mises
Joined: 05 Nov 2007
Location: retired
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 Posted: Thu Nov 27, 2008 7:19 am Post subject: World Bank China Quarterly |
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http://siteresources.worldbank.org/INTCHINA/Resources/Quarterly_December_2008.pdf
http://blogs.cfr.org/setser/2008/11/26/if-you-only-read-one-thing-on-china-this-fall-%E2%80%A6/
An excellent report from the World Bank. Brad Setser offers some highlights:
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1. China was no workers� paradise during the boom years.
GDP growth has been quite strong. But wages have fallen from around 50% of China�s GDP at the start of the decade to around 40% of GDP. That � not a high rate of household savings � is the main reason why consumption is a very low share of GDP (See Figure 15 of the World Bank Quarterly). If China�s workers had secured a bigger share of China�s output, they could be better off now even if China had grown somewhat less rapidly. There is good reason to think that a world where China subsidies US borrowing (and consumption) isn�t the best of all possible worlds. The fruits of the recent boom weren�t shared broadly in either the capital-exporting countries or the capital-importing countries.
2. China really is a manufacturing and investment driven economy.
Even when compared to Korea in 1990 or Japan in 1980, China stands out. Investment accounts for a large share of GDP than it ever did for the smaller Asian miracles and manufacturing accounts for a higher share of China�s GDP than it ever did in other Asian manufacturing economies (Figure 14). Given China�s size, it is pretty clear that China cannot continue to grow by investing ever more and manufacturing ever more. China ultimately has to produce for Chinese demand not world demand.
3. China�s current slowdown was made in China, not in the world.
Yes, growth in �light manufacturing� (toys, shoes and textiles) has slowed. But electronics and machinery exports are still doing very well � even if they don�t get the press (Figure 3). Or perhaps I should say were still doing well in the third quarter; must has changed recently. China� problem this year is simple: labor intensive export sectors have slowed more than capital intensive export sectors. Overall though China�s real exports grew at a 10-15% y/y clip in 08 � far faster than the overall growth in world imports. China�s real export growth is forecast to outpace its real import growth in 2008 � which implies that net exports will still contribute positive to China�s GDP growth. True, the net exports won�t provide as much of a positive contribution as in 07, 06 or 05. But they are still adding to growth not subtracting from it.
Why then is China slowing so sharply? Simple, real estate investment has hit a wall. After growing at 20% y/y for a long time, real estate investment stalled � with a y/y growth rate of around 0% (Figure 5). That means that China is in turn producing more steel and cement than it needs, and producers of steel and cement are cutting back. That in turns hurts iron ore exporters �
This though is very much a result of China�s own policy choices. Rather than allowing the real exchange rate to appreciate back when China was truly booming (05-late 07/ early 0 , China�s policy makers opted to rely on administrative curbs on credit growth. That left China more exposed to global slump in demand � as it kept exports up by limiting real appreciation even as it credit curbs limited the amount of froth in the real estate market back when China was booming and real interest rates were negative. China invested a lot in real estate, but it is no Dubai. But China�s policy makers still look to have slammed the brakes on a bit too hard. Rather than slowing gradually, real estate investment fell off a cliff (Figure 5).
4. There is more bad news ahead.
While real exports contributed positive to GDP growth in 2008, they won�t contribute in 09. The World Bank forecasts that for the first time in a long time, 2009 real import growth will exceed real export growth. In 2005, real exports grew about 10% faster than real imports (23.6% v 13.4%). Many economists remain � for reasons that to be honest elude me � reluctant to draw the obvious connection: the most likely explanation for China�s strong real export growth is the large depreciation the RMB in 2003 and 2004. That combined with administrative controls � which limited lending, investment and ultimately imports � to create China�s large current account surplus. Real export growth exceeded real import growth by 5 percentage points in 2006 and 2007 � and by 4 percentage points in 2008.
The positive contribution of net exports to GDP is forecast to end in 2009: real import growth will exceed real export growth by 3 percentage points.
That though doesn�t mean that China�s currency isn�t undervalued. China�s exports are forecast to grow faster than the world�s imports, meaning China�s global market share is still increasing (see Figure 2). And if 2008 and 2009 are taken together, China will still be drawing on the world for its growth: the drag from net exports in 09 will be smaller than the contribution from net exports in 08 (see Table 1)
I fully realize that China is appreciating quite significantly now in real terms � just global demand for China�s goods is falling (Figure 11). The tragedy is that this appreciation is coming now � not two or three years ago when domestic Chinese demand was booming and China didn�t need to draw on the rest of the world to sustain strong growth. |
If you're interested in China, it is a must read. |
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