive. Propping up uncompetitive businesses simply because they are owned or favored by the state just drains the governments coffers for little or no return.

It depends.

For starters, you are usually completely wrong with your assertion.

Imagine a shipyard competing with South Koreans. Let's say South Koreans are 20% more competitive (in part due to subsidies).
Does it make sense to subsidize the shipyard by 20%?

Likely YES.

Taxes and stuff mean that half of those 20% come back to government coffers (even without considering any service sector multipliers) within 12 months.

Now we're down to 10%.

The alternative for the shipyard workers was to be unemployed, unemployment pay is probably something like 50%. Now we save a lot instead of having 20% losses.

The costs of the shipyard are of course be much less than 100% labour costs. That doesn't change the picture, though. The material and energy costs will be about domestic suppliers in a large country. In the end, about 60-70% of these costs end up being labour costs somewhere else, while 30-40% would end up being capital income of someone.


So in the end, net savings from subsidizing may be about three times as high as the subsidies.


I know that popular economics doesn't consider such second-order effects and prefers a more Darwinian approach, but the reality is messy. Millions of workers have no alternatives to speak of. One worker fired at a closing shipyard equals an increase of the structural unemployment by more than one person.


The Darwinian stuff only applies to some markets, it does not apply to old industries at all.

[Dayuhan]

For starters, you are usually completely wrong with your assertion.

Imagine a shipyard competing with South Koreans. Let's say South Koreans are 20% more competitive (in part due to subsidies).
Does it make sense to subsidize the shipyard by 20%?

Likely YES.

So what do you do when the Koreans raise their subsidy? Raise yours too?

That of course would depend on the extent of the "in part due to subsidies" argument. How big exactly is that part? If you're in the US, you also have to consider the very limited availability of skilled labor in technical disciplines, high labor costs, very restrictive regulatory environments, etc.

At what point do you begin taxing competitive sectors (rendering them less competitive) to subsidize non-competitive sectors?

I can see an argument for subsidizing industries that have potential to be competitive, but which need a temporary subsidy in order to achieve that status. Pouring money into industries that have low potential for competitiveness and which will probably require perpetually increasing subsidies makes a lot less sense.

In any even the Chinese problem is less one of subsidizing industries competing with those in other countries than one of an extraordinarily incestuous relationship among industry (particularly the domestic construction industry), government, and lenders. The Chinese cushioned the impact of recession in their export markets by subsidizing an enormous surge in construction, which along with its second and third tier support industries created an enormous amount of employment. The problem is sustaining this, as in many cases end-user demand is not sufficient to absorb the building stock coming onto the market. Prices have been artificially propped up due to speculative buying, but sustainability is also an issue there.

Nobody's quite sure where it's all headed, but it looks to be a quite unsettled situation, on reason why rich Chinese seem so eager to get money out of the country.

[Fuchs]

So what do you do when the Koreans raise their subsidy? Raise yours too?

This turns into an investment calculation with great dependence on expectations. Wrong forum to do it.

At what point do you begin taxing competitive sectors (rendering them less competitive) to subsidize non-competitive sectors?

This shows you didn't understand. A country as a whole has to support its population's goods and services consumption with its economy.
A given quantity of workers - unemployed or working - has to get its goods and services from their economy (closed economy model for simplicity).
This only gets easier if they keep working (for example in the shipyard) and more troublesome to the rest of the economy (not less!) if the example shipyard closes!

I can see an argument for subsidizing industries that have potential to be competitive, but which need a temporary subsidy in order to achieve that status. Pouring money into industries that have low potential for competitiveness and which will probably require perpetually increasing subsidies makes a lot less sense.

Forget factories buildings, machinery and the illusion of companies for a while. Remember; it's really only about people.

Many workers will not get a decent job in another sector, given their age, qualifications et cetera.
What really counts is thus the middle ground between your "temporary" and your "perpetually". It makes usually perfect sense to keep even substantially uncompetitive companies/industries above water until their non-versatile workers have retired (an exception is extreme lack of competitiveness, such as higher losses than labour costs).
Again: Low productivity work is more productive than no work at all.

The Chinese cushioned the impact of recession in their export markets by subsidizing an enormous surge in construction, which along with its second and third tier support industries created an enormous amount of employment. The problem is sustaining this, as in many cases end-user demand is not sufficient to absorb the building stock coming onto the market. Prices have been artificially propped up due to speculative buying, but sustainability is also an issue there.

Playing the markets in order to sustain (or replace) this system may be tricky, but China as a nation is having surpluses in trade and has thus proved that their system works without net foreign input. It is most likely possible to stabilise it.
The biggest challenge to this is their necessarily sharp demographic change (they would be worse off if they hadn't have it).

[Dayuhan]

This turns into an investment calculation with great dependence on expectations. Wrong forum to do it.

Certainly so, but for the purposes of this discussion may we take it as agreed that there is an extent beyond which it is no longer economically rational to subsidize an unprofitable enterprise?

This shows you didn't understand. A country as a whole has to support its population's goods and services consumption with its economy.
A given quantity of workers - unemployed or working - has to get its goods and services from their economy (closed economy model for simplicity).
This only gets easier if they keep working (for example in the shipyard) and more troublesome to the rest of the economy (not less!) if the example shipyard closes!

That makes sense if you are subsidizing a limited number of enterprises. Unfortunately, once you subsidize some, others demand the smae treatment, and all of them have all sorts of emotionally compelling reasons why they should be on the public teat. At some point this will become unsustainable: what do you do when the number of industries being subsidized exceeds the number that are self-sufficient, or the number of workers whose salaries depend on subsidy exceeds those with salaries not depending on subsidy? If the uncompetitive are to be subsidized, the subsidy must ultimately be paid by the competitive, no? Who else will pay it?

Many workers will not get a decent job in another sector, given their age, qualifications et cetera.
What really counts is thus the middle ground between your "temporary" and your "perpetually". It makes usually perfect sense to keep even substantially uncompetitive companies/industries above water until their non-versatile workers have retired (an exception is extreme lack of competitiveness, such as higher losses than labour costs).
Again: Low productivity work is more productive than no work at all.

You won't be able to sustain the industry purely with the non-versatile workers. You'll have to hire new workers to keep the enterprise afloat, thus creating a new generation of workers that need to be subsidized. Essentially you walk onto an unending wheel in which industries have to be subsidized just to keep the workers employed. Obviously the final calculation will depend on how badly uncompetitive the industry is to start with, but I expect that if the industry has little to no chance of ever being competitive, it will in most cases be more effective to close them and retrain or adapt as many workers as possible. For the few that cannot adapt, many of whom will be approaching retirement anyway, simply paying their salaries to retirement age will likely be more cost-effective than sustaining and entire uncompetitive business just to keep them employed.

Playing the markets in order to sustain (or replace) this system may be tricky, but China as a nation is having surpluses in trade and has thus proved that their system works without net foreign input. It is most likely possible to stabilise it.

Didn't the Japanese maintain a strong trade surplus right up to and into their lost decades? A trade surplus is a nice thing to have, but it's not a guarantee of economic health.

The difference between Japan and China, of course, is that Japan's social structure allowed it to sustain a high degree of political stability through an extended downturn. That's not likely to be the case in China.

[Uboat509]

It depends.

For starters, you are usually completely wrong with your assertion.

Imagine a shipyard competing with South Koreans. Let's say South Koreans are 20% more competitive (in part due to subsidies).
Does it make sense to subsidize the shipyard by 20%?

Likely YES.

This assumes A) that the state is better at picking winners than the private sector and B) that competitiveness can be raised simply by throwing money at the problem. I am not saying that the state should never provide subsidies to young industries with potential (although the whole Solyndra debacle clearly illustrates the danger in that), but the key word is temporary.

Taxes and stuff mean that half of those 20% come back to government coffers (even without considering any service sector multipliers) within 12 months.

Now we're down to 10%.

That depends entirely on your tax system.

The alternative for the shipyard workers was to be unemployed, unemployment pay is probably something like 50%. Now we save a lot instead of having 20% losses.

That assumes that 100% will remain unemployed. Even allowing for that, how long do you continue to subsidize an uncompetitive business before the cost of subsidies becomes greater than the cost of paying temporary unemployment benefits? How does the state address the underlying cause of the uncompetitiveness?

I know that popular economics doesn't consider such second-order effects and prefers a more Darwinian approach, but the reality is messy. Millions of workers have no alternatives to speak of. One worker fired at a closing shipyard equals an increase of the structural unemployment by more than one person.

Modern economics most certainly does consider second order effects, which is why the auto industry was bailed out in the US. The overall losses to the economy from the loss of the auto industry would have been catastrophic but the bailouts were temporary and the industry was required to repay the cost as soon as it was back on its feet. It is not that modern economics prefers a Darwinian approach, it is simply that Darwin is inevitable. Industries that fail to innovate and remain competitive will eventually fail.

The Darwinian stuff only applies to some markets, it does not apply to old industries at all.

In which old industries do the markets not determine success or failure?

[tequila]

This assumes A) that the state is better at picking winners than the private sector and B) that competitiveness can be raised simply by throwing money at the problem. I am not saying that the state should never provide subsidies to young industries with potential (although the whole Solyndra debacle clearly illustrates the danger in that), but the key word is temporary.

...

In which old industries do the markets not determine success or failure?

The banking, oil, natural gas, nuclear power, defense, and agricultural industries disagree with you. Nat gas and nuclear might be more "new" industry, but all the rest have been around for centuries and depend enormously on government largesse/policy/regulatory authority to survive.

[Uboat509]

The banking, oil, natural gas, nuclear power, defense, and agricultural industries disagree with you. Nat gas and nuclear might be more "new" industry, but all the rest have been around for centuries and depend enormously on government largesse/policy/regulatory authority to survive.

Banking is a special case. Countries need at least a functional banking system to grow and an outright collapse of the banking system will be devastating to the economy. Part of the problem with growth now in the rich world is that the banking system is only barely functional in many places.

Natural gas and oil do get significant help from various governments but remember, many of the states that provide these commodities and have gotten rich from them like Saudi Arabia, Russia and Venezuela for instance, are wholly dependent on them. A significant drop in commodity prices could be devastating to their economies. They can ill-afford not to support these industries in any way they can. Conversely, countries that are net fossil fuel importers are also dependent these commodities although it is a significant rise is prices that can devastate their economies. No other industry, with the possible exception of banking, has as much power to destroy a nation's economy.

The defense industry is another special case because the main customers for the defense industry are governments. The goods and services provided by the defense industry are important to their home states not only as providers of defense technology but also as useful tools of foreign policy.

Nuclear power is also a special case because of the immense (and necessary) regulation necessary to build and run a nuclear power plant as well as the huge start-up cost.

The enormous benefits that the agricultural industry has enjoyed in this country has far more to do with blatant populism than need. The only reason that we have not seen sharper cuts to agricultural subsidies in this country is that both parties lack the political will to make those cuts although that may be changing.

[Fuchs]

This assumes A) that the state is better at picking winners than the private sector

No, that's entirely unrelated.

I am not saying that the state should never provide subsidies to young industries with potential (although the whole Solyndra debacle clearly illustrates the danger in that), but the key word is temporary.

It's questionable whether this "temporary" is really a good idea. in regard to industries which face foreign competition. Subsidies or another privileged status can make sense as permanent institution if they lead to the lesser evil.

That depends entirely on your tax system.

Not really. It's 40-60% for all developed countries. This automatic return plays a huge role in regard to arms purchases; it means a factor 2 preference for domestic suppliers. They're often effectively cheaper even if their price is substantially higher.

That assumes that 100% will remain unemployed. Even allowing for that, how long do you continue to subsidize an uncompetitive business before the cost of subsidies becomes greater than the cost of paying temporary unemployment benefits?

I tell you that the vast majority of those workers will often end up unemployed or employed in such poor jobs that keeping them in their old job means a vastly higher productivity even before taking subsidies into account.
It makes no sense whatsoever on the macroeconomic scale to tolerate such a change.

How does the state address the underlying cause of the uncompetitiveness?

I don't care. I was pointing at an optimisation problem that's only visible if you're willing to look at issues on a case-by-case basis. Nobody will ever recognise such counter-intuitive details if he or she only applies general rules or even ideologies.
The optimisation problem does not require an answer to your question, in fact my remarks about the problem already reveal a decision model that leads to an optimal decision without any addressing of the underlying cause of competitiveness.
Shed off the blinders and forget this overemphasis on relative performance (competitiveness). In the end, absolute performance should not drop.

It is not that modern economics prefers a Darwinian approach, it is simply that Darwin is inevitable. Industries that fail to innovate and remain competitive will eventually fail.

That's wrong. Many industries are very mature and have next to nothing left to innovate. Moreover, some sectors are so much privileged (as oil in the U.S.) that even the worst management debacles don't keep the company from producing a huge profit.

Industries in mature economies that fail to compete with rising economies' industries don't do so because they're not innovating (often times the upstarts innovate nothing).
The typical reasons are rather
* a wage disadvantage that's outweighing transportation issues only until the rising economy has reached a better income level about a decade later
* subsidies and other privileges offered in the rising economy
* low profit in the mature economy (not the same as lack of competitiveness at all, for the foreign competitors who rise often do so with a string of losses; see South Korean shipyards). The low profit cuts the chance to finance necessary re-investments with outside capital.

In which old industries do the markets not determine success or failure?

In monopolies and oligopolies.

You misunderstood me, though. I was referring to the desirability of evolutionary selection, not to it itself.

[Entropy]

Fuchs,

It seems to me you're ignoring deadweight loss, not to mention political reality. It may theoretically be possible to do what you're suggesting, but one must account for the politics. A political system (especially the US) isn't going to determine subsidies and when to end them on a strictly technocratic basis.

[Dayuhan]

I tell you that the vast majority of those workers will often end up unemployed or employed in such poor jobs that keeping them in their old job means a vastly higher productivity even before taking subsidies into account.

Vast majority? I doubt that. Based on what empitical evidence?

[Uboat509]

No, that's entirely unrelated.

On the contrary, if the state is going to pour a bunch of subsidies into a business they are usually doing it with the expectation that the business will return to profitability at some point in the future.

It's questionable whether this "temporary" is really a good idea. in regard to industries which face foreign competition. Subsidies or another privileged status can make sense as permanent institution if they lead to the lesser evil.

How often does that happen?

Not really. It's 40-60% for all developed countries. This automatic return plays a huge role in regard to arms purchases; it means a factor 2 preference for domestic suppliers. They're often effectively cheaper even if their price is substantially higher.

Actually the top rate in the US is %35. Most of the employees will be in a lower tax bracket and will not pay that much. The Corporate tax take will also be lower than that after deductions. The bottom line is that subsidies will not pay for themselves over the long term.

I tell you that the vast majority of those workers will often end up unemployed or employed in such poor jobs that keeping them in their old job means a vastly higher productivity even before taking subsidies into account.
It makes no sense whatsoever on the macroeconomic scale to tolerate such a change.

I am not sure that is true but even if it is, pouring subsidies into an uncompetitive business simply maintain employment crosses the line from economics to social welfare. As someone pointed out already, as long as the business remains open, new workers will be brought in to replace those who leave thus passing the cost of maintaining the business open on to a new generation. As a social welfare program this would do nothing to address the problem all the while being a net drag on the economy. A far better way to spend social welfare money is on programs like job retraining schemes.

I don't care. I was pointing at an optimisation problem that's only visible if you're willing to look at issues on a case-by-case basis. Nobody will ever recognise such counter-intuitive details if he or she only applies general rules or even ideologies.
The optimisation problem does not require an answer to your question, in fact my remarks about the problem already reveal a decision model that leads to an optimal decision without any addressing of the underlying cause of competitiveness.
Shed off the blinders and forget this overemphasis on relative performance (competitiveness). In the end, absolute performance should not drop.

You cannot simply ignore the cause of uncompetitiveness. Throwing money at the problem while failing to address the underlying cause is treating the symptom while ignoring the disease. That can only work in the short term. Ignore the disease long enough and it will kill the patient. The question then becomes how many resources will be expended in fruitless palliative measures before the patient dies?

That's wrong. Many industries are very mature and have next to nothing left to innovate. Moreover, some sectors are so much privileged (as oil in the U.S.) that even the worst management debacles don't keep the company from producing a huge profit.

Which industries have nothing left to innovate?

Industries in mature economies that fail to compete with rising economies' industries don't do so because they're not innovating (often times the upstarts innovate nothing).
The typical reasons are rather
* a wage disadvantage that's outweighing transportation issues only until the rising economy has reached a better income level about a decade later
* subsidies and other privileges offered in the rising economy
* low profit in the mature economy (not the same as lack of competitiveness at all, for the foreign competitors who rise often do so with a string of losses; see South Korean shipyards). The low profit cuts the chance to finance necessary re-investments with outside capital.

All of those things will provide short term benefits but ultimately only the persistent innovators can hold market share. Apple did not get where it is through subsidies wage advantages etc, they did so through innovation. The oil companies are continuously innovating (fracking for instance). Auto makers must innovate or die (Saab). In short, anyone who is not looking for a way to provide a product or service that is better, faster and/or cheaper will eventually lose out to someone who is. There are some few exceptions but that is not the norm.

I should mention that good marketing can mitigate a lack of innovation to some extent but only in the short term for the most part.