Labor and unemployment

You are currently browsing the archive for the Labor and unemployment category.

More public worrying about the Chinese stimulus

July 24, 2009 in Fiscal stimulus, Labor and unemployment, Money growth, NPLs, Real estate by Michael Pettis | 44 comments

Although I am often surprised by how eagerly foreign commentators have embraced the Chinese fiscal stimulus story and see it as a great, shining success, I am happy to say, mercifully, that in China there is a lot more skepticism.\’a0 There seems to be a serious debate among Chinese policymakers over the stimulus package.\’a0\’a0\’a0

\

The debate lists, on one side, people centered on the PBoC, the CBRC and the National Bureau of Statistics, who are worried that the stimulus may be exacerbating Chinese imbalances.\’a0 On the other side are people in the State Council, the Ministry of Commerce and in the provincial and municipal leadership who are more worried that any half-heartedness will lead to a significant rise in unemployment.\’a0\’a0\’a0

\

In the past week or so the former, with whom I am of course in complete sympathy, seem to have become increasingly worried and have been making a lot of noise.\’a0 The formidable Hu Shilu, editor of Caijing, (and by the way Evan Osmos wrote a very interesting article about her in the current New Yorker) recently made a strong case against continuation of the current fiscal program when she wrote in an editorial this week that \’93a policy that encourages loose lending and investment is driving China’s economic engine down an old, unsustainable path.\’94\’a0

\

Various signals suggested China’s economy had returned to a stable track by the end of the second quarter, giving us an opportunity to reassess macroeconomic policy.\’a0 Data released by the National Bureau of Statistics showed that China’s GDP rose 7.1 percent in the first half of the year, and 7.9 percent in the second quarter alone. Apparently, China’s economy has bottomed out.\’a0

\

Arduous efforts contributed to this upward trend. External developments have had a much more serious impact on China’s economy recently than during the Asian Financial Crisis a decade ago. However, first half growth was only a bit below the level recorded in 1998. And although heavily dependant on exports, China may yet achieve its 2009 growth target of 8 percent, even while other major export countries report contractions.\’a0

\

These achievements could intoxicate Chinese policymakers. But we see no miracles here. In fact, economic growth recovery in China is being driven by investment. Some 6.2 percent of the country’s first half GDP growth rate can be credited to investment, while consumption accounted for 3.8 percent. The net export business contributed a minus 2.9 percent to the growth rate figure.\’a0

\

Hu makes the point that the \’93surprisingly high\’94 Chinese growth is neither surprising nor cause for celebration.\’a0 It is the automatic outcome of a huge stimulus, and the real question, as I have argued many times, is not whether high current growth indicates that China has turned the corner on the crisis (it most certainly has not, in my opinion), but whether the cost of achieving this growth is excessive and will lead to more difficult conditions in the future.\’a0

\

It’s long been acknowledged that China’s traditional methods of achieving economic growth cannot be sustained. However, we are now racing down this traditional path of economic development.\’a0\’a0

\

Dramatic increases in the currency supply and lending have been backing this investment, the single most important engine of economic growth. M2 increased 28.5 percent and yuan-based lending rose 34.4 percent in the first half, setting new records for each. But nominal GDP growth was only 3.8 percent during the first six months of 2009. And these astronomical increases in currency and lending are a double-edged sword that can support GDP growth as well as endanger the economy.\’a0

\

\’85It’s high time we re-emphasize the actual policy of moderation. A moderately loose monetary policy is necessary for an unpredictable, downward-sloping economy. However, monetary policy that’s too loose will have more drawbacks than merits once an economy levels out. It’s only a matter of time before loose monetary policy leads to inflation and asset bubbles.\’a0

\

She concludes, very diplomatically I think:\’a0

\

In the current economic environment, the more quickly China’s economy grows, the greater the effort needed to adjust future methods of economic development. Now is the right time to consider the timing of exit from stimulus. The third quarter can be a crucial juncture.\’a0

\

She is not alone in criticizing the stimulus.\’a0 Another formidable lady, Wu Xiaoling, former People\’92s Bank of China vice governor, was interviewed by National Business Daily on Wednesday, and warned that the combination of excess capacity and excessively loose monetary policy was leading to asset bubbles.\’a0 According to an article in yesterday\’92s South China Morning Post,\’a0

\

“Under conditions of overcapacity, excess money supply will not lead to rises in price indexes, but it could generate asset bubbles,” she said at a forum in comments reported by the Chinese-language National Business Daily.\’a0\’a0″The money has really gone out and if it is a time when there is no investment in the real economy and no one will put the money in banks to earn interest, then the funds will flow into the property market and stock market,” she said.\’a0\’a0

\

China’s central bank may have to raise banks’ reserve requirements to mop up excess liquidity, she said, adding that this was simply a tool for managing the money supply and should not be misunderstood as monetary tightening.\’a0

\

\’85Ms Wu said that China faced a dilemma in easing the rate of loan growth. Inflationary pressures would arise if lending continued at the same pace, but without sustained lending, many big projects may wind up unfinished because they are contingent on longer-term financing.\’94\’a0

\

Although an increasingly large number of Chinese academics and think tank researchers have been raising warning cries, I think she is the first official or ex-official to go so public with her worries. \’a0That doesn\’92t mean other public officials don\’92t act as if they are worried.\’a0 The CBRC for example announced this week the good news that the NPL ratio declined from 2.42% at the end of 2008 to 1.77% at the end of June.\’a0\’a0\’a0

\

Part of this reflected an actual decline in NPLs, and most of it of course reflects the surge in new loans, but the CBRC is not acting complacent.\’a0 They have reinforced credit control policies on second-home purchases and their spokesman insisted earlier this week that there would be \’93strict enforcement\’94 of the CBRC’s mortgage lending policy.\’a0\’a0

\

According to another article in Caijing, \’93the authorities have consistently been encouraging banks to raise their loan-loss coverage, reflecting fears that the massive surge in new credit extended in the first half may lead to a rise in bad loans.\’94\’a0 The South China Morning Post had this to say on that subject:\’a0

\

Beijing has required banks to raise their bad-loan reserve ratio to 150 per cent at the end of the year, forcing the lenders to set aside an additional 70billion yuan ($79HK.4 billion) as provision amid deteriorating asset quality, a fresh sign of China’s mounting worries about a backlash from its stimulus package.\’a0\’a0

\

Liu Mingkang, the chairman of the China Banking Regulatory Commission, told a government working conference over the weekend that all mainland-based banks including local units of foreign giants such as Citigroup \’a0and HSBC Holdings must boost their reserve ratio to 150 per cent, as risks were increasing amid a torrent of imprudent loans in this year’s first half.\’a0\’a0

\

“Rapid growth in banking loans has led to accumulated risks,” Mr Liu was quoted in a CBRC statement as saying. “Reckless operations of banks were seen as some banks rushed to extend loans without due diligence.”\’a0

\

The article goes on to quote She Minhua, a banking analyst at China Jianyin Investment Securities as saying “The requirement is basically a message that asset quality deterioration is deepening.\’a0 A serious problem will probably surface in 2010.”\’a0

\

And Zhu Hongren, spokesman for the Ministry of Industry & Information Technology, said earlier this week that China, the world\’92s largest steel producing nation, should curtail \’93reckless investments\’94 in the industry by withholding project approvals. \’a0According to an article in Bloomberg:\’a0

\

China’s demand for steel is about 500 million metric tons, less than the annual output capacity of 660 million tons, Zhu Hongren, spokesman for the Ministry of Industry & Information Technology, said at a conference in Beijing today. Zhu is reiterating figures given by the China Iron & Steel Association in February for last year.\’a0\’a0

\

Crude steel output in China rose to a record 266.6 million tons in the first half as the nation\’92s $586 billion stimulus package spurred demand from builders and carmakers. Annualized, this would beat the 460 million tons output forecast by the steel association for this year.\’a0\’a0

\

“The industry must produce according to market needs, and avoid adding to the excess capacity,” Zhu said. “They should avoid reckless investments. The government must also take action to curtail additional investments by companies that are already in excess.”\’a0\’a0

\

Even Justin Lin, the World Bank’s chief economist, and someone who has been more of a cheerleader for China\’92s economic model than a critic, made a statement that suggests to me an indirect criticism of the fiscal stimulus package, although he (and others) may disagree with my interpretation.\’a0 According to a July 15 article in the Telegraph:\’a0\’a0

\

\

Justin Lin, the bank\’92s chief economist, said factories running idle around world threaten to trap economies in a vicious cycle, risking further spasms of financial stress, requiring yet more rescue packages.\’a0 “Significant excess capacity has been built up and unless this issue is addressed, we will face a deflationary spiral and the crisis will become protracted,” he told an audience in Cape Town.

\

\’a0

\

Mr Lin said capacity use had fallen to 72pc in Germany, 69pc in the US, 65pc in Japan, and as low as 50pc in some developing countries, mostly touching lows not seen in modern times.\’a0 The traditional cure for countries caught in slumps is to claw their way back to health through devaluation, but this cannot be done today because the crisis is global. “No country can count on currency depreciation and exports as a way out of recession. Unless we deal with excess capacity, it will wreak havoc on all countries. There is urgent need for global, co-ordinated fiscal stimulus,” he said.\’a0\’a0

\

But for all the warnings I don’t want to exaggerate my account of rising skepticism among Chinese economists and regulators.\’a0 In spite of possible back-door attempts by the PBoC and the CBRC to manage the excesses associated with the fiscal stimulus, it is pretty clear I think that policy is still being managed largely by policymakers who are far more worried about rising unemployment in the short term than about asset bubbles and an exacerbation of the unbalanced development model.\’a0

\

The front page of today’s People’s Daily, for example, makes this clear.\’a0 They cite Finance Minister Xie Xuren’s insistence that “China will stick to proactive fiscal policy in the second half.”\’a0 According to the article, which is also carried in Xinhua:\’a0

\

China will continue its proactive policy and reform its economic structure in the second half of this year to boost economic growth, Finance Minister Xie Xuren said Thursday.\’a0 Xie told local financial bureaus at a conference in Beijing on Thursday that the proactive policies, which included increased investment from government, tax cuts and subsidies to low income families, had taken effect in stimulating a recovery of the national economy.\’a0

\

Xinhua today also prominently cites Peking University professor Li Yining as saying that “China should stick to its proactive fiscal policy and moderately easy monetary policy to fuel the economic growth as the foundation for recovery is not solid yet.”\’a0 I was not at the conference, so I wonder if professor Li\’92s comments were spun a little, because according to the Xinhua article he also said that “the current economic advance was pushed by investment, which was not the final demand \’96 stable economic recovery should be sustained by increased consumption,” and warned that Chinese banks should “improve credit quality and structure.”\’a0

\

So for all the rising skepticism among policymakers and scholars I think there is little doubt that we are going to see still more fiscal stimulus along the lines we have already seen.\’a0 If there is indeed global excess capacity, as Justin Lin says there is, I cannot see how an investment-driven program to increase capacity, and one which is almost certain to involve a huge additional misallocation of capital (after all, 8% growth given the sheer size of the fiscal and banking stimulus is actually a disappointingly low level of growth), can be much more than a short-term stop gap.\’a0 On the contrary, I think it will make the medium term adjustment even more difficult.\’a0

\

On that note I want to recommend Victor Shih’s excellent OpEd piece in the Wall Street Journal \’96 Asia yesterday.\’a0 He argues that:\’a0

\

Should this pace of credit expansion continue for the remainder of the year, China may well face a difficult trade-off down the road. The economy is unlikely to face a financial crisis because most of the debt is owed to domestic investors and depositors and China can still prevent large-scale capital flight. However, if inflation spikes next year, the central government will have to choose between shutting off credit, which will reveal a massive nonperforming loan problem currently obscured by a torrent of new loans, or an unprecedented level of inflation. High inflation is destabilizing, as it has caused major runs on the banks before. If additional credit expansion in the face of rising inflation is not an option, the greater the extent to which lending is uncontrolled at the moment, the bigger a nonperforming loan problem the central government will face in the future.\’a0

\

An often overlooked ingredient to China’s success story is that generations of top-level central technocrats like Chen Yun, Yao Yilin and Zhu Rongji time and again used their political influence to constrain local investment bubbles, thus forestalling high inflation and major financial crises. Past retrenchment campaigns were unpopular and controversial, but senior technocrats nonetheless maneuvered to stop uncontrolled local investment. As credit continues to rocket toward the stratosphere, China is in increasing need of such leadership again.\’a0

\

Before closing this long post I want to add three additional comments.\’a0 The first involves a conversation I had with one of my Tsinghua students who graduated in 2003 and now works as a currency trader.\’a0 Last year he bought a few apartments in Chengdu, the capital of Sichuan, his home province, for speculative purposes, and in spite of surging land prices he seemed to think it was a terrible trade.\’a0\’a0\’a0

\

I asked him why, and he said that although real estate prices had gone up dramatically since he bought the apartments, and he needed the money back, he nonetheless found himself unable to sell the apartments.\’a0 That\’92s a little weird, I thought.\’a0 Rising prices should mean eager buyers, but he can\’92t get anyone to take the apartments off him?\’a0\’a0\’a0

\

Has any other of my blog readers experienced anything similar?\’a0 Of course the historian in me remembers that during the final two years of the Japanese bubble, when land prices soared to levels never before seen in history, there were complaints by sellers that transaction volume was so thin that they couldn\’92t actually sell their land.\’a0

\

My second comment concerns university unemployment.\’a0 I have been writing for three years that unemployment among college graduates in China was soaring, and that authorities were understandably nervous.\’a0 So nervous, it seems, that they have been putting pressure on university to do more to get jobs for their graduates by limiting their next-year enrollment to the number of graduates this year with jobs.\’a0

\

There are, of course, two ways to improve statistics.\’a0 One way is to improve the underlying reality.\’a0 The second way is just to fake the numbers.\’a0 According to a Tuesday article in the People’s Daily:\’a0\’a0

\

\

A Shaanxi graduate said his university gave him a bogus work contract to inflate its post-study employment figures.\’a0 The former student said the contract was for a job at a local company which did not exist and carried the signature of his tutor.

\

I had no idea that I already had a job,” the student, who had been hunting for work, wrote anonymously on a website.\’a0 In order to ensure a high employment rate and deliver a satisfactory work report during the global financial crisis, some Chinese universities have been faking work contracts or employment agreement for graduates, Southern Metropolis Daily reported yesterday.\’a0\’a0

\

\

“Faking employment rates is not an isolated case and it has existed for years in China,” an education expert, who wanted to remain anonymous, told China Daily.\’a0 Due to fierce competition among universities, especially secondary-tier ones, the performance and reputation of a school largely depends on its employment rate after graduation, he said.

\

\’a0

\

According to unwritten rules at many universities, students cannot graduate if they do not find a job, the report said.\’a0 This means many unemployed students have to buy a fake job contract or employment agreement from small companies so that they can get their certificates.\’a0\’a0

\

This kind of thing will mean that the college employment numbers, a very useful figure for understanding the effect of economic growth in China, are now much less useful.\’a0 Already the People’s Daily article cites differences between the Ministry of Education numbers and a private firm\’92s numbers.\’a0

\

The Ministry of Education said that nearly two thirds of them [2009 college graduates] had already secured jobs before graduation in early July.\’a0 But this figure differs widely with an employment report from an independent consulting firm on higher education.\’a0 A report from MyCOS HR Digital Information Co said 58 percent of prospective graduates had not signed job contracts by the end of June and that 2 percent had contracts cancelled.\’a0

\

By the way the article has an interesting graph on the number of college graduates over the past eight years, for those who are interested.\’a0 The total number of university graduates has surged from 1.45 million in 2002 to 5.59 million in 2008 and 6.10 million this year.\’a0 The intervening years saw 2.12, 2.80, 3.38, 4.13, and 4.95 million graduates.\’a0

\

My third comment is about the great article in today’s Wall Street Journal on the explosive development of the Beijing music scene, a subject that all my friends know is one dear to my heart.\’a0 Anyone who is interested in knowing more about this scene should read it.\’a0

Tags: ,

Graduating this year?

March 31, 2009 in Demographics, Labor and unemployment, Real estate by Michael Pettis | 27 comments

Last week China Daily had an interesting article on job prospects for university graduates on the mainland. \’a0In 2006, as a reaction to rising unemployment among college graduates \’96 even with GDP growth buzzing at rates above 12% \’96 the government launched a program to help students find jobs as university teachers. \’a0The program has been expanded this year.\’a0 According to the article:

\

\’a0

\

Schools across China will hire 50,000 college graduates as short-term teachers this year to help ease employment pressure. \’a0That is almost triple the number of teachers hired last year.

\

\’a0

\

They will work under three-year contracts with local education departments and be paid by a special central government fund, the Ministry of Education said.\’a0 “Most of the jobs are only open to students who will graduate from colleges this year,” ministry spokeswoman Xu Mei said on Wednesday.

\

\’a0

\

The newspaper article comes with a graph listing the number of graduates in the past nine years. \’a0According to the graph, Chinese universities graduated 1.45 million students in 2002.\’a0 Five years later that number had risen to 4.95 million.\’a0 In 2008, 5.59 million students graduated and later this year 6.10 million are expected to graduate.

\

\’a0

\

Meanwhile job offers are declining.\’a0 The same issue of China Daily has a second article on the prospects for college employment in Guangdong province.

\

.

\

Only about 7 percent of the students who are about to graduate in July have managed to secure jobs till now, down 50 percent from the same period last year, the Guangdong education bureau said yesterday.

\

\’a0

\

About 331,000 local college students will graduate in July this year, 14.2 percent more than last year.\’a0 A large number of graduating students from other provinces have been coming to Guangdong in search of jobs, the bureau said, adding that almost 500,000 graduates would be applying for jobs in Guangdong this year.

\

\’a0

\

The demand for graduates has dipped by 20 percent in the wake of the global economic slowdown, Luo Weiqi, director of the Guangdong provincial education bureau, said.

\

Till March 10, only 7.61 percent of four-year college graduates have found jobs and signed work contracts, Luo said.\’a0

\

\’a0

\

In contrast, 8.43 percent of two-year or three-year college graduates, and 14.87 percent of all postgraduates have signed labor contracts, he added.\’a0 So far, the bureau has organized 36 job fairs for fresh graduates. However, according to Luo, the number of available jobs in finance and real estate is far less than previous year’s.

\

\’a0

\

I have heard that the Guangdong numbers are pretty consistent with numbers from other provinces, with roughly 30% of last year\’92s graduates still unemployed, and current graduates getting job offers at half the rate of last year \’96 already a bad year. \’a0The (small bit of) good news is that unemployment prospects may increase the likelihood of Chinese graduates starting their own businesses. \’a0Often in the foreign press I have read ecstatic paeans to Chinese entrepreneurialism, some thing that doesn\’92t jibe at all with my experiences as a university professor or in running a music club and independent music label, and the first of the two China Daily articles seems to confirm my skepticism:

\

\’a0

\

Special funds and subsidies have been earmarked to encourage college graduates to work in rural and grassroots positions or to start their own businesses.\’a0 However, “most graduates are focusing on jobs in large cities and few would like to start their own businesses”, Wang [Yadong, deputy director of Ministry of Human Resources and Social Security employment promotion department] said.

\

\’a0

\

A recent study by the MHRSS found only 0.3 percent of college graduates in 2007 started their own businesses. That is much lower than some developed countries where the rate is about 40 percent.

\

\’a0

\

If more Chinese graduates are forced \’96 by terrible job prospects \’96 to consider starting their own businesses, the long term consequences for China should be positive although, as everyone running a small business in China will tell you unendingly, starting and running businesses here is extremely difficult and, what is worse, it is never easy to know when you are and when you aren\’92t legally compliant.\’a0 Still, China really does need more entrepreneurialism and one of the unexpected benefits of the crisis may be to boost small businesses.

\

\’a0

\

As for the job creation program, today\’92s South China Morning Post has a more sobering assessment:

\

\’a0

\

New selection criteria are expected to eliminate existing substitute teachers from contention for 200,000 new teaching positions in village schools and give the edge to this year’s crop of 6 million or so university graduates, state media reported yesterday.

\

\’a0

\

Under regulations issued by the Ministry of Education, all candidates for teaching positions at mainland primary or secondary schools will have to pass a tough exam that many poorly educated substitute teachers would generally not be able to pass. \’a0It is the first time that the mainland has stipulated prerequisites for teachers.

\

\’a0

\

The article goes on to say:

\

\’a0

\

But education experts have raised doubts about the scheme’s feasibility, given that fewer than 59,000 graduates have joined since it was introduced in western provinces more than three years ago. Others say the plan simply brushes reality aside. \’a0“Even with government subsidies, rural teaching jobs are still the least attractive positions for the vast majority,” mainland columnist Song Guifang said. \’a0

\

\’a0

\

“Village schools could end up with no teachers if regulators raise the recruitment standards too high.\’a0 You will immediately understand that this action is leading you down a blind alley when you visit any of the 100,000 shabby village schools deep in the mountains. Qualified candidates that do pass the tough examination are very likely to pass up the offer.”

\

\’a0

\

Many substitute teachers in poor areas claim the Ministry of Education has sacked tens of thousands of their counterparts since 2006 without proper severance payments, all the while subsidising the expensive scheme to help jobless graduates. \’a0\’a0Substitute teacher Zhang Xicang – from Nayong county in Guizhou, one of the nation’s poorest areas – said he had taught there for a decade and was paid just 50 yuan a month, about 8 per cent of the pay that a fresh graduate would receive for the same job.

\

\’a0

\

More than 765,000 students graduate as teachers every year and compete for the 200,000 or so vacancies at primary and secondary schools.

\

\’a0

\

Regular blog readers know that I have worry a lot about graduate employment, not just out of concern for my students (most of whom mercifully don\’92t have to worry about unemployment), but also because I think of college employment as being a very useful way of understanding China\’92s development model.\’a0 If all the growth of the past four or five years has nonetheless been unable to absorb the employment needs of China\’92s university graduates, that tells us something both about the composition of job creation in China as well as the possible impact of a sharp slowdown.

\

\’a0

\

By coincidence an ADB report released today highlights this issue while cutting its growth forecast for China.\’a0 According to an article in today\’92s Bloomberg:

\

\’a0

\

China\’92s 4 trillion yuan ($585 billion) fiscal stimulus spending won\’92t create enough jobs, making unemployment the nation\’92s \’93most pressing issue,\’94 the Asian Development Bank said. \’a0\’93Investment projects in the stimulus package will generate jobs, but not enough to absorb the growing labor surplus,\’94 the ADB said. \’93Infrastructure projects are generally less labor-intensive than export-oriented manufacturing.\’94 The ADB cut its forecast for China\’92s economic growth this year to 7 percent from 9.5 percent in a report released in Hong Kong today

\

\’a0

\

I am more than a little skeptical about the 7% growth forecast \’96 I think that will be a tough target to reach \’96 and I suspect it will be further downgraded this year.\’a0 The article goes on to say:

\

\’a0

\

China will find it more difficult to create jobs than it has in the past, the ADB said. Between 2000 and 2007, 13.6 million non-farm jobs were created each year as growth averaged 10.2 percent a year, the ADB said. \’a0\’93Employment generation on this scale will be more difficult in the future because employment elasticity — the rate of employment growth to GDP growth — has declined in recent years,\’94 the ADB said.

\

\’a0

\

About 9 million jobs may be created this year by stimulus spending with growth in the region of 7 percent, said Wihtol. With 20 million migrant workers already jobless, that still leaves \’93quite a significant gap,\’94 he added.

\

\’a0

\

On a much more positive note last week\’92s South China Morning Post heralds a surge in real estate prices:

\

\’a0

\

A countrywide surge in sales since the beginning of the year has injected a sense of optimism that the worst is over for the mainland property market and a sustainable rebound is under way. \’a0The market improvement was proven by inventory depletion as well as price stability in some cities, analysts said. \’a0

\

\’a0

\

While optimists said home buyers had regained confidence after the government’s stimulus package including falling mortgage loans and lower transaction tax expenses, some said the rebound was spurred by pent-up demand and bargain prices. \’a0They were also concerned that prices were not following deal volumes higher.

\

\’a0

\

“It is definitely a sustainable volume recovery,” said Lee Wee-liat, a property analyst at investment brokerage Nomura International HK. \’a0Mr Lee based his call of a rise in demand since February – following a short-term rebound by the end of last year – on data compiled by Nomura showing a widespread surge in deal volumes nationwide last week.

\

\’a0

\

The number of property deals was up on the previous week’s sales by 24 per cent in Beijing and Tianjin, and 71 per cent and 19 per cent higher, respectively, in Qingdao and Dalian, the data found. In Shanghai, 19 per cent more properties changed hands. \’a0Guangzhou and Shenzhen recorded slight volume declines on the week, Mr Lee said, but remained at around the highest levels seen in the two cities for two years. \’a0The increasing pace of sales was beginning to reduce unsold housing inventory, he said.

\

\’a0

\

I have to admit that as a former investment banker I always take bullish statements from members of the selling profession with a big grain of salt. \’a0The Guanghua Students Monetary Policy Committee discusses property prices in each of its weekly meetings, and I don\’92t remember any of their comments being this optimistic. \’a0Needless to say the rebound of housing prices is very important both to confidence and to bank portfolio quality.

\

\’a0

\

On a different note I found another very interesting article in today\’92s South China Morning Post:

\

\’a0

\

Shenzhen foreign-exchange dealer Fang Zhen has been worried for months by a surge in people exchanging yuan for Hong Kong dollars based on fears that the mainland currency would plummet in value amid the financial crisis. \’a0The fears were so strong that they drove up demand for and the price of the Hong Kong dollar on the black market. \’a0

\

\’a0

\

People soon realised they could make quick money by buying Hong Kong dollars at official banks and selling them on the black market. Mr Fang said he had reported his concerns to his superiors at the China Construction Bank and industry supervisors at the People’s Bank of China. Since October, many people in Shenzhen had discovered they could make a profit from currency trading between official banks and the black market. The margin between the buying price for Hong Kong dollars listed by state banks and the selling price set by black market dealers was growing. By the Lunar New Year, the gap was up to half a percentage point, Mr Fang said.

\

\’a0

\

The widening spread between the official and underground prices was spurred by expectations that the central government would heed calls from influential think-tanks since late last year for depreciation of the yuan against the US dollar, to help beleaguered exporters.

\

\’a0

\

Two weeks ago I wrote about the latest (rumored) reserve figures for January and surmised that there were at least $20-30 billion in hot money outflows that month.\’a0 The SCMP article is consistent with my assumptions.

\

\’a0

\

And finally, on a completely different note, my student Gao Ming is writing a paper that involves a mention of the Mexican crisis in 1982. \’a0He asked me some questions about President Lopez Portillo\’92s failed attempts to defend the peso, and that question led to some searching. \’a0In so doing I dug up an old quote that I had forgotten. \’a0During the oil boom of the latte 1970s, when every expert knew that oil prices would soar forever and would result in a major realignment of geopolitical forces, the president, presiding over Mexico\’92s then-massive oil wealth, ecstatically announced that his job was to administer the era of Mexican abundance (\’93\’a1Vamos a administrar la abundancia!\’94 he proclaimed).

\

\’a0

\

He went on to say: \’93En el mundo de la econom\’eda los paises se dividen en dos: los que tienen petr\’f3leo y los que no lo tienen. \’a1Y nosotros lo tenemos!\’94 which translates as: \’93In the world of economics there are two types of country: those that have oil and those that don’t. \’a0And we have it!\’94

\

\’a0

\

What does this have to do with China or the world financial crisis?\’a0 \’a0Perhaps not much, but it is good to remind ourselves about how utterly wrong we can be about predicting major changes or historic turning points.\’a0 By the way Gao Ming\’92s favorite part of the story was my telling him that for years after his failed defense of the peso (\’93We will defend the peso like a dog!\’94 he shouted), whenever ordinary Mexicans saw him in public they started barking like dogs.\’a0 Mexicans have never lost their very healthy skepticism, it seems.

\

\’a0

Tags: ,

No, I was not disappointed by Premier Wen\’92s speech

March 5, 2009 in Economic growth, Labor and unemployment by Michael Pettis | 40 comments

Strangely enough I think I am among the least disappointed people about Premier Wen\’92s speech this morning during the opening of the National People’s Congress. Like most people I think there was very little of substance in the speech except the usual statements about boosting consumption, maintaining growth, and promoting social welfare \’96 all easier said than done \’96 and I have already argued many times, in a recent blog entry, for example, and in today\’92s WSJ Op-Ed piece, that China\’92s development model and financial system make it very difficult for China to boost consumption in the short term except by boosting investment, which is both slow and contrary to China\’92s role in the global crisis.

\

\

The main thing I got from his speech is that while Premier Wem claims that China is ready significantly to expand its stimulus, for now policymakers plan to wait and see what are the effects of the current stimulus spending. This makes sense, I think, because there is a real risk that continued deterioration in the global environment and rising domestic unemployment may panic the government into throwing everything they can into the stimulus mix.

\

\

And if they do, what will that accomplish? Global demand is contracting so there is no way to get around the fact that Chinese overcapacity will have to decline, and since it cannot decline sufficiently via a sharp increase in net domestic consumption, it will inevitably decline in the form of reduced production, especially as the threat of protection, which Wen explicitly addressed, rises.

\

\

I think to a certain extent this was recognized by the premier. According to Xinhua\’92s coverage of the speech:

\

\

When delivering a government report to the annual session of the Chinese legislature, he said that the global financial crisis continues to spread and get worse. Demand continues to shrink on international markets; the trend toward global deflation is obvious; and trade protectionism is resurging.

\

\

“The external economic environment has become more serious, and uncertainties have increased significantly,” he said. “Continuous drop in economic growth rate due to the impact of the global financial crisis has become a major problem affecting the overall situation. This has resulted in excess production capacity in some industries, caused some enterprises to experience operating difficulties and exerted severe pressure on employment,” according to the Premier.

\

\

But what if policymakers try to force the problem away? The risk is that they cause a massive increase in investment in the hopes of boosting employment, but if this boost comes as a consequence of building even more capacity, there are, in my opinion, likely to be two very dangerous outcomes. First, they will enter next year with even more excess capacity, and second they will have weakened the banking system further and increased government direct and contingent indebtedness.

\

\

If the world recovers quickly, then none of this will matter. But if it doesn\’92t, China will face 2010 with even more excess capacity and in a much weaker fiscal position to combat the contraction.

\

\

There were a few worrying aspects to the speech. Recently there has been an increasing chorus among exporters demanding RMB depreciation, and three days ago Commerce Minister Chen Deming said that February\’92s trade figures would be much weaker than January’s. According to an article in the South China Morning Post:

\

\

Mr Chen did not rule out the possibility that the country would adopt some trade protection measures but said it would resist out-and-out protectionism. “Trade protection does not equal protectionism. Some measures are allowed under the [World Trade Organisation] framework,” he said.

\

\

I am not sure I understand how trade protection is different than protectionism, except perhaps in a strictly legalist sense that will hold little water in the global debate. I would propose, if anyone wanted my opinion, that the world\’92s leading exporter by far of overcapacity \’96 and the only major country that has seen its trade surplus surge during the crisis \’96 does not need to push exports, especially not via any form of protection, legal under WTO rules or not.

\

\

More worrying, at least superficially, it seems that it was not just Chen who is making these kinds of noises. The People\’92s Daily, in reporting today\’92s speech by Premier Wen, had an article with the kind of headline almost designed to catch my eye: \’93Wen’s report urges unslackened efforts to promote export.\’94 According to the article:

\

\

China “must not slacken efforts” to promote export amid a sharp decline in external demand and growing international trade protectionism, Chinese Premier Wen Jiabao said Thursday, pledging reinforced government support.

\

\’85″We will continue to diversify our export markets and compete on quality, enhance traditional export markets, and energetically open up new markets,” said Wen. The government is to take a series of measures to relieve the difficulties of exporters and to ensure steady growth in foreign trade, according to Wen.

\

\

The rest of the article was a little less worrying, suggesting mostly anodyne feel-good measures

\

\

A central government fund for trade development will be increased, eyeing to cultivate brand-name export products and support small and medium-sized enterprises in expanding their international markets, Wen said. To improve the country’s financial services for importing and exporting, the government will expand the coverage of export credit insurance, and encourage financial institutions to develop export credit, he said.

\

The government will adjust the prohibited or restricted commodity categories of processing trade, and encourage the relocation of export processing industries from the eastern to the central and western regions, Wen said.

\

\

\

Perhaps all of this is more designed to ward off continued attacks by a frantic export sector than to represent a real attempt to force export growth. Let\’92s watch the trade figures over the next few months. China has only just begun to feel the impact of sharply declining exports, and is suffering a lot less than most other Asian countries.\’a0 This should change soon.
\

\

Tags:

As deficit countries contract, can surplus countries be far behind?

January 10, 2009 in Fiscal debt and deficits, Hot money, Labor and unemployment, Policy by Michael Pettis | 10 comments

The US loses the most jobs since 1945, the Financial Times headline blared out yesterday. According to the article:

\

The US economy lost more than half a million jobs in December for the second month running, figures showed on Friday, making 2008 the worst year for job losses since 1945 and intensifying pressure on Congress to pass a fiscal stimulus. The number of jobs lost during the year reached 2.6m, while the unemployment rate \’96 4.4 per cent before the credit crisis \’96 jumped to 7.2 per cent in December, its highest level in 16 years.

\

Yesterday\’92s Telegraph was not a whole lot warmer on the subject of Europe. It had an article entitled \’93Europe’s economy contracts at rates not seen since 1930s,\’94 which started off with:

\

German exports and industrial orders have both plunged at the steepest rate since modern records began and Spain’s unemployment has surged above three million, capping one of the most disastrous days for Europe’s economy since the Second World War.

\

It is pretty obvious that consumption in trade deficits countries is adjusting at a breakneck pace \’96 \’93adjusting\’94 being a word often used by economist\’92s to mean \’93the party\’92s over\’94. The rising savings rate required by households to repair tattered balance sheets has not just meant an equivalent decline in consumption, since this rise is occurring so quickly that income is declining. The total drop in consumption is, and will continue to be, severe.

\

With consumption declining so quickly, and fiscal spending so far unable to keep pace, what does this do for countries exporting excess production? In some trade surplus countries \’96 i.e. Germany \’96 the predictions some of us had been making about the \’93second stage\’94 in the crisis, in which trade surplus countries get hit with deeper and longer-lasting adjustments, seem already to be coming true. Exports are collapsing, and with no increase in domestic demand to compensate, it is pretty hard to imagine how businesses are going to cope.

\

For all the attempts by the government to keep confidence up, Chinese businesses, not surprisingly, are worried. Yesterday\’92s South China Morning Post had the following article:

\

Business confidence in the mainland plunged in the final three months of this year to an eight-year low as the mounting effects of the financial crisis weighed on exports and industrial output, an official survey showed on Friday. The business confidence index fell 29.2 points in the fourth quarter to 94.6, the National Bureau of Statistics said. That is the lowest reading since the start of 2001, the earliest date for which official figures are available.

\

Hardest hit were manufacturers, hurt by shrivelling demand in the United States and Europe and a weakening domestic property sector. Their sub-index plummeted 32.1 points from the third quarter to 87.2. That reading is in line with two purchasing managers\’92 surveys published earlier this month, which showed a continued contraction in the sector, as well as economists\’92 expectations that exports shrank more quickly in December.

\

The debate locally about what caused the trouble and what to do about it (and not incidentally, who to blame) continues strong, and recently two things seem to have been added to the stew. One, the China-trade-imbalance argument has gotten enough traction within China that suddenly the debate seems to have erupted into the spotlight. A number of local analysts, especially critics of both the left and the right, have been arguing that Chinese monetary and fiscal policies may have been part of the root cause of the imbalances that led to the crisis.

\

Regular blog readers know that I won\’92t find this argument at all surprising, but local policymakers are inordinately sensitive to being blamed for anything, and the official position is that China is simply an innocent bystander in a problem wholly concocted and hatched elsewhere. However an increasing number of Chinese economists and academics seem to be challenging that position, so much so that the People\’92s Daily posted a rather angry editorial three days ago titled \’93U.S. blame game cannot change facts of financial crisis.\’94 The article blasts Paulson and Bernanke for saying that \’93a failure to address the rise of emerging markets and resulting imbalances was partly to blame for the global financial crisis,\’94 and concludes:

\

Imbalances in global trade and investment did have a role in the crisis but were not at the root of the problem. Loose supervision that helped pump excessive dollars into circulation was the root cause. When a morally upright person is mired in difficulties, he or she will engage in introspection rather than shift responsibility. China has moved to cope with the problem with a stream of measures and so have other large world economies.

\

It is not time to play a blame game. Regulators in the United States might not want to miss the chance that they failed to seize before the crisis, when property companies, investment banks and insurance companies juggled various financial products and Wall Street “elites” snatched tens of millions out of the bubble.

\

It is hard to argue with these conclusions, but a cynic might wonder if any of the participants in the crisis would be considered, by this argument, \’93morally upright.\’94

\

The second thing we seem to be hearing a lot of is concerning capital flows and whether or not China is experiencing hot money outflows. We are all still trying to figure out what is happening to capital flows and to the composition of reserve accumulation (or is it reserve dissipation?). In a recent note, Logan Wright of Stone & McCarthy tries to back out the things we know to get some sense of what is happening to capital flows.

\

He concluded in an email to me that was attached to his research report that \’93outflows of around $100-150 billion for the quarter seem within the realm of possibility, but we won’t know anything until we see the data,\’94 but was at pains to establish that he is only guessing. His guesses would be easier to dismiss if a SAFE official hadn\’92t made a rather surprising announcement four days ago. According to Bloomberg:

\

China faces a threat of “abnormal” cross-border capital flow because of global financial tumult, the country’s foreign exchange regulator said Tuesday.

\

I accidentally erased the article and can\’92t get it back, so I can\’92t quote much more from it, but I do remember finding the whole thing a little odd. There was no clear explanation of what was \’93abnormal\’94, but all the evidence suggests that money flows are not behaving as well as we would want them to. Other interesting official commentary last week included the following, from an article in Tuesday\’92s South China Morning Post:

\

The mainland’s financial position will be difficult in the year ahead as revenues fall and spending surges, Minister of Finance Xie Xuren warned yesterday. Painting the most sombre picture of the government’s finances in years, Mr Xie said that shrinking corporate profits caused by rapidly slowing economic growth, as well as tax cuts, would lead to a drop in revenue, while government measures to boost growth would add to spending.

\

\

\’93[It] will be a very difficult year,\’94 Mr Xie told an annual national meeting on fiscal affairs in Beijing. \’93The problem of unbalanced income and expenditure will be prominent in 2009.\’94 His warning came as an official revealed that the mainland’s giant state-owned enterprises had reported a rare decline in profits last year. \’93Profits of state-owned enterprises directly under the central government fell about 30 per cent year on year in 2008 to 700 billion yuan [HK$800 billion],\’94 said Huang Shuhe , vice-chairman of the State-owned Assets Supervision and Administration Commission

\

Some of my older readers will remember last year when I argued that something a lot of analysts saw as a real strength \’96 the huge surge in China\’92s fiscal revenues, which left the fiscal account more or less in balance \’96 was, in my debt-trader-influenced pessimist\’92s eyes actually a real problem. If the fiscal account stayed in rough balance with fiscal revenues soaring by 30% a year, it seemed to me that any discrepancy between the rate of revenue growth and expense growth could lead to a sudden unexpected rise in the fiscal deficit, especially since in a downturn the pressure for revenues to decline and for expenses to rise would be unbearable.

\

The probability geek in me instinctively worries about very rapidly changing numbers, even when they are good, because there is a lot more room for things to go very bad. From what Mr. Xie is saying, the worry was on the mark. The growth rate of fiscal revenues and fiscal expenses have already sharply diverged, and this is even before the big spending plans have been put into place. The article goes on to say:

\

\

\

Ha Jiming , chief economist at China International Capital Corp, said the weakening financial position would cast doubt on the government’s much-vaunted economic stimulus package. The measures, including the 4 trillion yuan stimulus package and tax cuts, are to stem a rapid slowdown in economic growth, by boosting public spending and private consumption.

\

It claims that economists \’93expect the mainland will have a budget shortfall this year, with the deficit between 500 billion and 800 billion yuan.\’94 I am nowhere near smart enough to predict what the deficit will be, but I am happy to bet anyone it will be a lot more than the current predictions.

\

Finally one last comment about recent interesting, and even surprising, government statements, is about a report last week in Laiowang, a Xinhua publication. According to an article on the topic in South China\’92s Morning Post:

\

The mainland faces surging protests and riots this year as rising unemployment stokes discontent among migrant workers and university graduates, a state-run magazine said in a blunt warning about unrest in this sensitive year. The unusually stark report was in this week\’92s Liaowang [Outlook] magazine, issued by Xinhua news agency, which laid out the hazards facing the mainland and ruling Communist Party as growth falters during the global economic crisis.

\

\’93Without doubt, now we\’92re entering a peak period for mass incidents,\’94 a senior Xinhua reporter, Huang Huo, told the magazine, using the official euphemism for riots and protests. \’93In this year, Chinese society may face even more conflicts and clashes that will test even more the governing abilities of all levels of the party and government.\’94

\

This report has been so widely discussed that I don\’92t have a whole lot to add to it.

\

My last comments are about two recently published pieces. On yesterday\’92s Economists Forum on the Financial Times website Martin Wolf published my short version of a longer article also published today in Far Eastern Economic Review on the global balance of payments and the US-Chinese adjustments.

Tags: ,

Chinese manufacturing numbers reinforce the pessimist\’92s outlook

January 4, 2009 in Consumption and production, Labor and unemployment, NPLs by Michael Pettis | 16 comments

There is some good news about Chinese retail sales, although I am not sure how useful it is because retail sales numbers in China have always been a little hard to reconcile with other indicators of domestic demand. According to an article in today\’92s Bloomberg:
\

Retail sales in China rose 13 percent during the three-day New Year holiday from a year earlier as both rural and urban consumers spent more, state television reported, citing commerce ministry data. Retail sales were 12.5 billion yuan ($1.83 billion) in the first three days of the year, China Central Television reported, citing a ministry survey of 1,000 major retailers. Household appliances and cars topped the list of purchases, CCTV said.

\

\
Against this, two recent indices indicate that manufacturing output continues to fare badly. The CLSA China PMI, released Friday, was 41.2 in December, the second worst month since the index started in 2004 (November clocked in at 40.9), and the fifth month in a row that in comes in below 50, which indicates a contraction in manufacturing output. The PMI produced jointly by the China Federation of Logistics and Purchasing and the National Bureau of Statistics was released today and, coincidentally, also came in at 41.2. According to an article in today\’92s Xinhua:
\

The Purchasing Managers’ Index (PMI) of China’s manufacturing sector climbed 2.4 percentage points month-on-month to 41.2 percent in December, China Federation of Logistics and Purchasing (CFLP) told Xinhua Sunday.

\

The index has been lower than 50 percent for three consecutive months. It was also the fifth time the index remained below 50 percent within last year after it fell to a record low of 38.8 percent in November. The new monthly figure reflected the country’s economy had further contracted, analysts said.

\

\
The article then goes on to quote Zhang Liqun, a researcher with the Development Research Center of the State Council, as saying that \’93the PMI figure indicated the economy remained in the tank but the number of purchasing managers who were bullish on the economy was on the rise. He said with previous macro-management policies taking effect, the economy would embark on a relatively fast growth track after the spring next year,\’94 although the news agency regularly tries to put a positive spin on bad economic news, so perhaps we shouldn\’92t take Mr. Zhang\’92s comments too seriously.
\

\
The contraction may not be as bad as it seems because some of it seems to represent the running down of overstocked inventories, and so output could rebound in one or two quarters as inventories decline to the minimum necessary levels. Still, according to the CLSA report \’93Chinese manufacturers reduced the size of their workforces at the fastest rate recorded by the series to date.\’94 An employment index it created suggests that in December we completed the fifth month of net layoffs, and of course rising unemployment is likely to lead to further contractions in demand. The risk is that we get caught in a spiral in which output declines to meet lower demand, but firing workers further forces demand to decline further. Unless there is a sudden rebound in export orders (don\’92t hold your breath) it will be up to new government spending to absorb unemployment and prevent demand from contracting further.
\

\
On that note Xinhua yesterday published a less upbeat story:
\

Cai Fang, a renowned labor expert in China, warns the country may see more job losses among urban workers in 2009 after millions of migrant workers became unemployed last year. The majority of job losses in 2008 were mainly reported among migrant workers, Cai, head of the Population and Labor Economy Institute under the Chinese Academy of Social Science (CASS), wrote in an article published in Caijing Magazine in December.

\

Migrant workers, who often work in factories, are among the first to bear the brunt of the current global financial crisis. Statistics from the Ministry of Human Resources and Social Security showed 10 million of China’s total 130 million migrant workers went back to their rural hometowns jobless last year after some exporters were forced to shut down or halt production to avoid losses as a result of decreased overseas demand. As a result, the income of rural and urban residents could grow at a slower pace, Cai said. The deceleration of income growth would definitely hurt consumption, he added.

\

\
There is a lot of hope being placed on either a revival of the export environment in early mid-2009 or on the success of the government fiscal expansion. The fiscal expansion plan is still too fuzzy to inspire much confidence and a number of Chinese economists I have spoken with recently are openly disparaging \’96 even in print and on TV. One of them told me that he was worried that the government would be so desperate to boost growth that he wondered if we might not find ourselves having to choose between allowing growth to decline more sharply than anyone is comfortable with, or pulling out all the stops to jam growth forward, but in so doing create so much unsustainable and un-repayable debt that both the government and the banking system find themselves in real straits in two or three years.
\

\
Since this is something I also have been writing about, needless to say I agreed with him that there is a real risk that we \’93solve\’94 the current problem by creating a more-difficult-to-solve debt problem in a few years. This is in line with my longstanding contention that there is no policy solution to this problem if by \’93solution\’94 we mean some way of avoiding the consequences of massive overcapacity. It is just going to have to run down one way or the other, and without serious international cooperation the real policy choices for China are between \’93bad\’94 outcomes and \’93worse\’94 outcomes.
\

\
Actually quite a few local economists have been talking about the explosion in bad lending that they are expecting, and \’96 no local economist, since he is American, but someone with a great view on Chinese policymaking \’96 Victor Shih at Northwestern had a Wall Street Journal Asia Op Ed a few days ago which got a lot of attention and discusses exactly this problem. He says:
\

Risk-prevention institutions built up over the past decade are now under enormous pressure to forgo prudence in the interest of maintaining economic growth.\’85Meanwhile, if the economy worsens in the first quarter the government may be tempted to abandon prudent regulation altogether. Beijing could order the CBRC to disregard risk targets or even abolish the CBRC. This would plunge China back into the old days when the only risks that bankers faced were political ones.

\

\
I confess this is the thing that worried me most about the fiscal expansion plans. Since the social and political stakes are higher in China than in many other places, I think there is too great a risk that we overreact to the current mess by creating a potential debt disaster. This means that the next two years might not be as bad as I am expecting, but they will be followed by an even greater problem \’96 another banking crisis \’96 and without the furious global growth and ample liquidity of recent years, it will be much harder for China to grow its way out of a repeat of the late 1990s banking crisis.
\

\
I am struck in my conversation with Chinese economists about how openly dismissive they often are of recent policymaking. This adds some substance to the claims by my more politics-savvy friends that the debate \’96 I hesitate to say warfare \’96 within policy circles is hotter than ever. Blame, apparently, is flying back and forth, and even leaders at the highest level are facing strident criticism. This isn\’92t bad for China, of course, since one of the problems here has been the difficulty of changing policy once it has been decided, and a more intense debate should lead to a more realistic understanding of the consequences. It does suggest however how nervous people are.
\

\
One last comment before closing \’96 I mentioned that there is still some hope in many quarters that there will be a revival in exports that may help pull China out of the current mess \’96 even to the extent of people feverishly citing the explosive growth in Sino-Indian trade as an indication of things to come (although funnily enough Sino-Indian trade is almost negligible). I suspect that only people who have the dimmest understanding of the global environment and no sense of how the global balance of payments works hold this view (which is not to suggest that they aren\’92t the overwhelming majority), but it is probably reflected in the continuing debate about what must be done for China to regain its \’93competitiveness.\’94
\

\
In that light I though I would quote from an interesting article I read published by The Economist a scant few weeks (November 23) after the stock market crash of 1929. Perversely enough I love reading old article on economics and business news, and The Economist is a great source. This one says:
\

In any case, against any disadvantage arising from American competition must be set the great advantage which we mentioned at the outset, namely, the return to cheap money conditions. This should assist trade recovery throughout the world, which has been handicapped for so many months past by the abnormal financial conditions in New York. If we are justified in assuming that the setback in American industry will only be temporary, we may look forward to steady development in 1930, free from the incubus that has of late been hampering world conditions.

Tags: ,