RDX: 說得好 我一直宣傳中國的問題在于投資而不在出口（雖然之前也迷信De-Coupling 后悔后悔啊）而投資泡沫的破裂 恐怕就是中國步入低速增長的開始
by Hugo Restall
Posted November 7, 2008
Milton Friedman famously said in 1965, “We are all Keynesians now.” And it looks to be true again. Facing the fallout of a global crisis, governments across Asia are resorting to countercyclical spending in the hopes that it will jump start domestic demand—i.e. spending by their own citizens—to replace the declining external demand from the United States and Europe
The problem with this prescription, however, can be boiled down to a basic observation, related to John Maynard Keynes’s paradox of thrift: Everyone tightens their belts in a crisis, even though they may know that collectively this will lead to economic disaster. Therefore the government spending would have to be very big indeed to make a difference. People who were saving very little (Americans) will naturally increase their saving rate. But those who were already saving a lot (Asians) are unlikely to loosen their purse strings.
The former behavior is already apparent. The U.S. savings rate, which coasted down to 0% from 10% of GDP over the last three decades, has already rebounded in the last two quarters to about 2%, and some analysts predict it could go as high as 5%. While the federal government will continue to spend, households, corporations and even local governments are undertaking the painful task of deleveraging.
It’s not just that Americans now see the error of their free-spending ways. With both stocks and real estate declining in value, the wealth effect is going into reverse. And as companies shed workers, there is a natural incentive for households to save against the possibility of losing their income. Finally, companies are trying to bolster their balance sheets by economizing and paying down debt.
The effect is already being felt in Asia, although it is not yet reflected in the official numbers. The biannual Canton Trade Fair saw few foreign buyers, and China’s Purchasing Manager’s Index, a leading indicator of manufacturing, has turned sharply negative. There are reports of inventories piling up, and waves of closures in Guangdong province of Hong Kong-owned factories. This is all bad news for East Asia, which has seen a procession of newly industrializing countries get a leg up on growth by exporting to the developed economies, especially the U.S. And not only has the region supplied products for American consumers, it has also sent back the proceeds of these sales in the form of investment, fuelling the credit expansion that enabled yet more consumption. This was sometimes called the East Asian development model, characterized by high savings rates and an export orientation.
It all worked fine for decades, lifting hundreds of millions of people out of poverty. But it depended on the U.S. financial sector remaining liquid, if not always solvent. America’s crack-up leaves Asia sitting on thousands of factories without orders, and a mountain of Treasurys. At least for the next year or so, the region will have to find a new growth engine.
When the subprime crisis first broke, conventional wisdom had it that Asian economies were not at risk. After all, the first-order effects were small, since Asian banks held only a fraction of the “toxic assets” bought by North American and European institutions. Moreover, Asian nations’ balance of payments and foreign exchange reserves were healthy enough to resist a contagion effect.
However, as it became clear that the American financial system was suffering a systemic crisis and the credit markets that Asia also depends on were seizing up, Asian stock markets fell in concert with Wall Street. Now the U.S. real economy is faltering, and a second-order effect, the drying up of orders for goods made in Asia, is materializing. Still to come is perhaps the biggest blow of all: firms abandoning plans for investment in new capacity as a result of lower forecasts of global demand.
Still, some observers believe that Asia can weather the storm in better shape than the West. For example, on Nov. 3 Citigroup put out an optimistic report suggesting that measures by the regions’ governments to spend more will translate into renewed growth: “The escalation of timely policy stimulus to support domestic demand should set the region up for faster economic rebound once the global financial crisis abates.”
Moreover, the bank sees China as the brightest spot in the region in terms of its capacity to withstand a slowdown in the world’s demand for its products, predicting a soft landing for the economy. Likewise, economist and former Australian Ambassador to China Ross Garnaut presented a paper at the end of October expressing faith in China’s ability to use a Keynesian stimulus to avoid a “major slump,” although growth over the next 18 months would be significantly slower than the long-term trend.
What everyone seems to agree on is that China is the bellwether of the region of the whole. If it cannot survive the crisis in reasonable shape, nobody can. And in that case, if by some miracle they did bob up to the surface, a sinking China would pull them back down anyway, given its size and importance as a market. So can the Beijing government and the Chinese consumer spend their way out of the slump?
To some degree, the faith expressed in China’s resilience is hardly surprising. On paper at least its fundamentals are strong—growth last year was officially 11.4%, and foreign-exchange reserves total more than $1.9 trillion. Domestic demand growth has been quite strong. And Beijing is reprising the measures used successfully after the 1997 Asian financial crisis to maintain growth momentum. The fiscal-stimulus plans unveiled so far, such as an additional 800 billion yuan ($117 billion) for railway modernization, suggest that the government has the requisite sense of urgency.
However, as a large net exporter China is highly vulnerable to a slowdown in external demand. The export sector’s share of the economy has been steadily rising since accession to the World Trade Organization in 2001. Some analysts point out that the true importance of exports to the economy is not as great as the eye-popping total value (over 40% of GDP) suggests, since many of these products are made from imported components, with very little value added in China. But the fact remains that in the last three years import growth has lagged far behind export growth, showing that reliance on exports has increased.
The real problem for China, and hence for Asia, is that this external shock coincides with the bursting of an investment bubble domestically. And investment, not exports, is the true linchpin of China’s economy—it represents more than 40% of GDP, for real. Although the numbers for fixed-asset investment still look robust, once adjusted for the producer-price increases of the last year they reveal a significant slowdown. This is the true story behind the decline in GDP growth to 9% in the third quarter.
For years, fixed asset investment has been growing at a blistering pace of more than 20%. To a large degree this explains the run-up in global prices of raw materials; for example, China has been pouring 40% of the world’s concrete production, about 1.4 billion tons per year, for new infrastructure, homes, offices and factories. Supplying the raw materials for this boom has become one of the drivers of growth in the rest of the region.
The government finally stepped in last year with a series of measures to rein in an economy in danger of overheating. As asset prices and inflation began to take off in the last few years, Beijing deserves credit for acting early. Even though the instruments of monetary policy are not mature, it raised interest rates, boosted reserve ratios and ultimately used administrative means to rein in investment, especially among real-estate developers and home buyers.
The policy worked, but perhaps too well. Sales volumes of real estate have fallen significantly, and in cities that were gripped by speculative fever, prices are falling. Moreover, the stock market has lost about 70% of its value since its peak a year ago. Investors and potential home-buyers alike are sitting on the sidelines, waiting to see if they can discern a bottom to the markets. Home buying has accounted for a quarter of fixed-asset investment, but it also drives a wide range of other spending, as the emerging middle class trades up from the previously state-owned apartments they were allowed to buy cheaply a decade ago to privately built homes of a much higher standard.
A prolonged decline in housing prices doesn’t seem likely. But if the market does not revive quickly, it could have several unintended effects. One is the vocal dissatisfaction of homeowners who have never experienced a housing downturn before. More importantly, local governments have become increasingly reliant on property-related revenues as their spending has increased and they have been pressured to scale back other taxes. A halt to new projects would put them in a precarious situation and force cutbacks in spending.
The danger now is that combined with the external shock of the global financial crisis, China is facing a perfect storm. With asset and commodity prices falling, external demand shrinking and Chinese consumers nervous there is a growing risk of deflation.
This has happened before, in the aftermath of the Asian financial crisis. For too long, the government maintained tight controls on credit in an effort to contain the inflation of the mid 1990s, causing several years of deflation. As it turned out, the negative effects were not too great, as continuing high nominal growth rates eventually brought prices back into moderate inflation.
But today it seems that the government risks repeating the same mistake. Already the consumer inflation rate has fallen to 4.6% in September, from a range of 7.1% to 8.7% in the first half of the year. Yet once again the People’s Bank of China is fighting the last war, trying to squeeze out the inflation caused by the past year’s runup in commodity prices. Official rhetoric remains focused on fighting inflation, or at least finding the “proper balance” between growth and inflation, as an essay by Premier Wen Jiabao in a Communist Party policy journal put it.
The financial crisis will only add more deflationary pressures. Facing declining orders from abroad, export-oriented factories will retool in order to produce for the domestic market. A surplus of capacity will push prices down further. Meanwhile, seeing prices falling and feeling insecure about the world economy, Chinese consumers may decide to postpone purchases. The stage could then be set for a deflationary spiral, as even loose monetary policy fails to encourage firms to invest and households to consume. Needless to say, that would derail efforts to jump start consumption using a fiscal stimulus.
Asia has been here before. Consider what happened the last time the U.S. had a significant contraction of its economy in 1991-92. Japan’s central bank had just popped the bubble economy with an interest rate hike on Christmas Day, 1989. But it seemed that Japan could work through the bad debts without too much pain. The kicker was that the U.S. recession took away Japan’s crutch of exporting its way out of trouble.
The situation quickly went from bad to worse. The problem was exacerbated by the Bank of Japan’s failure to understand soon enough that deflation, not inflation, was the main threat and cut interest rates promptly. Moreover, the government’s failure to recapitalize the banking system and enact reforms delayed the recovery further. In the end Japan lost one decade of growth, which Bruce Greenwald of Columbia University has estimated at $50 trillion in present value.
Mr. Greenwald also points to the U.S. in the 1930s as a parallel. Today it is largely forgotten that after the 1929 Black Friday crash, the U.S. economy, then a major exporter, was not immediately crippled. The true devastation of the Great Depression didn’t come until the early 1930s, when foreign retaliation for the Smoot-Hawley Tariff Act began to bite and the U.S. Federal Reserve kept monetary policy tight to ward off inflation, leading to a deflationary spiral.
Today China stands at a similarly precarious position. There are some important differences, such as the fact that its domestic bubbles were not as large as Japan’s. But then Beijing doesn’t have the full range of monetary-policy tools available to a developed economy, and the banking system is still recovering from the bad loans left over from the planned-economy era. China’s efforts to keep the yuan exchange rate stable by buying dollars and sterilizing these interventions by selling domestic bonds arguably is putting the monetary system under greater stress than Japan experienced.
If these parallels teach anything, it is that quick action is needed to prevent deflation from taking hold. In China’s case, it’s officially estimated that growth below 8% will lead to rising unemployment, since new manufacturing jobs are needed to absorb excess workers leaving the countryside. But the main concern is not so much the farmers, who can fall back on their land, but college graduates. University enrollments were increased nine-fold in the last nine years, and this year there are already reports that only a fraction of last spring’s graduating class has found jobs. Rising inequality and complaints about corruption could lead to a repeat of the 1989 protest movement.
The irony is that Beijing has been discussing the need to “rebalance” the economy and promote domestic demand for several years. But as long as the export avenue remained open, little concrete action was taken. Now it is probably too late for reforms undertaken now to have a meaningful effect in combating the downturn.
Nevertheless, the crisis could provide the impetus needed for China and other Asian countries to dismantle some of the government policies encouraging high savings and discouraging consumption. The recent granting of greater land ownership rights to farmers, for instance, could boost the incomes and access to capital of the rural poor. Investing in health care would not only boost spending immediately, but it would reduce the need for Chinese to save for the possibly of catastrophic illness. Likewise, increasing funding for education would remove another impetus for saving.
One radical measure Beijing could take that would have an immediate impact on savings incentives would be a relaxation of the one-child policy. Many scholars have linked the high savings rate in one way or another to the family-planning initiative started around 1980. Children are the original pension system, so having only one child means having to save more for retirement. And of course having children means a large outlay of expenses. The longer term benefits of a higher birthrate are also becoming obvious, since China faces a demographic time bomb as its population ages.
Ultimately the biggest obstacle to rebalancing the Chinese economy is the exchange-rate regime, which has outlived its usefulness. The costs of absorbing the inflows of dollars continue to grow more onerous, hobbling the PBoC’s ability to manage the money supply.
But more important, holding down the value of the yuan deprives consumers of spending power, while encouraging overinvestment in export capacity that has left China vulnerable to this crisis. A more freely floating exchange rate would allow Beijing to loosen capital controls, bringing the benefits of greater integration into the world economy and the opportunity to develop international financial centers. And it would create a natural mechanism for forcing firms to become more competitive and innovative instead of relying on low prices as their competitive advantage. The crisis would not be the ideal time to tackle this, however, since in the short term it would add to deflationary pressures.
It is too much to expect Asia to renounce its high-savings development model in the face of this crisis. But instead of relying on Keynes to get through the tough years ahead, a better approach would be to look for reforms that increase economic freedom as well as reduce the incentive for high levels of savings. Such policies should put Asia on a more sustainable growth track even after the U.S. consumer has started to buy again.
Hugo Restall is the editor of the REVIEW.
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