China Economy Megathread

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namaste friends: Sep 18, 2004; by Smythe

http://blogs.ft.com/the-a-list/2014...ed%2F%2Fproduct

quote:

Let us not miss the point on Chinese defaults
Whenever there is a sign of possible weakness in China�s financial armour there are voices that cry out that a crisis is brewing. The latest example is the recent default on a bond payment by Shanghai�s Chaori Solar Energy Science and Technology. This quickly prompted questions about whether this was China�s �Bear Stearns or Lehman moment�. Less alarmist views welcomed the default as a signal that the government wanted to instil a sense of prudent risk-taking.

Interpretations of Premier Li Keqiang�s statement that future defaults may be unavoidable also depended on one�s sentiments, with some seeing it as a sign of imminent problems and others dismissing it as an acknowledgment that defaults are part of every economy.

All this, however, may be missing the point.

Although Chaori is a landmark as the first onshore bond default, it tells us little about China�s financial risks. After all, the problems of Chaori, and the solar sector more generally, are well known and their implications have long been factored into market expectations. No one in China�s financial markets is surprised that Chaori could not pay: it was always a question of whether it would be bailed out.

But the decision not to bail Chaori out is not a true test of Beijing�s commitment to allow the �market to play a decisive role� in resource allocation as announced last year in the third plenum. Chaori was an easy target as a relatively small private company in a major city that is not dependent on it for revenues or employment. Its bonds are held by retail investors with little clout. It is also in an industry with excess capacity that officials have earmarked for downsizing and consolidation.

Contrast this with the pre-third plenum case of LDK Solar, a large private company that employed 20,000 workers and accounted for 12 per cent of the taxes for the city of Xinyu in Jiangxi province, central China. Like Chaori and other solar businesses, LDK had financial difficulties. But given its importance to Xinyu, the municipal authorities passed a resolution guaranteeing repayments of Rmb500m in loans. In that case being private was not a barrier to a bailout as the firm was too big to fail. Chaori does not tell us whether that has changed since the third plenum.

In short, Chaori tells us nothing about the prospects of an impending financial crisis (which is unlikely) or whether market risks will now be more appropriately priced. But even if it had told us how Beijing chooses to deal with private firms, the much deeper issue is whether the party is willing to allow defaults by state-owned enterprises. Creative destruction is the heart of a thriving market economy, with bankruptcy and defaults creating opportunities for new entrants driving change � SOEs must not be exempted from that pressure.

More than a decade ago China launched a policy to reform SOEs by cutting back on direct subsidies and closing or privatising the poor performers under the slogan of �grasp the big, release the small�. The total number of SOEs fell from 260,000 in 1998 to about 145,000 in 2003. The creation of the State-Owned Assets Supervision and Administration Commission (Sasac) in 2003, with the mandate to represent state interests in the SOEs, slowed down exits, with the steep decline in the numbers of SOEs coming to a halt with about 115,000 by 2008.

But the SOE reform initiative had already made its mark by the time the global financial crisis hit. Returns on assets of industrial SOEs rose from 1 per cent in 1998 to more than 6 per cent by 2008, nearly closing the gap with private companies. But with the flood of financial support from the 2008 stimulus program, which was largely targeted at the state sector, incentives for more efficient SOE performance were seriously weakened.

The result has been a decline in returns on assets to about 4 per cent, while returns for private companies have continued to rise to roughly 11 per cent. This gap between the returns of private and public companies explains a significant part of the recent decline in China�s economic growth.

Financially, the discipline-weakening impact of the stimulus program and Sasac�s unwillingness to pressurise poor-performing SOEs to exit the scene have also taken their toll. Thus while overall, China�s industrial sector is not under unusual financial stress, the SOEs as a class are much more highly leveraged than private firms. At the end of 2012, SOE debt was 4.6 times their earnings compared with just 2.8 times for private businesses. The debt to profit ratio of private listed companies is 5 per cent lower than in 2008, before the crisis, compared with a 33 per cent rise for listed SOEs. Private businesses have 60 cents in operating cash flow for each dollar of current liabilities, while centrally owned SOEs have just 30 cents. Thus the more important candidates for defaults and restructuring, especially if implicit subsidies are factored in, lie in the state sector.

Will Beijing address seriously the need to encourage poorly performing SOEs � big or small � and not just the odd private firm, to exit? November�s third plenum decision does call for creating a �market exit mechanism�. If so, defaults will be taken much more seriously as credible evidence of the new government�s strategic objectives.

# ? Mar 23, 2014 08:34

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# ? Apr 24, 2024 00:29

Helsing: Aug 23, 2003; DON'T POST IN THE ELECTION THREAD UNLESS YOU JOE BIDEN

asdf32 posted:

Why?

Subsidies of all forms are basically just run of the mill investments - you take money from one place in the economy and invest it in another. At best the government's advantage is it's borrowing rate or size, but like any other investment there are costs and no guarantee of success.

The government is not compelled by the short term need to realize a profit on its investments. In many cases the industries that are necessary to incubate a high growth economy can be uncompetitive on the international scale for years so relying on private capital to make those investments is simply not feasible.

quote:

What you're asking for here, choosing high growth industries, is exactly the thing private capital is trying to do at the same time. And after accumulating a certain amount of capital it should be in a position to do exactly that.

You want to have the presence of certain kinds of industry, such as high value added manufacturing, regardless of whether it can be internationally competitive in the short term. These are the industries that can provide rising wages, that utilize an educated workforce, and which can create spin off innovations.

To ensure the presence of that kind of economic activity you need the government to take a more active hand in managing the economy by encouraging some uses of capital and discouraging or limiting others.

quote:

Government of course has an incredibly important role doing all the things government is uniquely well suited for - education, infrastructure, regulatory framework etc, but picking and choosing winning industries isn't really among them.

Though I'll note that I think it's obvious from historical examples that government involvement in industry often isn't harmful, especially when the path to develop (get/deploy basic capital) is fairly clearcut. But that remains somewhat far removed from being evidence that it's necessary.

The best argument here I think one of stability - government investment can be more stable than private which is relevant for certain industries. But I see that as a more limited argument applicable to specific industries rather than a general necessity for growth across the board.

The problem with your suggestions is that economic development is a lot more complicated than just the accumulation of capital. You need the right institutions and the right balance between economic sectors to actually create the conditions for sustainable long term growth in living standards. Having the right industries will create knock on effects that are good for the rest of the economy and the workforce, whereas following the short term dictates of capital will mean that you keep reinvesting your resources in the areas where you already have a 'comparative advantage', i.e. low productivity manufacturing, basic agriculture and resource extraction.

# ? Mar 23, 2014 17:09

asdf32: May 15, 2010; I lust for childrens' deaths. Ask me about how I don't care if my kids die.

I think this post does a good job zooming in on the disagreements. I'll mostly just rephrase and highlight them here.

Helsing posted:

The government is not compelled by the short term need to realize a profit on its investments. In many cases the industries that are necessary to incubate a high growth economy can be uncompetitive on the international scale for years so relying on private capital to make those investments is simply not feasible.

Predicting what's going to pay off in several years is the hard part and generally the inherent uncertainty behind long term investments is what discourages private capital. When they decide it's worth it businesses make 5-10 year investments all the time (cars, jets, processors for example).

So my problem with this argument is that government doesn't have an advantage on the prediction aspect which is actually the harder part and leaves government at just as much risk of loss.

The two main points that I see on your side here are that while private firms will be focused on their specialty, government can invest without caring where the returns end up coming from. This is an argument for general purpose research for example. And separately, as I commented earlier government should at least assume that it's going to be around in 2+ decades.

quote:

You want to have the presence of certain kinds of industry, such as high value added manufacturing, regardless of whether it can be internationally competitive in the short term. These are the industries that can provide rising wages, that utilize an educated workforce, and which can create spin off innovations.

To ensure the presence of that kind of economic activity you need the government to take a more active hand in managing the economy by encouraging some uses of capital and discouraging or limiting others.

Just to re-emphasize, while an industry requires subsidies it's costing the rest of the economy. Jobs which earn $15 an hour with a $5 subsidy are worse than jobs that earn $11 with none. When you replace the latter with the former you're losing in the immidiate. It's a real cost and it must be recouped.

The key argument is diversity here which I think makes some sense from a risk perspective at the least.

And again a key here is the human side - having a wider range of skills in your population makes the economy more adaptable. If this comes with a short term loss in growth or output I can see the argument that it may be worth it.

quote:

The problem with your suggestions is that economic development is a lot more complicated than just the accumulation of capital.

No, not really*. See below.

quote:

You need the right institutions and the right balance between economic sectors to actually create the conditions for sustainable long term growth in living standards. Having the right industries will create knock on effects that are good for the rest of the economy and the workforce, whereas following the short term dictates of capital will mean that you keep reinvesting your resources in the areas where you already have a 'comparative advantage', i.e. low productivity manufacturing, basic agriculture and resource extraction.

I agree with this because all of these things actually feed back into capital accumulation (physical and human). Countries really are poor because they're lacking capital but then the question shifts to why? That's what's complex and the answer includes most of the things here.

It may be a nitpick but I think it keeps the emphasis where it ought to be.

*How well capital gets used depends on management, workforce participation, working hours etc but all these things vary by only 10's of percent. While capital and skills vary by orders of magnitude and correspond to the roughly two orders of magnitude differences between economies in the world.

asdf32 fucked around with this message at 18:12 on Mar 23, 2014

# ? Mar 23, 2014 18:10

sincx: Jul 13, 2012; furiously masturbating to anime titties

Is there not a separate thread on the Taiwan/China trade pact protests?

# ? Mar 24, 2014 03:27

Arglebargle III: Feb 21, 2006

So by what date should I get my money out of China?

# ? Mar 24, 2014 03:58

namaste friends: Sep 18, 2004; by Smythe

Arglebargle III posted:

So by what date should I get my money out of China?

If anyone had a definitive answer to that, they'd be richer than god.

Anyhoo...check 'dis out

https://twitter.com/TheStalwart/status/447913184716787712

# ? Mar 24, 2014 04:41

ComaPrison: Jan 1, 2014; by FactsAreUseless

Arglebargle III posted:

So by what date should I get my money out of China?

My family has had money in China for nearly two decades. In the long run, we've made a lot more than what we could potentially lose from any sort of major adjustments (whether Japan-style, European-style, or even U.S.-style). If you've only been in there for a few years, then I can see how you might have not gained enough to make any risk of staying worthwhile. I can tell you this though, we lost a lot more during the U.S. financial crash than we ever have anywhere else, at any time. With that in mind, we're keeping the percentage of our total investments, as Chinese investments, more or less what they are. If you really don't have the stomach to stay in for the long-run, I recommend putting more of your money into safer instruments. If I remember correctly, small cap funds (in Canada and the U.S.) have been doing pretty well in recent years, so there's a place to start. I can tell you this though, some of our acquaintances that lost the most of their net worth in the last decade have been those that had most of their assets and investments in the U.S. I remember some of them lost ~50% or more.

ComaPrison fucked around with this message at 08:20 on Mar 24, 2014

# ? Mar 24, 2014 05:11

namaste friends: Sep 18, 2004; by Smythe

That is the worst loving anecdotal financial advice I have ever loving read. Even worse than the tripe a loving realtor would tweet.

# ? Mar 24, 2014 05:22

ComaPrison: Jan 1, 2014; by FactsAreUseless

Cultural Imperial posted:

That is the worst loving anecdotal financial advice I have ever loving read. Even worse than the tripe a loving realtor would tweet.

If you're on Something Awful for financial advice, you've got a lot more serious things to worry about. I'm just a random stranger on the internet, and I can only tell you what my personal experience has been in observing the ups and downs of my family's investments since the late 90s. If you want solid advice from people that do this poo poo for a living, there are places to go for that! On top of that, this is the "China Economy Megathread", not the "ITT Goons Give Me Financial Advice I Will Take Seriously" thread. I can only tell you that there are a lot of people, my family included, that have made out quite well with investing there, and some are in it for the long haul. We're not professional economists or even econ nerds, but we've had some good judgments and some good luck since the late 90s. What more can you expect from laymen?

If you want this thread to be exclusively for hardcore econ nerds to circle jerk, you should've titled it something other than "China Economy Megathread". If, on the other hand, you intend for this to be a nesting pit for bears, you should've made that clear from the title as well. From a cursory glance at your OP and other posts in this thread though, I have to question whether you have any direct stake (i.e. actual investments) in the ups and downs of the Chinese economy. More than anything else, you just seem like a bitter Canadian bear that is praying for a Chinese implosion so you can satisfy some twisted need for schadenfreude. Having spent a couple of decades in Vancouver, I can understand why you'd feel pissed about the insane bubble that is Vancouver's property. Although it's true that it's mostly due to immigrant money from China, you also have to consider that the BC government has benefited quite a bit from that inflow of cash. Yeah, it has priced a lot of locals out of the property market, but blaming China for that is as silly as blaming the WTO for hollowing out Detroit. The global economy is an amoral beast, and countless people get hosed by it if they lack some luck and some good judgement. Lastly, you should still give the Canadian government some credit for shutting SOME of the valves of that hot money inflow from China. Last I checked, the Vancouver property bubble is more or less frozen, if not gradually deflating. It hasn't been good news for people looking to sell (like we are), but it should certainly take some pressure off people who are eventually hoping to buy.

ComaPrison fucked around with this message at 05:46 on Mar 24, 2014

# ? Mar 24, 2014 05:24

namaste friends: Sep 18, 2004; by Smythe

Look at China getting all socialist and poo poo.

http://www.ft.com/intl/cms/s/0/2038...iteedition=intl

quote:

Official China union raises stakes in Walmart closure programme
By Tom Mitchell in Beijing and Barney Jopson in Washington
A woman walks past a Walmart sign in the Shekou district of Shenzhen, China, on December 19 2013�Bloomberg

A restructuring of Walmart�s China business is being challenged by the country�s normally reticent official union, which is involved in at least one of three protests that have erupted at stores slated for closure this month.

A unit of the government-sanctioned All China Federation of Trade Unions has been leading the protests outside a Walmart store in Changde, Hunan province that closed last week. The ACFTU�s involvement in an industrial action, which is extremely rare, could increase official scrutiny of the closures.

�The fact that the union president has come forward in Changde has given the workers great confidence,� said Wang Jiangsong, a labour expert who has been advising the workers in Changde and at two other Walmart stores in Maanshan, Anhui province.

The protests highlight Chinese workers� growing willingness to demand higher compensation during corporate acquisitions and restructurings, in addition to agitating for higher pay adjustments every year. A historic demographic shift in 2012, when China�s working-age population declined for the first time, has given workers greater bargaining power.

China has proved to be a difficult market for Walmart. It opened its first stores in the country in 1996 and now has about 400, but it has struggled to get a satisfactory return on investment and in the past two years has admitted to making mistakes in its haste to expand.

While China�s ACFTU was instrumental in establishing branches at Walmart�s Chinese stores in 2006 and 2007, many labour activists say that it is more interested in collecting lucrative payroll fees than fighting for workers� rights. ACFTU officials played no part in a recent strike that affected an IBM factory in southern China and have also been silent on two other labour protests in which workers were charged with disrupting public order.

China Labour Bulletin, a Hong Kong-based rights group, has described the situation in Changde as �historic�.

�It�s a very unusual and encouraging sign that a store union chairman would take the initiative and take such a strong stand in defence of his members� interests,� said Geoffrey Crothall at CLB.

Chinese workers have been picketing the stores in Changde and Maanshan since it was announced that they would be closed. They are demanding twice the compensation offered by Walmart to workers who will lose their jobs, and also rental and other subsidies for those who transfer to stores in other cities.
FT Video Archive

China still key to Walmart growth

December 2013: Walmart�s expansion of its Sam�s Club chain, which targets increasingly affluent Chinese customers in the country�s largest cities, is a key part of the retailer�s strategy to boost flagging international sales.

The more than 140 workers at Walmart�s Changde store have been offered positions in the city of Yiyang, a three-hour bus ride away. �Workers cannot survive elsewhere on their low wages,� said the store�s union head, Huang Xingguo. �Walmart�s offer is an empty cheque. Our families are in Changde. It would cost more to rent new homes in Yiyang.�

Mr Huang has vowed to continue the Changde protest even after police forcibly detained workers at the weekend.

Walmart has denied claims that its workers in Changde and Maanshan were given inadequate notice about the closures and says that it consults closely with local governments, the ACFTU and affected workers. �The nearest store [to Changde] is Yiyang, which unfortunately is about 100km away,� said Ray Bracy, a senior vice-president with Walmart�s China operations. �That makes it really difficult for the associates to transfer.�

Mr Bracy said Walmart was closing about 20 stores as part of a wider restructuring of its China business, but also has plans to open another 110 new stores and hire 19,000 more workers over the next three years. �Those stores [that are closing] are not acceptable from a dollars and cents standpoint,� he added. �In the cases where we�re closing it�s a decision of last resort.�

# ? Mar 24, 2014 05:33

Job Truniht: Nov 7, 2012; MY POSTS ARE REAL RETARDED, SIR

asdf32 posted:

Don't just parrot dumb arguments. The larger implication of the claim that business is exceedingly shortsighted is that the capitalist class is unable or unwilling peruse long term goals. I doubt that's the point you're trying to make.

Generally I think business is too shortsighted too but it's a human trait which government is certainly not immune too. We have ample examples of politically expedient but shortsighted legislation. Government however still has some advantages in terms of long term investment in the sense that the actual interests of the population as a whole can't shift as fast as any individual firm or investor nor can government change policy as quickly as them if it wanted too. Government can also probably safely assume that it's going to be around in a decade or two.

Maybe you can start with the fact that most private investment firms are willing to front the risk government subsidies do, which make up most long term projects.

# ? Mar 24, 2014 06:18

ProfessorCurly: Mar 28, 2010

ComaPrison posted:

I can only tell you that there are a lot of people, my family included, that have made out quite well with investing there, and some are in it for the long haul. We're not professional economists or even econ nerds, but we've had some good judgments and some good luck since the late 90s. What more can you expect from laymen?

For what it's worth, the businessmen that I've had the opportunity to speak to about this issue seem very willing to bet their company's success on Chinese expansion. Nothing lasts forever, but for right now people with skin in the game are counting on China's success.

# ? Mar 24, 2014 06:52

Tarkus: Aug 27, 2000

I think a big thing for China as it starts expanding its own technological industries will be to start enforcing copyright and IP laws, even for foreign countries and businesses. While they've been able to make a big market out of reverse engineering and copying foreign designs, that time is coming to a close. They will have their own industries, technologies and intellectual properties hampered and decimated by cheap knockoffs that they themselves encourage with no enforcement of these laws.

# ? Mar 24, 2014 22:23

ComaPrison: Jan 1, 2014; by FactsAreUseless

Tarkus posted:

I think a big thing for China as it starts expanding its own technological industries will be to start enforcing copyright and IP laws, even for foreign countries and businesses. While they've been able to make a big market out of reverse engineering and copying foreign designs, that time is coming to a close. They will have their own industries, technologies and intellectual properties hampered and decimated by cheap knockoffs that they themselves encourage with no enforcement of these laws.

At this point in time, I don't think they're too worried about having their technology copied. There may come a day when that will change, but I am not sure it will be anytime soon. On balance, the decision of how strictly to enforce IP laws will depend on the macro-level impact on the economy. If a few Chinese companies get ripped off on a few billion worth of IP, but a few other Chinese companies make off with tens of billions worth by reverse-engineering, we'll probably see a continuation to the very mixed record on enforcement. It's just different for the U.S. because there's a lot more to lose in having tech ripped off by foreigners than there is to gain in stealing other people's tech.

ComaPrison fucked around with this message at 09:03 on Mar 25, 2014

# ? Mar 25, 2014 09:00

ProfessorCurly: Mar 28, 2010

ComaPrison posted:

At this point in time, I don't think they're too worried about having their technology copied. There may come a day when that will change, but I am not sure it will be anytime soon. On balance, the decision of how strictly to enforce IP laws will depend on the macro-level impact on the economy. If a few Chinese companies get ripped off on a few billion worth of IP, but a few other Chinese companies make off with tens of billions worth by reverse-engineering, we'll probably see a continuation to the very mixed record on enforcement. It's just different for the U.S. because there's a lot more to lose in having tech ripped off by foreigners than there is to gain in stealing other people's tech.

I think the point is that if the situation persists there will be no Chinese IP. If you are left twisting in the breeze with nothing but research costs and a bunch of knockoffs, why would you go through the trouble?

# ? Mar 25, 2014 13:58

shrike82: Jun 11, 2005

I don't see any reason why China won't follow Japan or South Korea when it comes to developing IP in the future.

They're still on the copycat phase of economic development curve. Once they develop IP worth selling, you'll see a sudden respect for legal protections and framework.

Arguing that they lack some intrinsic ability to generate IP smacks of post-war criticisms of Japan being no good for anything more than producing cheap imitation goods.

# ? Mar 25, 2014 14:25

Peel: Dec 3, 2007

Haven't most industrialising nations followed a similar path?

IP law is a scheme to create and then and protect property, it doesn't make sense to create it until you're the one who will have the property.

# ? Mar 25, 2014 14:42

OXBALLS DOT COM: Sep 11, 2005; by FactsAreUseless; Young Orc

Tarkus posted:

I think a big thing for China as it starts expanding its own technological industries will be to start enforcing copyright and IP laws, even for foreign countries and businesses. While they've been able to make a big market out of reverse engineering and copying foreign designs, that time is coming to a close. They will have their own industries, technologies and intellectual properties hampered and decimated by cheap knockoffs that they themselves encourage with no enforcement of these laws.

The current policy of mostly only enforcing laws when it benefits Chinese businesses seems to be working pretty well for them and will probably be relatively easy to expand if it starts becoming an actual issue for Chinese IP holders. Why bother with protecting foreign companies when they're throwing in all their money regardless?

# ? Mar 25, 2014 16:24

Helsing: Aug 23, 2003; DON'T POST IN THE ELECTION THREAD UNLESS YOU JOE BIDEN

The United States industrialized through stolen "intellectual property" as did most other countries. The fact that China has a massive industrial base and technology sector, plus a large educated workforce, means they'll likely become very innovative over time. They are still in the wild growth phase of their development so its a bit premature to be speculating about when they will change their attitude toward IP.

asdf32 posted:

I think this post does a good job zooming in on the disagreements. I'll mostly just rephrase and highlight them here.

Predicting what's going to pay off in several years is the hard part and generally the inherent uncertainty behind long term investments is what discourages private capital. When they decide it's worth it businesses make 5-10 year investments all the time (cars, jets, processors for example).

So my problem with this argument is that government doesn't have an advantage on the prediction aspect which is actually the harder part and leaves government at just as much risk of loss.

The two main points that I see on your side here are that while private firms will be focused on their specialty, government can invest without caring where the returns end up coming from. This is an argument for general purpose research for example. And separately, as I commented earlier government should at least assume that it's going to be around in 2+ decades.

There are substantial benefits to having a manufacturing sector in your economy even if it is relatively less efficient than the global average. Manufacturing in sectors with rising productivity and increasing returns to scale create the potential for higher wages. It also tends to create the economic clusters of activity necessary to incubate innovation and it creates a demand for skilled workers.

So even absent the capability of government to anticipate which industries are going to take off, there are still very good reasons to support a local manufacturing industry that will develop the country's capability to reach middle income status. Even if you can't produce cars as well as Japan there are very real benefits to the economy from having a car manufacturing sector in the economy.

Obviously there are dangers that subsidies create a permanently inefficient industry that lobbies for protection from the government rather than innovating. That may be part of the reason that export oriented industrial strategies have tended to perform better than import substitution strategies (i.e. you want an Asian industrial strategy, not a Latin America one). But, even if we recognize this danger, its important to also recognize that countries like Peru and Mexico which pursued an import substitution strategy in the post war era were much better off than they have been since they abandoned import substitution for neoliberal economic policies. So even accepting the dangers of subsidized industry, the historical record suggests very strongly that a country with a protected and somewhat inefficient advanced industrial sector is still better off than a country that merely specializes in its 'comparative advantage' and relies on capital accumulation (most of which will usually end up flowing out of the country to the firms that own the textile factories) to develop itself.

quote:

Just to re-emphasize, while an industry requires subsidies it's costing the rest of the economy. Jobs which earn $15 an hour with a $5 subsidy are worse than jobs that earn $11 with none. When you replace the latter with the former you're losing in the immidiate. It's a real cost and it must be recouped.

The key argument is diversity here which I think makes some sense from a risk perspective at the least.

And again a key here is the human side - having a wider range of skills in your population makes the economy more adaptable. If this comes with a short term loss in growth or output I can see the argument that it may be worth it.

If you just invest in education without investing in industries that require an educated work force then the people you train will leave the country to work elsewhere. This is why I keep emphasizing that economic development is much more complicated than the accumulation of capital stock or even just the accumulation of 'human capital'. You need the right institutions, including industries that will create employment for an educated workforce.

A properly functioning economy doesn't just emerge spontaneously anymore than a farm will just emerge from a plot of uncultivated land.

quote:

No, not really*. See below.

I agree with this because all of these things actually feed back into capital accumulation (physical and human). Countries really are poor because they're lacking capital but then the question shifts to why? That's what's complex and the answer includes most of the things here.

It may be a nitpick but I think it keeps the emphasis where it ought to be.

*How well capital gets used depends on management, workforce participation, working hours etc but all these things vary by only 10's of percent. While capital and skills vary by orders of magnitude and correspond to the roughly two orders of magnitude differences between economies in the world.

In order to develop the institutions and industries that will create the virtuous circle of economic development you need to encourage certain types of economic development so that you can jump start development.

Otherwise a country that is currently on the bottom of the global economic order will never be able to catch up with countries that are at the top. Instead the wealthy countries will monopolize high growth industries until all the potential innovation has been squeezed out of them, at which point they'll be passed along to the poorer countries (this is what happened with textiles or shoes: as long as they were high growth industries they remained concentrated in the developed economies, once they reached the far end of their 'learning curve' however the potential for growth and innovation in the production process was exhausted and they became staples of the under developed economies of the world).

# ? Mar 25, 2014 16:49

Typo: Aug 19, 2009; Chernigov Military Aviation Lyceum
The Fighting Slowpokes

Peel posted:

Haven't most industrialising nations followed a similar path?

IP law is a scheme to create and then and protect property, it doesn't make sense to create it until you're the one who will have the property.

Pretty much, the US for instance basically pirated the designs from the British textile industry for its industrialization

# ? Mar 25, 2014 19:38

namaste friends: Sep 18, 2004; by Smythe

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10722032/Moodys-warns-of-Hong-Kong-risk-to-Chinese-banks.html

quote:

The growth in lending at the Hong Kong subsidiaries of China�s largest banks has led to Moody�s warning about the increased risks they pose to their parents as they increase their exposure to the mainland economy.

Moody�s issued a �negative� outlook on three of the five Hong Kong subsidiaries of Chinese lenders, including those of China Construction Bank and Industrial Commercial Bank of China, over concerns at the rapid growth in loans.

Lending in Hong Kong has been driven by a combination of overseas expansion by mainland companies, domestic loan quotas, lower funding costs outside of China, and the appreciation of the renminbi.

The balance sheet of Wing Lung Bank, which is owned by China Merchants Bank, grew 99pc between 2010 and the middle of last year, while its exposure to mainland China rose from 8pc of its total loans at the end of 2010 to 40pc by June 2013.

Though still well above the regulatory minimum, Wing Lung�s growth has depleted its capital �steadily� and Moody�s said its negative outlook in part reflected the lender�s weaker loss buffer.

Though less extreme than Wing Lung, Moody�s said it had also kept a negative outlook on the debt of China CITIC Bank International, which is owned by China CITIC Bank and Spanish lender BBVA.

�These banks� future performance will be increasingly influenced by developments in the Mainland economy and health of its corporate sector,� said Moody�s.

Much of the lending by the Hong Kong subsidiaries is backed by credit guarantees provided by their mainland parents, but Moody�s warned that these arrangements had yet to be put through a proper crisis.

�The use of these guarantees means that, in theory, the credit risk of these loans has been transferred back to mainland banks, though it should be noted that the enforceability of these structures have not been truly tested due to rare occurrences of default in recent times,� said the ratings agency.

Sonny Hsu, a senior analyst at Moody�s, said: �The impact of such loan growth and increasing mainland exposures leads us to maintain negative outlooks on three of the five banks� stand-alone credit assessments.�

The warning from Moody�s echoes the concerns of many analysts over the increased exposure of Hong Kong-based banks to problems in the financial system of mainland China.

Credit Suisse last week downgraded the shares of HSBC, one of the Swiss bank�s corporate broking clients, to �sell� in part over worries at developments in Hong Kong.

In particular, Credit Suisse pointed to the potential unwinding of the increasingly popular renminbi carry trade, whereby many Chinese companies and banks have borrowed money offshore at a lower interest rate, normally in dollars, to invest back in China at a much higher rate.

While HSBC has been directly involved in this trade, the use of Hong Kong, where it has major operations, to facilitate the effective speculation on a rising renminbi has led to fears about the impact if the trade were to unwind.

�To the extent that loans are converted into renminbi for onshore use in China, they also present risks of currency mismatches for the borrowers and exposes the banks and the borrowers to potential changes in government policy,� said Moody�s.

Additionally, the Hong Kong subsidiaries of the major Chinese banks have also had a distorting impact on the province�s savings rates as the lenders have offer higher rates to attract deposits to fuel their continued offshore growth.

# ? Mar 25, 2014 19:48

OXBALLS DOT COM: Sep 11, 2005; by FactsAreUseless; Young Orc

Typo posted:

Pretty much, the US for instance basically pirated the designs from the British textile industry for its industrialization

One of the major players was a guy who memorized all the designs and was able to replicate them when he returned to the US. He was also one of the first major employers of women. Interesting fellow

http://en.wikipedia.org/wiki/Francis_Cabot_Lowell_%28businessman%29

# ? Mar 25, 2014 19:49

Typo: Aug 19, 2009; Chernigov Military Aviation Lyceum
The Fighting Slowpokes

Helsing posted:

its important to also recognize that countries like Peru and Mexico which pursued an import substitution strategy in the post war era were much better off than they have been since they abandoned import substitution for neoliberal economic policies.

Now this is interesting because I've consistently heard it argued the other way but never seen this side of the argument before.

What is the background behind this statement?

Typo fucked around with this message at 19:55 on Mar 25, 2014

# ? Mar 25, 2014 19:50

Helsing: Aug 23, 2003; DON'T POST IN THE ELECTION THREAD UNLESS YOU JOE BIDEN

Typo posted:

Now this is interesting because I've consistently heard it argued the other way but never seen this side of the argument before.

What is the background behind this statement?

As far as the track record of the neoliberal era you can refer to this document. Growth rates have been much worse since the turn toward market liberalization and the 'Washington Consensus'. Even making some allowance for the idea that different eras have different growth potential (i.e. maybe something about the 1950s-1970s made that era more amendable to growth regardless of the economic policies in place) its still quite remarkable just how lovely the real world results of market liberalization have been in contrast to the bad old days of protectionism, capital controls and Keynesian economics.

As for the more specific claims on Peru, this whole paper is worth reading (and quite relevant to a thread on the Chinese economy) but I'll just make an extended quote here:

Erik Reinert, The Terrible Simplifiers: Common Origins of Financial Crisis and Persistent Poverty in Economic Theory and the new '1848 Moment', December 2009, DESA Working Paper No. 88, pp. 18-21 posted:

Increasing Returns and Synergies: Their Creation and their Destruction

In many ways, the United States can be seen as the prototype successful developmental state. After US independence, the Continental European understanding of development as synergies among a large number of increasing returns industries was retrieved from European literature and rediscovered by US economists. These economists insisted that the United States, in spite of its abundance of natural resources and obvi-
ous comparative advantage in agriculture, would grow poor without manufacturing industry (Hamilton 1791; Raymond 1820; M. Carey 1822). Later, along the same lines of reasoning, Henry Carey (1793�1879) insisted that trading too much with Britain would preclude the United States from enjoying the bounties of future technological change. Carey also devised what he called a �commodity map�, which illustrates how the presence of a manufacturing sector changes the way income is distributed within a nation. Carey�s map, which could also have been called a �development synergy� map, is an illustration of the centuries-old obser- vation of the effects of a manufacturing sector. Today, the map can be used to explain the mechanisms by which Washington Consensus policies increased poverty in the world periphery.

Figure 3 represents the breakdown of a typical dollar�s worth of goods, i.e. a proxy for what we would call output or GDP. The height of the graph represents 100 per cent of GDP. Carey shows how dif- ferent the composition of GDP was in the developed East compared to the undevel- oped West of the United States at the time; the graph indicates how the composition of output changes as one moves gradually from Boston to St. Louis�from right to left in the figure�or vice versa. Economic development�increasing the division of labour and manufacturing�is represented by moving east from St. Louis, Missouri towards Boston. Poverty and backwardness grows as one moves west from Boston to St. Louis. St. Louis thus represents the situation in the undeveloped world or periphery today. Here, raw materials�e.g. cotton or cattle�are produced; land is abundant and cheap, labour is unskilled and cheap, tasks are simple, and the division of labour is limited. Under such condi- tions, Carey says, profits take up a large share of the GDP.

The East, Boston, represents today�s developed world with a large division of labour that adds a lot of value to a raw materials base. In the East, in contrast to the underdeveloped West, a multitude of workers combine their efforts within a complex social division of labour to work raw materials into ever more sophis- ticated products. More skills are required, increasing returns create higher profits and higher barriers to entry. Here, wages and rents form a much larger portion of the value of products, while profits shrink to a smaller percentage of GDP.

If a nation should move over time from Boston to St. Louis, that means undoing the synergies of development, reversing the critical mass that creates wealth, in a sense travelling from capitalism back in time towards something resembling feudalism. This more than 150 year old graph shows how Washington Con- sensus policies that started in the late 1970s have produced the same regressive effect as Henry Carey claims moving from Boston to St. Louis would have done in 1858: wages as a percentage of GDP sank slowly, while rents and profits�the FIRE sector: finance, insurance and real estate�grew correspondingly.

�Market failure� is a term often used when actual developments fail to behave the way economic theory would predict. Cimoli, Dosi and Stiglitz (2009) acknowledge that �market failure� is not a useful way to approach the problem of poverty. In fact, from a Schumpeterian angle, what we generally refer to as �development� is, in fact, a �market failure� compared to the standard neo-classical model assuming perfect competition and diminishing returns. What all developed countries have in common is a large increasing re- turns sector that has created huge barriers to entry, imperfect competition, and a �rent� that has been divided among capitalists (high profits), labour (high wages), and the government sector (larger tax base) (Reinert 2009a). In this section, we shall see how the policies of the Washington institutions led to the destruction of these industrial rents, and to huge falls in real wages. The shock therapies of the Washington institutions� instant free trade and �structural adjustments��sent poor countries, whose industrial sectors were not yet competitive on the world market, �from Boston to St. Louis� in Carey�s scheme.

Looking at the example of Peru since 1950, waves of industrialization and de-industrialization have been associated with fluctuations in living standards. The standard of living of the population has been inversely related to the weight of the primary sector in the total economy. During the period 1950 to 1997, a one percentage point decrease in manufacturing as a share of GDP led to a fall in white-collar wages by 5.4 per cent, and a fall in blue-collar wages by 7.5 per cent. Conversely, when manufacturing increased by one percentage point in total GDP, white-collar and blue-collar real wages increased by 10.6 and 15.5 per cent respectively (Roca and Simabuko 2004). Going back to Carey�s map, we can conclude that every time manufacturing increased as a percentage of GDP, this corresponding to �moving east� on the Carey map: wages went up. Every time the manufacturing sector shrank, it corresponded to 'moving west' on the Carey map, wages went down.

Figure 4 shows how real wages in Peru peaked in the mid-1970s when the country did everything �wrong� according to the Washington Consensus. Peruvian industry was kept up by high tariffs and represented a �bad� form of protection.
Industrialization was �artificial�, but the wages, roads, schools, and hospitals created by this industrialization were all real. It is also important to see how exports took off and made the country look very successful while real wages were plummeting at the same time. The Washington Consensus shock therapy hit Peru on two fronts simultaneously�with de-industrialization plus downsizing the public sector. By killing off the two sectors with strong union power�one private, one public�the whole national wage level collapsed. This was accompanied by a rapid fall in the terms of trade (Reinert 2007: Figure 15).

Peruvian wage levels fell much faster than GDP, as the composition of Peruvian GDP changed. Figure 5 shows how dramatic this change was. At the height of industrialization in Peru in 1972, wages amounted to 51.2 per cent of GDP and the income of the self-employed was 26.5 per cent, a total of 77.7 per cent of GDP. Figure 5 shows how wages, salaries and the income of the self-employed shrank rapidly as the country prematurely opened up to free trade. In 1990, the last year the Peruvian central bank provided a break-down of GDP in this way, the share of wages in GDP had been almost halved to 26.5 per cent, and the share of the income of the self-employed had fallen to 15.9 per cent. In total, the wages, salaries and the income of the self-employed as a share of GDP had shrunk by 45 per cent�from 77.7 per cent to 42.4 per cent of GDP�as a result of Washington Consensus policies from the mid-1970s to 1990. The �national industrial rent� had been destroyed, with devastating consequences for real wages that had been more than halved in real terms.

Rapid trade liberaliza- tion led to rapidly falling real wages, worsening income distribution, and primitivization of the economy back to a more feudal structure, correspond- ing to a voyage from developed Boston to underdeveloped St. Louis in Henry Carey�s model. This underscores why a poor nation is much better off with a relatively inefficient manu- facturing sector than with no manufacturing sector at all. I have argued that successful eco- nomic policy has been based on a �cult of manufacturing� before introducing free trade since the late 1400s (Reinert 2007). Occasionally�as just before the French Revolution (1789), just before 1848, and after the stagflation of the 1970s�theoretical �overshooting� based on excessively abstract models has led to this understanding being abandoned. In all three cases the result has been seriously worsening social conditions for the poor. Just before the French Revolution free trade in grain had led to a shortage of bread in Paris. The Storming of the Bastille, marking the start of the Revolution, was triggered when news of the dismissal of the last anti-physiocrat (anti-free trader) Jacques Necker as Minister of Finance reached Paris. Just as in 1848�which will be discussed in the concluding section of the paper�ill-timed free trade was seen as a source of human suffering. Free trade may come into conflict with the right to food, as French economist Simon Linguet (1736�1794) argued.

Getting back to China, I think its hilarious the way free market fundamentalists have tried to use China's economic growth as some kind of vindication of neoliberal policies or of the so called 'Washington Consensus' model of development. While China certainly represents a break from Soviet style central planning its absolutely not an example of a free market success story. Instead it exemplifies how what are basically mercantilist policies continue to be the most reliable toolkit for developing your national economy - provided that you are strong enough to resist other countries when they try to tell you that you'd be better off focusing on your 'comparative advantage' in cheap labour.

Using cheap labour and low value added industries as a stepping stone toward real economic development is acceptable, but it needs to be accompanied by a conscious policy of incubating a strong manufacturing sector with a high level of value added (even if that means protection against superior foreign competitors for an extended period of time, maybe even indefinitely since you're still better off with an inefficient manufacturing sector than you are with nothing at all, as we see in the case of Peru).

# ? Mar 26, 2014 00:28

dilbertschalter: Jan 12, 2010

The problem with this entire argument is simple- a big part of the reason growth has been "bad" is because the ISI-fueled growth that the paper above touts above was the definition of an unsustainable bubble. Latin American governments propped up their inefficient (i.e. wages too high/productivity too low to be truly competitive on the world market) industries through heavy borrowing and the end result was a huge economic crisis when the credit ran out. Latin American countries didn't move away from ISI because they were tricked by nefarious advocates of the free market, they did so because ISI was a disaster. Growth rates in America from 2001-2007 were reasonably good, but that doesn't mean we should start another subprime bubble to boost growth. Mercantilism isn't necessarily bad, but if you the industries you protect never produce anything people abroad want you're going straight down a dead end.

# ? Mar 26, 2014 06:10

OwlBot 2000: Jun 1, 2009

Helsing posted:

Over the last five centuries there's been a fairly reliable dynamic at play where certain industries, whether its textiles or automobiles or information technology, tend to be growing at a much faster rate than any other industry. This paper gives an overview of this process. As the paper demonstrates industries tend to follow something called a "learning curve".

As we see with these examples from the textiles and footwear industries there is an initial burst of productivity growth that eventually tapers off. Eventually the technology, which was previously transformative, becomes such a ubiquitous and standard part of the economy that we barely even notice it, and productivity growth in the industry becomes measurably slower or basically stops altogether.

How does this work, if at all, from a TRPF perspective?

# ? Mar 26, 2014 09:00

namaste friends: Sep 18, 2004; by Smythe

http://www.minyanville.com/sectors/global-markets/articles/will-China-Debt-Bomb-Trigger-US/3/26/2014/id/54329

quote:

On Wednesday night I had a long Twitter conversation with Larry McDonald over his latest article concerning China. You can read his piece here, but the gist of it is that

based on the spreads of their respective credit default swaps (CDSs), the credit risk of several Chinese / China-sensitive financial institutions is now higher than the credit risk of US financials;

The underperformance of Chinese credit risk is a telltale sign of credit problems that will transmit to equities; and

He concludes with the following paragraph: "We think the situation becomes disorderly and leads to a massive contraction of available credit in what was the fastest-growing economy in the world. Sell US stocks."
I won't dare to suggest that China's credit issues won't become disorderly and the world won't suffer from it. There is little doubt that China has wasted trillions of dollars to build empty cities, and that its shadow financial system (and even the non-shadow one) is about as transparent as mud. On the other hand, one must also consider that China sits on almost $4 trillion of foreign reserves. That's as much as the Fed has printed to intervene in the $17 trillion US economy, and the Chinese economy is half that. So he "may be right, I may be crazy," and only time will tell.

# ? Mar 27, 2014 15:17

Ardennes: May 12, 2002

Cultural Imperial posted:

http://www.minyanville.com/sectors/global-markets/articles/will-China-Debt-Bomb-Trigger-US/3/26/2014/id/54329

The ultimate question is going to be how much the Chinese government is willing (or is able) to tap those currency reserves, and ultimately the costs of propping up the banking industry.

Remember those foreign currency reserves also exist to back up the Renminbi, and if they are raiding that piggy bank it may have a long term effect on their currency. Remember, the Renminbi is not a major reserve currency, especially in comparison to the Chinese economy. Right now, their currency reserves are around 40-60% of GDP, a considerable amount but not necessarily unassailable under the right pressures.

# ? Mar 27, 2014 15:32

CIGNX: May 7, 2006; You can trust me

You can't use foreign reserves for a domestic bailout because it's all foreign currencies. The Chinese banks' liabilities are all in RMB, so if you gave them a bunch of Euro's and USDs they would have to exchange them for RMB with the central bank in order to pay back their debtors and depositors. This leaves the government with its original problem: how to get ahold of a bunch of RMB without deleterious effects. Their only real options are to print more RMB, issue debt, or increase tax revenue.

# ? Mar 28, 2014 00:43

Helsing: Aug 23, 2003; DON'T POST IN THE ELECTION THREAD UNLESS YOU JOE BIDEN

dilbertschalter posted:

The problem with this entire argument is simple- a big part of the reason growth has been "bad" is because the ISI-fueled growth that the paper above touts above was the definition of an unsustainable bubble. Latin American governments propped up their inefficient (i.e. wages too high/productivity too low to be truly competitive on the world market) industries through heavy borrowing and the end result was a huge economic crisis when the credit ran out. Latin American countries didn't move away from ISI because they were tricked by nefarious advocates of the free market, they did so because ISI was a disaster. Growth rates in America from 2001-2007 were reasonably good, but that doesn't mean we should start another subprime bubble to boost growth. Mercantilism isn't necessarily bad, but if you the industries you protect never produce anything people abroad want you're going straight down a dead end.

Your comment really just illustrates how premature free trade is a recipe for keeping currently under developed countries at the bottom of the global economy. South Korea industry was less efficient than its best global competitors for many decades and had to use various protectionist measures and subsidies. The USA had a century of protectionism and Britain had several hundred years of it before those countries were able to compete effectively in a "free market". In fact it isn't a coincidence that Britain switched from protectionism to advocating 'free trade' right around the time it became the world leader in industry. The Americans did the exact same thing: they were huge advocates of protectionism and cultivating 'infant industries' until they had built up the world's most productive industry and then they suddenly became the world's fiercest advocates for free trade. All those countries also experienced major bubbles during their development, but they were able to recover from them and forge ahead because, for various reasons, they didn't end up at the mercy of foreign creditors who had a vested interest in keeping them down.

I agree that the record of ISI isn't as good as the record of export lead protectionism but its still got a much better track record than "free trade" which tends to only benefit the core countries plus a small strata of elite interests in the periphery. If we actually wanted to use trade to develop the entire world then free trade would be phased in gradually, starting at the regional level and then slowly working up as countries became more efficient. We'd recognize that while a country is developing they are better off having an inefficient industrial base that is protected by government rather than having no real industry at all.

OwlBot 2000 posted:

How does this work, if at all, from a TRPF perspective?

Reinert is a Schumpeterian, not a Marxist (though Schumpeter, despite being quite conservative, took Marxian economics quite seriously and credited Marx with having a much clearer understanding of how capitalism develops than Alfred Marshall or other neoclassicals).

In the Schumpeterian perspective the focus is placed on 'entrepreneurs' (this can be an individual or a corporation or whatever) who "innovate" via "combination", i.e. they combine two inputs or services or ideas in some novel way. This could be anything from the idea of having a cafe where you can also play boardgames (i.e. you're combining the idea of a cafe with the idea of a gaming store) or it could be combining two industrial techniques to hugely improve the efficiency of your factory. To use a recent example you could think of the Blackberry, which essentially combines the functions of a computer and a phone.

If this innovation is succesfull then the entrepreneur who developed it is able to charge well above the cost of production for it. This extra profit is referred to as a Schumpeterian rent. However this will cause others to copy your innovation (think of how, within a few years of Blackberry's roll out, numerous other 'smart phones' were being brought to market). As more people enter the market seeking to copy or improve on your innovation your profits will go down. Eventually your profit rate drops down to the industrial average or even below it.

There's a certain resemblance here to the idea of the tendency of the rate of profit to fall since you start out with a highly profitable product and then over time the market process causes more capital to rush into this particular industry, bringing down the rate of profit. However Schumpeter was pro-capitalist (though he largely accepted the Marxian idea that capitalism was doomed in the long run) and was more interested in describing how a capitalist economy functions than he was in predicting its inevitable downfall.

# ? Mar 28, 2014 16:50

Typo: Aug 19, 2009; Chernigov Military Aviation Lyceum
The Fighting Slowpokes

Helsing posted:

Your comment really just illustrates how premature free trade is a recipe for keeping currently under developed countries at the bottom of the global economy. South Korea industry was less efficient than its best global competitors for many decades and had to use various protectionist measures and subsidies. The USA had a century of protectionism and Britain had several hundred years of it before those countries were able to compete effectively in a "free market". In fact it isn't a coincidence that Britain switched from protectionism to advocating 'free trade' right around the time it became the world leader in industry. The Americans did the exact same thing: they were huge advocates of protectionism and cultivating 'infant industries' until they had built up the world's most productive industry and then they suddenly became the world's fiercest advocates for free trade. All those countries also experienced major bubbles during their development, but they were able to recover from them and forge ahead because, for various reasons, they didn't end up at the mercy of foreign creditors who had a vested interest in keeping them down.

I don't think he has a problem with protectionism and said as much his post. But he is correctly pointing out that if protectionism doesn't lead to competitive industries it is problematic. Whatever you have to say about protectionism in Britain or Germany or the US it did result in industries that were genuinely competitive on the world stage.

quote:

I agree that the record of ISI isn't as good as the record of export lead protectionism but its still got a much better track record than "free trade" which tends to only benefit the core countries plus a small strata of elite interests in the periphery. If we actually wanted to use trade to develop the entire world then free trade would be phased in gradually, starting at the regional level and then slowly working up as countries became more efficient. We'd recognize that while a country is developing they are better off having an inefficient industrial base that is protected by government rather than having no real industry at all.

But he -is- correct though. ISI only has a better record in the sense that it borrowed money countries can't repay and kicked a economic crisis down the road.

Typo fucked around with this message at 18:24 on Mar 28, 2014

# ? Mar 28, 2014 18:13

Helsing: Aug 23, 2003; DON'T POST IN THE ELECTION THREAD UNLESS YOU JOE BIDEN

Typo posted:

I don't think he has a problem with protectionism and said as much his post. But he is correctly pointing out that if protectionism doesn't lead to competitive industries it is problematic. Whatever you have to say about protectionism in Britain or Germany or the US it did result in industries that were genuinely competitive on the world stage.

If those countries had been forced to open up their industries after only a decade or two then they would have suffered the same fate as Peru. They were able to reach competitiveness because they had a much longer time to incubate their infant industries.

quote:

But he -is- correct though. ISI only has a better record in the sense that it borrowed money countries can't repay and kicked a economic crisis down the road.

Periodic crises in Latin America where investment capital rushes in and then rushes out again are not new or unique to ISI. The downturn became an excuse for the IMF and the United States to put the breaks on the industrialization (and what was perceived to be a leftward shift) in Latin America. I agree that ISI doesn't always have the best track record but it went a lot better than the neoliberal reforms that followed it and I don't think its accurate to say it simply kicked the crisis down the road. Like I said, an economy with an inefficient industrial base is still better off than an economy without any industry at all.

If the United States had been forced by international creditors to impose IMF style conditionalities on its economy following the Panic of 1873 then America never would have become a global power.

# ? Mar 28, 2014 19:06

namaste friends: Sep 18, 2004; by Smythe

So real estate is taking a turn.

http://m.scmp.com/comment/blogs/article/1464831/hk470-million-hong-kong-apartment-just-wont-sell

quote:

It probably seemed like a good idea at the time. If you have trouble finding a buyer for the most expensive apartment ever listed in Hong Kong (on a square foot basis), best not worry, just hang on. One will eventually come along - probably from the mainland. Just give it some time.

Or at least that’s how Swire Properties’ management likely sized up the situation back in December when they decided to withdraw from sale an upper floor unit of its luxury Opus apartment tower after bids fell short of its HK$470 million reserve price. The tower, a marvel of fluid lines by architect Frank Gehry, offers some stunning views from its perch up on the peak.

Its price, however, is enough to make even billionaires cringe. Consider that media mogul Rupert Murdoch in February paid US$57.25 million for a New York apartment following his split from Wendy Deng. Murdoch’s new bachelor pad spans 10,000 square feet spread over the top four floors of a 60-storey tower on Manhattan’s East 23rd street. The 11th floor unit that went on tender at the Opus is 5,400 sq ft.

It’s a prime asset, we’re not so concerned about when we sell it

SWIRE PROPERTIES CHIEF EXECUTIVE MARTIN CUBBON

For another point of reference, consider that Swire Properties’ net profit for the recently-ended financial year was HK$6.348 billion. At asking price, that single Opus unit is equivalent to 7.4% of the group’s profit.

Swire Properties Chief Executive Martin Cubbon said he was happy to hold the apartment as finished inventory. He indicated that it could be rented out, as the company has done with other units that it owns in the building. Seven of 12 units in the development are tenanted.

“It’s a prime asset, we’re not so concerned about when we sell it,” Cubbon said recently. He acknowledged there had been bids by the December 12 deadline, but that they “weren’t quite enough” to trigger a sale.

Sales at the development just a few months earlier had been more successful. A ninth-floor apartment sold for HK$455 million in October, setting a record at the time as the most expensive in Asia on a per square foot basis.

Still, one has to wonder whether there’s a sense of regret now settling in among senior Swire management that they should have been more aggressive in liquidating inventory when they had the chance.

It doesn't appear wealthy mainlanders will be hunting for trophy properties in Hong Kong anytime soon, even as there’s few signs yet of a major slowdown in spending by cross-border visitors.

But data coming out of China in recent weeks isn’t comforting.

Take the nationwide housing data released last week.

Average home prices fell 3.8% in the first two months of the year, marking the first year-on-year drop since February 2012.

The figures were compiled by Nomura using CEIC data to create what they say is a more accurate snapshot of what’s going on inside China’s housing market. In compiling and plotting the data, they gave more weight to China’s third and fourth tier cities, which account for 67% of the housing under construction. Nomura calls the 70-city price index which shows average prices as still rising “misleading” because it overlooks smaller urban areas.

Check out this chart on what’s really going on, courtesy of Nomura.

Nomura

In a blunt assessment, Nomura’s Hong Kong-based analysts sum up the situation: “We believe China’s property market may have passed a critical turning point and will go into a downward cycle as the oversupply problem worsens.”

Exterior of Opus Hong Kong at 53 Stubbs Road, The Peak, by Swire Properties. Photo: SCMPInvestment in property will likely slow in coming months, Nomura’s analysts said, creating a drag on the economy that runs the risk of spiraling into a self-reinforcing slowdown.

Keep in mind that what’s really important here is the shifting market psychology. It may take many months to play out, but a gradual erosion of confidence is underway. Things are likely to come unglued, prompting the PBOC to loosen lending standards. Nomura thinks such steps are inevitable, initially in the form of a cut to banks’ reserves requirements, probably by July.

Here’s some other warning signs that not all is well.

Corporate bond defaults. Beijing’s decision to allow the domestically-issued corporate bonds of a solar cell maker to default earlier this month, the first by an onshore Chinese company in 17 years, was initially cheered by analysts who said it would help instill market discipline. Meanwhile, revelations last week that Chinese property developer, Xingrun Properties, had collapsed after it wasn’t able to service its debt, didn't garner quite the same praise from economists. Clearly the weaker developers are losing access to credit.

Widened trading band for the yuan. The PBOC’s official explanation earlier this month to widen the yuan daily band to 2% is to introduce greater two-way volatility in the currency. Daiwa analysts, however, argue that what’s been a “free lunch” for China has come to an end as the Fed winds downs its QE. They see a new era where policy normalization in the U.S. means shrinking liquidity in China. To combat the squeeze, the PBOC will have to print more yuan, which means a gradual depreciation.

Judging by the looks of things, it might be a long wait before the next half-billion Hong Kong dollar flat buyer arrives from across the border.

# ? Apr 4, 2014 13:08

asdf32: May 15, 2010; I lust for childrens' deaths. Ask me about how I don't care if my kids die.

Helsing posted:

As far as the track record of the neoliberal era you can refer to this document. Growth rates have been much worse since the turn toward market liberalization and the 'Washington Consensus'. Even making some allowance for the idea that different eras have different growth potential (i.e. maybe something about the 1950s-1970s made that era more amendable to growth regardless of the economic policies in place) its still quite remarkable just how lovely the real world results of market liberalization have been in contrast to the bad old days of protectionism, capital controls and Keynesian economics.

As for the more specific claims on Peru, this whole paper is worth reading (and quite relevant to a thread on the Chinese economy) but I'll just make an extended quote here:

Getting back to China, I think its hilarious the way free market fundamentalists have tried to use China's economic growth as some kind of vindication of neoliberal policies or of the so called 'Washington Consensus' model of development. While China certainly represents a break from Soviet style central planning its absolutely not an example of a free market success story. Instead it exemplifies how what are basically mercantilist policies continue to be the most reliable toolkit for developing your national economy - provided that you are strong enough to resist other countries when they try to tell you that you'd be better off focusing on your 'comparative advantage' in cheap labour.

Using cheap labour and low value added industries as a stepping stone toward real economic development is acceptable, but it needs to be accompanied by a conscious policy of incubating a strong manufacturing sector with a high level of value added (even if that means protection against superior foreign competitors for an extended period of time, maybe even indefinitely since you're still better off with an inefficient manufacturing sector than you are with nothing at all, as we see in the case of Peru).

Any examples are interesting but being a small country which suffered political instability at the time it liberalized makes it a difficult example to generalize from. I'd like to see more about the claims of government debt too.

Though in your defence a broader discussion could be had here, but I don't think Peru is ideal for it.

Wikipedia: Import Substitution posted:

For the six largest south american economies the phase of import substitution between 1940 and 1980 was the highest growth period in the last century with a growth of 2.7% per year on average. In the export-oriented era from 1900 till 1939 growth was at 1.3% and in the neoliberal era from 1980 to 2000 at 0.6%.[13]

One thing that's important about China for discussions like this is it's size. When China is able to grow and reduce poverty it means a significant chunk of the worldwide population is improving. We don't have to try and generalize from it (though we may want too).

I still don't think you're showing recognition of the fundamental importance of trade, especially for economy like Peru which doesn't have any hope of substituting imports for, well, most things including critical items like industrial equipment, computers, telecommunications etc. And again the landscape has really changed here. Mexico manufactured 95% of it's consumer goods in the 60's - this wouldn't be possible or desirable today. And as the technological gap widens between developed and undeveloped countries comparative advantage becomes more and more powerful.

China does rely on the comparative advantage of cheap labor as a major component of it's growth which is exactly why it gets brought up as an example of that. Personally, I generally don't go a whole lot beyond pointing this out. Trade is key, and a certain amount of liberalization (and not too much protection) is necessary to create it. China is a great example of this.

# ? Apr 6, 2014 02:04

Ardennes: May 12, 2002

asdf32 posted:

One thing that's important about China for discussions like this is it's size. When China is able to grow and reduce poverty it means a significant chunk of the worldwide population is improving. We don't have to try and generalize from it (though we may want too).

I still don't think you're showing recognition of the fundamental importance of trade, especially for economy like Peru which doesn't have any hope of substituting imports for, well, most things including critical items like industrial equipment, computers, telecommunications etc. And again the landscape has really changed here. Mexico manufactured 95% of it's consumer goods in the 60's - this wouldn't be possible or desirable today. And as the technological gap widens between developed and undeveloped countries comparative advantage becomes more and more powerful.

China does rely on the comparative advantage of cheap labor as a major component of it's growth which is exactly why it gets brought up as an example of that. Personally, I generally don't go a whole lot beyond pointing this out. Trade is key, and a certain amount of liberalization (and not too much protection) is necessary to create it. China is a great example of this.

The issue is the possibility of a "trade bubble," many of the economies that relied on trade for growth and improved standards of living may in fact begin to hit a wall if they haven't already. A big part of the development that happened from the 90s/00s was that these economies used their comparative advantage (ie cheap labor) to offshore manufacturing and services from the first world. Ultimately, the issue becomes when demand within the first world is sapped and there are effectively more limited options for finding capital. For a while it was claimed that China could just develop from internal demand but it is clear that much of that growth was purely financed on internal debt with relatively little return.

"Trade is key" in so far when the conditions are right but much of the history of ISI is also wrapped up in the Cold War and the fact many countries in the third world purposefully tried to distance themselves from the US/first world and therefore used ISI in order to maintain political independence.

Edit: The countries that did cozy up (sometimes they didn't have much of a choice...like Japan) did well for a while, especially if trade barriers opened up between them and the United States but this relationship also had its own complexities.

Ardennes fucked around with this message at 10:15 on Apr 6, 2014

# ? Apr 6, 2014 09:27

Arglebargle III: Feb 21, 2006

ProfessorCurly posted:

I think the point is that if the situation persists there will be no Chinese IP. If you are left twisting in the breeze with nothing but research costs and a bunch of knockoffs, why would you go through the trouble?

So would you say you are "not very familiar" with the Chinese tech industry or would "not at all familiar" be a better way to describe your level of knowledge?

# ? Apr 6, 2014 11:38

ProfessorCurly: Mar 28, 2010

At that point not at all, I was just responding to the general point of the person I quoted - that apparently in China there is an atmosphere of 'no big deal if someone else copies my idea' with the theory being that so long as the copy-cat companies make more than the developer lost it will be a net gain for society. If that is really the situation on the ground then I don't find it logical for there to be developers who are apparently surrounded by people waiting to rip off their idea with lax standards of enforcement.

Decided to do a bit of reading on it and apparently China has been moving towards a strong IP law system, and the areas with the best local enforcement of those laws are also where a lot of the best ideas/developments are coming from. Is this a bad assessment of the situation? I didn't mean to step into the thread to share my vast wealth of knowledge, just to point out the immediate flaw in a given post.

# ? Apr 6, 2014 13:50

Helsing: Aug 23, 2003; DON'T POST IN THE ELECTION THREAD UNLESS YOU JOE BIDEN

asdf32 posted:

Any examples are interesting but being a small country which suffered political instability at the time it liberalized makes it a difficult example to generalize from. I'd like to see more about the claims of government debt too.

Though in your defence a broader discussion could be had here, but I don't think Peru is ideal for it.

Another example would be Mexico. The Mexican government adopted ISI policies in the 1940s and maintained them up until the end of the 1970s, a period referred to as the "Mexican Miracle". Growth averaged around 6% during the ISI period before dropping to around 1.5% during the 1980s and 1990s. Also note that this period of growth the share of GDP taken up by manufacturing rose substantially while the share taken up by agriculture shrank. Also note that one of the factors involved in the eventual end of the miracle period was when the government began to invest heavily in oil exports (i.e. the Mexican economy's "comparative advantage" in oil) which created difficulties when the price of oil suddenly dropped in the early 1980s.

Like I said above, there are identifiable patterns here. Building and maintaining a manufacturing sector promotes healthy economic growth and rising wages. It isn't some kind of magical policy that will guarantee success but it is clearly a necessary step for achieving middle or high income status as a nation. It also takes a long and sustained period of protectionism mixed with trade to achieve middle or high income status, something that is evidenced by the historical example of just about every high or middle income country in the world today.

Typo argued above that the ISI period merely propped up industries that weren't competitive internationally, but this ignores the fact that all successful countries do this, often for extended periods of time, before their industries are ready to compete. The first Japanese car sold in America, the Toyopet Crown, was a disaster. It was too heavy and it had a weak motor that meant it could barely climb some hills, and it was more expensive than other economy cars. Japan also had a reputation for shoddy goods and there was left over bad feelings from the war. The car performed so poorly in the American market that it was withdrawn. Observers at the time, both in Japan and abroad, pointed to this as an example of why Japan should stay focused on producing textiles and electronics rather than sinking capital into its uncompetitive automobile manufacturing.

When South Korea decided to pursue self-sufficiency in steel construction it established POSCO in 1968 as a State Owned Enterprise. Since South Korea hadn't possessed any modern steel plants up until that time and since it lacked iron ore or coking coal the World Bank and most international lenders refused to loan money for the project and condemned it as an extravagant waste. However the South Korean government persisted and POSCO has become one of the world's largest corporations and possibly the world's most efficient producer of steel.

It takes many decades to achieve competitive status internationally and during that period you need all kinds of government support to keep the industry alive. This example is clear in country after country. You need to consciously encourage industries with the potential for high productivity growth even if this means protecting your own relatively inefficient industrial base from foreign competition for an extended period of time.

quote:

One thing that's important about China for discussions like this is it's size. When China is able to grow and reduce poverty it means a significant chunk of the worldwide population is improving. We don't have to try and generalize from it (though we may want too).

I'll just note that China is an extremely protectionist economy. It is in no way a vindication of free trade arguments or neoliberal policy.

quote:

I still don't think you're showing recognition of the fundamental importance of trade, especially for economy like Peru which doesn't have any hope of substituting imports for, well, most things including critical items like industrial equipment, computers, telecommunications etc. And again the landscape has really changed here. Mexico manufactured 95% of it's consumer goods in the 60's - this wouldn't be possible or desirable today. And as the technological gap widens between developed and undeveloped countries comparative advantage becomes more and more powerful.

I fully recognize the importance of trade, but I also recognize that so called "free trade" is a policy that strong countries impose upon weak countries to prevent them from emulating the successful development strategies that basically all wealthy countries have relied upon.

If you go back to the 19th century when Britain pioneered "free trade" and economic liberalism and you actually examine the arguments made by the British at that time then you'll note that the people arguing in favour of free trade advocated that policy because they thought it would retard the growth of manufacturing on the European continent. The argument basically ran as follows: since we have such an advanced manufacturing sector we should open up our market for agricultural imports from the continent. This will encourage the continental economies to focus on the short term profits they can achieve by selling us their agricultural produce and will thus discourage them from emulating our industrial growth.

Likewise in the 19th century USA there was a saying "don't do what the British tell you to do, do what the British did", i.e., encourage and protect infant industries rather than prematurely liberalizing the economy.

Trade is great. Countries on a relatively equal footing like France and Germany can gain plenty by trading with each other with relatively few restrictions. And economies at different levels of development can also gain a lot from trading with each other. This trade, however, should be pursued as part of a balanced approach that prioritizes development. It shouldn't be about blind adherence to the fake ideology of 'free trade' which, historically, has been a rhetorical excuse for powerful countries to maintain control over weaker economies.

quote:

China does rely on the comparative advantage of cheap labor as a major component of it's growth which is exactly why it gets brought up as an example of that. Personally, I generally don't go a whole lot beyond pointing this out. Trade is key, and a certain amount of liberalization (and not too much protection) is necessary to create it. China is a great example of this.

China is a heavily protectionist country. Sure it uses cheap labour to its advantage, but it does so in the context of a very aggressive development strategy in which the freedom of foreign capital is greatly restricted and in which massive subsidies and protections are extended to strategic industries. Nothing about China supports the conventional 'free trade' agenda.

I mean obviously international trade is an important part of development. Nobody is denying that. But that doesn't in any way vindicate the idea that the path to prosperity comes by abandoning industrial strategy in favour of "comparative advantage".

# ? Apr 6, 2014 17:53

namaste friends: Sep 18, 2004; by Smythe

http://ftalphaville.ft.com/2014/04/07/1820562/both-a-lender-and-a-borrower-be-china-property-edition/

Chinese developers are investing in Chinese banks whom they borrow from. They're deeply in debt with them so they're.... Well who knows why.

# ? Apr 7, 2014 13:41

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# ? Apr 24, 2024 00:29

Nintendo Kid: Aug 4, 2011; by Smythe

steinrokkan posted:

Tsarist Russia wasn't medieval. For instance the giant hydroprojects realised at the Aral Sea were originally drafted by a Tsarist commission. And there was an industrial basis already present throughout Russia - how else do you think the country survived the WWI?

Russia manifestly did not survive World War I. The government collapsed, everything became warring factions from before the end of WWI all the way up til the 20s. Numerous components of former Imperial Russia had their independence, already secured by force of arms in 1917 and early 1918, confirmed by the same terms that brought the November armistice for the central powers.

# ? Apr 7, 2014 14:38

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