Foreigners often describe China as "different"; a mysterious land whose people have a perplexing way of getting things done. Yet, when it comes to economic data, foreign "experts" look at China as they would look at any other country. I am not talking about those who ignore the fact that China's government tweaks economic indicators to fit pre-defined goals. Enough has been written about that (here, here, here and here, for example). I am talking about the way in which well-regarded western publications look at real indicators, and the assumptions they make in the process.
This morning, for example, I received a newsletter from RGE Monitor, Nouriel Roubini's consultancy firm. Reading it, I learned that 'unlike many global markets, the residential property market in China is showing some signs of stabilization'. The facts are correct. The free fall in residential prices has stopped, and in some places there are even slight increases. A sign of recovery? not necessarily.
The newsletter did not mention the fact that China is (still) full of empty residential projects, and that the current growth is the result of aggressive government (proxy) investment in real estate projects. This means that China's real estate bubble not only far from being over, but it is actually being perpetuated and inflated. The "recovery" seen in the numbers is not driven by market forces and thus cannot be taken as an indication of local demand.
This superficial approach is not unique. The Economist just published an article vindicating "decoupling", the theory that 'emerging economies had become more resilient to an American recession, thanks to their strong domestic markets and prudent macroeconomic policies'. The author uses China as the theory's 'Exhibit A' since its 'economy began to accelerate again in the first four months of this year... Fixed investment is growing at its fastest pace since 2006 and consumption is holding up well'. The author did not, however, mention the fact that 20-30 million Chinese lost their jobs in the last six months (and that's only according to official figures) or that the 'fixed investment' is done directly or indirectly by the government and thus says very little about the true market sentiment.
The author did note that 'China's rebound will only be sustained if the economy shifts further from state-sponsored investment to private consumption', but by doing so he implies that the current "recovery" in China is indeed a result of private consumption. It isn't.
In reality, China's consumers will not start spending until the government provides them with access to adequate healthcare and education. Even if this was China's top priority, it would take many years to implement. But is it really a top priority? A look at China's $586b stimulus package shows that most of it is devoted to infrastructure (read: real estate + extravagant government projects), disaster relief (read: pre-planned projects in Sichuan), and only 9% is dedicated to education and healthcare. For comparison, about 14% of America's stimulus package is devoted to healthcare education. This is out of a larger package ($787b) in a country with an educated population and markedly better healthcare facilities.
Even during peaceful times, when the global economy is functioning "properly", experts talk mostly about China's GDP growth, investment in fixed assets, and the real estate and stock markets. By doing so, they are missing a big part of the story, or even the whole plot. Lao Zi once wrote that 'ruling a kingdom is like cooking a small fish', It should be done with great care and sensitivity. When it comes to China, westerners seem to be 'judging a kingdom like meeting a fat kid' - they evaluate the country's development based (mostly) on its overall economic weight.
Imagine meeting a potential business partner online and evaluating him according to his weight. He tells you that he weighs 80kg and - judging from your own experience - you assume that he is a mature individual. If you were to go and meet him in person, you would discover that he is actually an overweight 8-year-old kid. Not only is he not fully mature, but he also has severe health problems. Not exactly the type of person you want as a business partner. But you'll never know unless you visit.
China is a fat, unhealthy kid. Its ignorant friends in the west encourage it to keep eating the same stuff in order to "maintain growth". Sadly, this encouragement might mean that China will stick to its non-viable development model and never grow up.
That's good, and it's true.
I by and large agree with your whole post, except for the last paragraph: Whatever the "ignorant friends in the West" say, their "encouragement" will anyway have little impact on what Chinese politicians decide to do...
Thanks, Chris.
@Tom: Westerners have considerable impact on China's development in at least two ways:
1. A big part of China's growth comes from foreign direct investment. On top of that, there's also indirect investment through technology transfers, and consumption of Chinese goods.
2. The international community lets China get away with various behaviors (currency manipulation, for example). This, in turn, prevents China's leaders from choosing a more viable course.
Excellent article.
I have been writing and talking on US TV (principally Bloomberg) about China's GDP claims and whether or not they are credible for some time.
I don't understand why economists merely believe what they are being told by the government without doing any independent verification of the data.
Below are three links to articles that maybe interesting to readers.
China's Economic Growth Claims Lack Credibility.
http://www.firstcapital.com/blogs/mark_sunshine/?p=321
The Chinese Economic Miracle Maybe Unraveling
http://www.firstcapital.com/blogs/mark_sunshine/?p=245
The 8% Mantra
http://www.firstcapital.com/blogs/mark_sunshine/?p=236
I'm pretty sure no one is claiming China will grow at 10% forever, this is a straw man created by anti-Chinese scaremongers so that they can argue with themselves and get worked up over nothing.
The economist has a better article on the nonsense about GDP and power production.
Yes, but those figures about power consumption have been known since the beginning of the year. Now they publish them as a curious side story while they should have been mentioned in every serious article about China since the crisis began...
Actually they've been brought up several times for almost a decade now, a professor at UPenn or Harvard or Princeton has been saying that China's growth has actually been 5%, not 8-9%.
An article on theeconomist:
http://www.economist.com/displayStory.cfm?story_id=13692907
What do you think?
Of course they have been brought up, but regular reports on China's economy never mention these things or other key factors affecting the growth or the way it is spread, so too much is left for the reader to assume based on what he knows from his own country (as in the example I provided). You can see an article from the Economist from this morning talking about how US is so weak now while China is so strong. Very misleading.
I don't know, the economist has been fairly accurate and is definitely not pro-China... they tend to err in favor of the US in almost all calculations.
All I get is the sense that you're like Gordon Chang in that you're driven to "bring up bad news" about China out of some kind of anger or desire to prove something.
The main thing I hear about China's economy is that it is "export dependent" or "60% exports" or some inane nonsense, written by American pundits to gloat.
If you want to dig that deep you can see the obvious flaws in America's healthcare, education, infrastructure, social security society, and of course all the wars that will cost billions over the next few years.
China may have social welfare problems, but it's not gonna cost as much.
social security and society*
Lastly I don't see where they are saying "China is so strong". Looks like it's the anger talking again. They are just suggesting China open up their currency to speculative attacks from America and Europe as usual.
@captcha: I only have strong emotions about places I care about, mostly Israel and China. I am sorry if that sounds like anger to you. My post was not about why America is so great - which is not what I think - so no need for you to try to convince me why it isn't. The whole point is to show that judging China in a superficial way is misleading and harms China and anyone that has any relation to it.
As for the economist article - it talks about how the tables have turned and that America is on it's knees etc. without qualifying China's "lecturing" with any explanation of China's current problem or the reason they are "lecturing" America on fiscal policy is that they erroneously invested their future in the USD (for example...). It has nothing to do with being pro-China, it's a matter of providing adequate context to make sure readers get a proper idea of the situation.
Actually they've been brought up several times for almost a decade now, a professor at UPenn or Harvard or Princeton has been saying that China's growth has actually been 5%, not 8-9%.
It is Lester Thurow, who is at MIT, I believe.
http://www.nytimes.com/2007/08/19/business/yourmoney/19view.html
I blogged on a great journal article on how difficult it is to quantify China's growth even when you have good numbers. It also noted that in 1989 when the government claimed growth was something like 5%, it was actually negative. Thus Tiananmen. I'll see if I can find that article.
Olivia Chung had a nice piece in Asia Times on the wizardry with the numbers. very data driven and wide ranging:
http://www.atimes.com/atimes/China_Business/KE14Cb02.html
Michael
Thanks for the informative comment, Michael. As stated above:
"I am not talking about those who ignore the fact that China's government tweaks economic indicators to fit pre-defined goals. Enough has been written about that. I am talking about the way in which well-regarded western publications look at real indicators, and the assumptions they make in the process."
So, even when looking at the real growth numbers (be it 8,5, or 4%), mainstream media hardly ever looks at how this growth is distributed, what it is driven by, and what that means for China's future.
I added your links to the post.
Mainstream media is garbage. They are prone to exaggerations when it comes to all sorts of things about China, be it negative or "positive". Like saying 10,000 died at Tiananmen and then 3,000 and then 1,800. And then saying 1.2 million Tibetans died since the 1950s, and then 600,000, and then 300,000, and now they don't really know.
Pure sensationalism.
It also noted that in 1989 when the government claimed growth was something like 5%, it was actually negative.
I found Thurow's report to be a laugh, especially with this quote:
Assume, too, that America grows at the 3 percent rate it has averaged for the last 15 years.
That should be enough to discredit him.
More on mister Thurow...
He has achieved some notoriety for books he wrote in the 1980s suggesting that the Soviet Union, due to their command economy, posed a significant economic threat to the United States.
Quote from Olivia Chung's article:
the wizards of Beijing, it seems, are successfully transforming the economy with barely a hitch from one that is dependent on overseas sales to one thriving on domestic demand.
The alchemy alleged to be doing the trick
Pure, seething rage. Someone is unable to cope with the fact that developing countries might grow because they can't do anything but grow.
Auto analyst Peng Qing (not her real name)
Is her real name "Olivia Chung"?
are huge, according to another auto analyst, Zhang Yong (not his real name), who said he obtained his Public Security Ministry data through an "unofficial" channel.
Sorry, but this sounds as believable as Communist propaganda.
Gordon Chang and all the angry writers are about as believable as the CCP, i.e they don't really provide any substance. The "insights" from these foreign experts don't really help anyone.
If anything, all they do is slow down reform.
Chang definitely reads like he has a chip in his shoulder. Still, at least he looks beneath the surface while everyone else are making ridiculous assumptions about things they don't understand.
Snort... Gordon Chang looks beneath the surface? This guy has a long history of prognosticating about fissures in the the Chinese economy, far longer than your budding career Dror... and his analysis has been proven false on just about every point. If you're going to criticize the Chinese economy, you'd be well served to read his book (Coming Collapse of China) published in 2001, lest you make his mistakes.
His many predictions include:
- an assertion that WTO entry would destroy Chinese enterprises, unable to compete with foreign imports,
- in particular, American/Japanese auto-makers would decimate Chinese auto-makers (snicker)... and the Chinese car market would never develop significantly,
- lingering NPL and hidden pension needs in the Chinese economy would make financial reform impossible, lead to the collapse of the state-owned banks, and eventually bring down the Chinese financial system as a whole.
It's rather ironic, really. If you replaced "China" with the "United States" in the context of Mr. Chang's bible... you would've ended up with a pretty accurate rendition of recent events.
You talk about empty commercial and residential real estate. Where is it? Where are the actual projects you're referring to? Can you back up your assertions with vacancy rates, net sqm construction and absorption rates over the past 5 years?
How long have you been in China...? 3 years? And you're going to wax poetic about long-term trends that you know nothing of? Those of us who've been following in China's development for a little longer have seen Chinese cities fill-up at an extraordinary rate, with entire districts that were farm-land a decade ago now bustling urban areas. With an urbanization rate that's still only around 40% of the population, there's still a huge amount of latent demand for further urban infrastructure.
@Just another Chinese: Thanks for the comment.
I am familiar with Chang's work, and my post was not about him or his predictions. I am the last to defend his conclusions and advise you to take up your grievances directly with him.
I enjoy reading articles/books that point out various trends that are not normally reported by mainstream media (or a variety of other experts). Still, I do not deal with fortune telling or predicting the future. The problems I talk about are ones that are already here - financial bubbles, environmental degradation, etc.
As for the residential and commercial projects, all the figures are known and I was not referring to any state secrets. Apart from what you can see with your own eyes, you are welcome to pick up a market research report about any of China's major cities and see who are the buyers, what are their considerations, and how what type of property is being sold and for how much.
As for my personal circumstances - I first arrived to China about 8 years ago and have been living here for a little over four years (about 4 years more than Paul Krugman...). I am young and healthy and would be happy to share my various adventures with you over a glass of beer (maybe I already have).
As for: "Chinese cities fill-up at an extraordinary rate, with entire districts that were farm-land a decade ago now bustling urban areas". That's very nice, but has nothing to do with my post. No one denies the fact that China is developing and still has a long way to go. Every bubble is driven by a real story that goes out of proportions. The tech bubble of 2001 was also based on real growth in internet users and incredible new technologies. Still, it was a bubble. Nonetheless, the internet did continue to grow since then, but at a different pace and under different 'leadership'. Catch my drift?
If you're talking about a substantial correction in real estate prices in the luxury residential segment, that's absolutely necessary, and fortunately has been happening. The crest probably came about last year, when CCTV broadcast a 30 minute special feature that essentially ended with a message that real estate speculators must (metaphorically) die before the industry revitalizes itself. While there is risk it *could* occur, I don't see any signs the luxury residential market has actually re-inflated itself.
Compare that, in contrast, to hundreds of billions of credit being thrown around by the US Treasury in the vain hope of re-inflating the US asset bubble.
If you're suggesting that there's high vacancy in office/retail or lower-end residential real estate markets... well, you told me to pick up research reports. As it happens, I read them regularly. What are you looking at, and where do you see signs of danger?
I think CBRE's a decent resource:
http://www.cbre.com.cn/china/eng/marketreports.aspx
I don't see any signs of a market in great danger. Vacancy rates in class A/B office buildings in Chinese cities are at worst comparable, and often better than Western equivalents.
@Another Chinese: Thanks for another interesting comment. As you can see from the CBRE report, it only looks at "Prime Office Market" - the part of the market that is comparable to the office market in the US. The problem is that there's lots of other projects which are not covered by these reports. Reports of this kind are superficial and give you a very skewed picture of what's happening on the ground. Even in more elaborate, tailor-made reports it's difficult to figure out what's going on since, as noted above, on the one hand there is real theoretical demand, and on the other hand, there's real over supply in many segments.
For example, you can see a chart showing you that office rents are going up, and assume that the market is under supplied. Then, you look at the number of office projects that have been built and see there's plenty of then. You ask some questions and you realize that rents are indeed going up, but since only 2 projects in the whole city are actually being rented out, these are the ones the figures come from. All the others have been strata-titled and sold. In some cases, if you visit those "office" projects, you might find that the average unit size is 60-120sqm, and that it includes a bathroom and small kitchen.
I have plenty to say about RE consultancies in China (CBRE etc.), but since this is part of my business, I will keep it to myself. I am happy to discuss things in person with you.
As for China's real estate market in general, as you know, scores of Chinese people invested their savings (and their parents and grandparents' savings) in new apartments. These apartments are over priced. The government cannot allow a real correction to occur since it would mean slicing a big chunk of the savings of urban dwellers. Add to that the fact that another big part of China's savings is invested in the USD, and you get a 'middle class' whose savings are under serious threat.
Yes, in America there was too much leverage, but this leverage means that now that the RE bubble there has collapsed, banks were the ones who took most of the pain. In China, since there was no leverage, the buyers will take the pain directly. When you make RMB 8,000 per month and buy an apartment for RMB 800,000 using your family's lifetime savings, and then see the value of this apartment go down to RMB 400,000.... it hurts. A lot.
normally reported by mainstream media
Once again, the mainstream media is overwhelming critical and condescending of everything Chinese not just the economy. What "mainstream media" are you talking about? Some fringe network none of us have ever heard of?
The problems I talk about are ones that are already here - financial bubbles, environmental degradation, etc.
The bubbles have been popping, and the environmental damage is something they are working with right now.
These apartments are over priced.
Again, if the situation is as you describe (buyers priced out of the markets by speculation) a "bursting bubble" won't cause a long-term loss as in Japan or America, where prices will probably never return to 1980s/2007 levels until three, four decades later.
Yes, in America there was too much leverage, but this leverage means that now that the RE bubble there has collapsed, banks were the ones who took most of the pain. In China, since there was no leverage, the buyers will take the pain directly. When you make RMB 8,000 per month and buy an apartment for RMB 800,000 using your family's lifetime savings, and then see the value of this apartment go down to RMB 400,000.... it hurts. A lot.
If they're "leveraged by the banks" it means either you end up with no competitive banking system, or the government increases taxes which passes the loss right back to you while worsening the entire nation's financial position.
If you make 8000 RMB a month and buy an apartment for 800,000 RMB, and then the value of the property drops to 400,000 it hurts of course, but then again your income is rising by 8-10% a year and the RMB is appreciating a further 3-5% a year while housing prices will recover in the long run as wages catch up.
In America, no such thing will happen.
Thanks, Captcha. It looks like you agree with what I say but claim that everything will be ok because China has a bright future.
If you think that consumers in China could absorb losing half of their family's saving and take it easy while they wait for the value to come back to them over a long period of time, good for you. Remember, too, that during this period - after seeing their savings being cut by half - they are also expected to save less in order to help China become a consumption-based economy. So far, this theory does not seem to work.
As for America ending up with 'no competitive banking system' - China, by definition, has no competitive banking system.
As for your point about mainstream media - I'm not sure what you mean. Please explain. Note that I am not talking about pro-China or anti-China. I am talking about looking at the details and not just macro indicators.
btw RE prices did not fall 50% in China yet, I was just operating off of that theoretical- definitely not in all areas.
And no, it isn't going to take a "long period of time" for Chinese RE value to rise again. As was said before, people need to live in something. Once they are able to afford moving, they will.
As I said before, the mainstream media is worthless. They are extremely anti-China, so you complaining about a pro-Chinese "mainstream media" is unfathomable.
If you think that consumers in China could absorb losing half of their family's saving and take it easy while they wait for the value to come back to them over a long period of time
I might as well say "if you think consumers in America could absorb losing 90% of their family's saving and take it easy while they wait 100 years for the value to recover". You're taking the worst case scenario for an individual or a family, and trying to extrapolate it to the entire nation out of some inexplicable desire to make things look worse than they actually are.
Sorry for the double post.
I just checked some reports and all I'm seeing is that the most overpriced properties dropped 10-40% since the beginning of the crisis, and the decline is slowing. So losing 50% of your family's savings, while dramatic and amusing, is so far off the mark that I have to question your sources.
I know in America and Western Europe RE prices have dropped by 30%, and some expect a further 10, 20% drop.
The difference is that China's population will eventually be able to afford to move into these new homes, in Europe and America nothing short of importing 300-500 million people from the third world will bring prices back up to what they were in 2006/7
Again, you mention distortion of the facts as a major problem facing China.. so why do you do it so much?
Captcha: My whole point is that the prices here did not go down enough and it looks like the Chinese government will not let them go down enough, and thus maintain the bubble and over-capacity instead of letting a full correction occur and embark on a more sustainable path.
When an average American loses 20% of his savings and an average Chinese loses 20% of his savings, they both feel the pain, but the pain in China has a very different flavor and effect.
As for losing 50% of their savings - this was a hypothetical point. Please read it again. No need to look for sources.
As for your last point, my instinct says that there are more empty apartments in China than in the US, and that the apartments in the US have a better chance of being filled in the medium term than the ones in China. In any case, my post was not about China vs. America or why China is bad or America is good. You are barking up the wrong tree.
I think we are getting bogged down in the details. Personally, I don't think that a centrally-managed economy can survive and prosper over a long period of time. I am equally concerned about government intervention in the US and in China. Still, I think that China is more fragile and volatile.
My whole point is that the prices here did not go down enough... instead of letting a full correction occur and embark on a more sustainable path.
... a correction, in this case, would be raising incomes so the 800 million possible buyers can start shopping.
It's not japan we're talking about here.
and that the apartments in the US have a better chance of being filled in the medium term than the ones in China.
Well, I do know places where there are 14-20 Mexicans in each rental property so you might be right there.
Thanks, Captcha.
- How exactly do you raise incomes without sustainable growth?
- Mexicans are not necessarily a bad thing. For better or worse, America is changing. So far, it did better than any other country in absorbing immigrants.
- How exactly do you raise incomes without sustainable growth?
You can raise incomes with unsustainable growth. This is sometimes called "industrialization", but when we talk about the Chinese it's called "unsustainable growth". I don't know which "unsustainable growth" you're talking about, but I'm assuming you're talking about the environment and society like everyone else who uses the phrase.
- Mexicans are not necessarily a bad thing. For better or worse, America is changing. So far, it did better than any other country in absorbing immigrants.
Because the immigrants killed all the natives. I might have to remind you, the South Chinese and North Chinese (as racially different groups) have assimilated far better. You might as well say the Jomon absorbing the Yayoi is more successful than America's farce of multiculturalism.
No one said Mexicans were a bad thing. All I said is that America has a lot of people coming in.
- I can't see how your point about industrialization counters the fact that China has an RE bubble. Do you suggest keeping prices high until China becomes fully industrialized? It might take a while. And yes, my point is not that it is "not nice" to develop in this way, my point is that it is not viable. i.e - not going to work.
- Sorry, but I still do not see how a "pissing contest" about which country killed more people in the past is relevant to our discussion. We're talking about what China is today, and what it should aspire to become. Looking for excuses based on past atrocities is unproductive.
-Do you have problems keeping track of the discussion? As I said before, everything that was said is written on your blog in case your memory fails.
RE is not all of China's growth. If the "RE bubble" is unsustainable, wages will rise from other sectors. That is what will raise incomes and help ease any "RE bubbles".
-If it's not relevant then don't bring it up. I take it you concede you lost this argument (that you started) as well. It's relevant because you're the one who started the pissing contests by suggesting we compare how many people died under Mao and how many people died under American influence, in Russia or Germany.
Captcha - i'll ignore your point about Mao since it has nothing to do with our discussion. As for "wages will rise from other sectors", i'll be happy to hear your theory on how that is going to happen. You can write about it on your blog . . .
I wonder why people are responding to comments from captcha and just another chinese. We all know what their agendas are and the ways they dig themselve out from a hole.