To understand China one needs to understand Deng Xiaoping

Deng led a long, complicated life that included time in France and the Soviet Union as a young man, years as a military leader and Communist Party official, and a long, fraught relationship with Mao Zedong, who twice purged Deng but never destroyed him. Vogel describes Deng as a pragmatic politician who led China’s embrace of technological innovation and worked to overcome the damage of Mao’s Cultural Revolution, but who also approved the crackdown on the Tiananmen Square protests of 1989. He wasn’t usually the source of the ideas that were transforming China, but he was the only person equipped to implement them. 

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China economy

In 2010, China’s ordinary-trade balance recorded a $71 billion deficit with East Asia and surpluses of $44 billion and $23 billion with the US and Europe, respectively. Europe’s ordinary exports to China increased from $85 billion in 2009 to $115 billion in 2010. By contrast, America’s ordinary exports to China increased more slowly, from $50 billion in 2009 to $64 billion in 2010. Thus, firms in East Asia and Europe are benefiting more than firms in the US from increasing demand in China.

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If imbalances between the US and China are thus unsustainable, it makes sense for policymakers to pursue a soft landing. In the case of the US, this requires recognizing that the government faces a budget constraint. For China, it means redirecting saving away from reserve accumulation towards cash-strapped small and medium-size enterprises, as well as much-needed investments in education, health care, and affordable housing.

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China paper of the day: When Fast Growing Economies Slow Down

When Fast Growing Economies Slow Down: International Evidence and Implications for China
According to research by Barry Eichengreen, Donghyun Park, and Kwanho Shin:

Using international data starting in 1957, we construct a sample of cases where fast-growing economies slow down. The evidence suggests that rapidly growing economies slow down significantly, in the sense that the growth rate downshifts by at least 2 percentage points, when their per capita incomes reach around $17,000 US in year-2005 constant international prices, a level that China should achieve by or soon after 2015. Among our more provocative findings is that growth slowdowns are more likely in countries that maintain undervalued real exchange rates.

That sounds pretty soon! If we look at some numbers of China GDP per capita (source):

. . . this means that in four or five years (approximately, given the the different base years) China's GDP per capita is going to more than triple [what is missing?]. This is much more than what one would expect from the calculation of the rule of 72, according to which China's GDP per capita will double by 2018 (approximately). China might well be an exception to this rule as well, given its high productivity, and specially high capital accumulation.  

China, three graphs of the day

Oil prices

I just had a conversation about the Chinese economy, specifically about why inflation is increasing recently. It is related with the increases in the prices of oil (graph 1), but also to the expansive monetary policy in China, this is increasing the CPI (graph 4). Why is China expanding the money supply at rates of 20 to 25%? They want to feed the high rate of economic growth (close to 10%), but also they want to maintain the fixed exchange rate. Given the high influx of US (proxy by FER, graph 2), in order to maintain the fixed exchange rate they are printing more money. Graph 3 shows a comparison with the US money supply.

Source of graphs

Paper of the day - The Future of Chinese Growth

by David Beim

Abstract

China’s real GDP has grown at an average annual rate of 10% for the last 30 years. A period of such super-growth is historically most unusual and now is likely nearing an end. The devices that have stimulated growth in the past – heavy capital investment and a massive focus on exports – face constraints: capital investment faces diminishing returns, and exports are undermined by wage inflation. Both constraints are visible in China today. China needs to stimulate domestic consumption of its prodigious output, but this is easier said than done. A push to do so will damage the export model well before it succeeds in building a replacement.

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