“This Time Is Different” Syndrome In China25 April, 2011, 22:57. Posted by Zarathustra
Tags: Bears, Bulls, Economy
Some people are bearish on China because they really want China to collapse. On the other side, some people are optimistic because China, in their views, will be the next great power and will ultimately overtake the United States as the largest economy. IMF, of course, came up with a shocker that China’s economy will be as large as the US by 2016, something that I don’t really care: China has 4 times as many people as the United States, so the surprising thing should be that the Chinese economy will only be as large as the United States, not that it will be as large as the United States finally.
Bulls like Shaun Rein (who really irritates me) and many others have plenty of reasons to tells people why the bears are wrong. From under-reported income level, fast income growth to eternity (eternity means their foreseeable futures) and urbanisation, bulls are running the story with the same old sets of reasons, claiming that China will be fine. Some went so far to say that there has been no bubbles at all and there has been no over-investment in infrastructure.
The Economist Intelligence Unit believe, for instance, that the housing boom is sustainable because urbanisation will proceed at a rapid pace, with urban population increasing by 26.1% by 2020. They went on and said that they believe Chinese real estate will be among the best performing asset classes in the next 10 years because of urbanisation, income growth and exchange-rate appreciation. They think that the tightening measures will only lead to short-term downturn, not a crash.
The bizarre thing in the report, which I have read last week, was that they actually conclude that at current income level, the Chinese is over-housed by 53% in terms of residential floor area per head. And it said:
Clearly, there are more factors than income that determine living space across countries. Population density, for instance, plays a prominent role. Japan’s population density is over ten times that of the US and nearly three times that of China, going some way to explain why Japanese people live in such small spaces (capsule hotel, anyone?). But even after controlling for population density, China remains the most overhoused country among the 35 listed.
How could they reconcile their finding that Chinese people are over-housed and their conclusion that Chinese real estate boom is sustainable? I don’t think they have adequately addressed this question, except the old arguments of urbanisation and income growth.
More popular view, however, is that people believe that the government is able to control its economy: they have both willingness and ability to engineer a soft-landing.
Willingness, that’s quite sure. Ability?
I tend to agree with judgment of Alan Greenspan that as China is opening up its economy, the leadership will have less and less control over the economy. Jiang Zemin & Co. had less control than Deng Xiaopeng & Co., and Hu Jintao & Wen Jiabo & Co. have less control than Jiang Zemin & Co, and this series will go on and on.
The Chinese government do have much greater control than the government of the United States. But we have to remember that the government has lost control of many aspects of the economy as they open up the economy. In the 1998-1999 banking crisis, for instance, the biggest state-own banks (Industrial and Commercial Bank of China, Bank of China, China Construction Bank, and Agricultural Bank of China) had the non-performing loan ratios which would dwarf the troubles of the Western banks in the subprime crisis, yet the crisis did not drag down the economy, and it is now pretty much forgotten. This is because those banks were 100% state-own, such that they could continue to operate as if nothing has happened with the government’s backing. Now, all these 4 banks have been listed in equities markets in Hong Kong and Shanghai, that means they are partially owned by public shareholders. These banks are being tested in the equities markets on a daily basis, such that a much smaller banking problem will be enough to make the market panic.
The government has also lost control on many other aspects of the economy. As I put it in When a planned economy becomes unplannable:
Things are, of course, getting more and more unplannable. Or, having one variable being controlled in a desirable level, other variables are getting uncontrollable. For instance, by keeping exchange rate low, they have no choice but to accumulate foreign currency reserve, buy US treasury securities that they don’t want, and increase money supply and fuel inflation and real estate bubble. In hope to curb home prices, the central government asked local governments to set prices targets, but all local governments wanted to see prices to increase rather than to fall.
The “this time is different” argument suggests that most people has underestimated the ability of the government. However, what we have seen is that the government has failed to control the economy: they have failed to keep its foreign exchange reserve at the right size, money supply growth at the right rate, inflation at the right rate, and real estate market at the right prices. They have failed to lower the share of investment and increase that of consumption in the GDP. The only thing that they really have good control is the exchange rate.
The government understand the problem of the economy pretty well, but they have literally failed to make necessary changes in almost every aspect, and you just can’t blame the United States for everything that you failed.
Are bulls actually over-estimating the ability of the Chinese government in controlling the economy? “This time is different”? Are you sure?
For an even more pessimistic view (so pessimistic that I actually have some trouble believing in it), see the comparison between China today and the United States in 1920s.