Think you misunderstand the experience of deflation in Japan (which seems common). It may have been bad for equity investors but for the average Japanese it wasn't a big deal and life during the alleged lost decades got better (just visit the place). Interestingly people in East Asia get this and don't share the Western opinion (ask Singaporeans about Japan say). I think the Chinese leadership see it the same way and would be happy to end up like Japan. A high trust, generally contented society with essentially single party rule.
China’s challenges are real, as are those facing “the West.” It looks to me that the biggest difference is that the Chinese government and its people are trying to DO something about those challenges, while “the West’s” misleadership class is engaged in various strategies of denial and delay — anything to maintain a status quo upon which they rely for their sinecures, yet increasingly immiserates larger and larger segments of the citizenry. What can’t continue, won’t continue …
Xi Jinping took a big risk when he decided to pop the real estate bubble.Perhaps it could have been done differently and not all the consequences had been sufficiently pondered.But it was a proof of macroprudential management to prevent the bubble from growing for another one or two decades.Now the cure is proving costly,later it might have been far worse.
Eugenio Bregolat,former Spanish Ambassador in China
Great piece as usual, but as I drew to your concluding thoughts on development as conceptualized by China itself, I began to feel an important absence- one almost might say, a "specter"- haunting the text...
Quite a ballanced essay I might say and this is why I look into Chartbook, for pearls like this, devoided of any ideological bias.
Comments, quibbles:
"A huge trade surplus is a sign of inadequate domestic demand." It is also a signed that, not only by its own designed but propped by the already industrialized world, China HAS become the world's workshop. It produces for the entire world, and not only cheap stuff. As such, the trade surplus is to be expected, no? Americans liked providing funny money for all those goods. The problem started when they realized that China has accumulated enough economic/industrial might that it can produce military might which then stops any US attempts to pound China into submission (as they would do otherwise).
China has layers upon layers upon layers of cultural/historical baggage. As such, the latest MATERAIL development shouldn't be considered miraculous by any means. The latent potential that existed in China does easily explain this "miracle".
And yes, China is a developing country and is in the process of continuous development that will take some more generations towards... communism... One should keep the eyes on the ball all the time. For the Western world and its elites, the main imperative is not growth, but maintaining the present socio-economic-political structures.
Also, one needs to remember something, the way we measure "growth" will be very inadequate in a world with rapidly shrinking population...
I often wonder if the US can ever have coherent economic policy with the vicissitudes of its political structures and timeliness. There seems to be too much antagonism between how political parties view national economic policy and strategy to collaborate for long term planning such as China does. We have no functioning Congress that cares to determine long term strategy but is mired in the political and populist every budget cycle.
Your discussion of the incredible number of engineers and scientists being trained in China sparked a new thought on my part. I'm always hearing about how most of the STEM post-graduate students in the USA are Chinese, and how this is a 'brain drain' because they mostly stay and end up heading up US faculties and corporations. What if this cohort are those that didn't have what it took to compete within their disciplines in China itself, bailed out, and still ended up heading up US faculties and corporations?
A quibble with the idea that Xi’s decision to pop the real estate bubble was an example of astute macro management: this supposes that the bubble had been created by market forces and ended by regulation, which is how a real estate market might work in, say, the United States or United Kingdom. In China, the state created the bubble. It did so through a tax regime and fiscal system that passed the cost of urbanisation onto the provinces through a short-sighted and unsustainable “unholy alliance” between local governments and developers that went on 10 years longer than it should have. Indeed, it was under Xi that developers were allowed - nay, encouraged - to finance their growth through pre-sales of unfinished apartments. This caused China’s real estate market to reach historically absurd affordability levels of around 17x average incomes (three to four times that in the US and UK).
It pre-supposes Xi inherited the RE bubble built on policies of previous admin(s) and prudently dismantled it without breaking everything. The broad timeline is regulators started tighten credit in 2010s, Xi enters, policies led to residential construction slump in 2012-2017 where floor space completion and construction employment peaked, 2014 loosening monetary policy when people freaked at attack on RE, 2017 deleverage/crack down on shadowbanking which drove developers to turn to presales as financial instrument, pre-sales were not encouraged, then hard 3RL in 2020. Xi took 10 years to dismantle a system that might have gone on for 10 years too long, but managing RE (read: everyone's wealth) is a 10 year management problem, not just managing macro, managing expectations about core asset and associated believes (RE only goes UP). It took multiple wait and see, whack-a-mole policies and gradual wearing down of mental barriers, that had to span 10+ years just for mass psychology reprogramming around purpose of RE (living in not speculation).
>(three to four times that in the US and UK).
Chinese Tier1 RE markets. Have to compare to T1 markets else where (mostly 10x). And then have to be real and acknowledge 15-20x average income levels is _FAIR_ for tier1 cities. Chinese Tier1s where the premium jobs has to address supply:demand curve of internal PRC migration patterns which is greater than ANY other western country with immigration. Makes places like SF, NYC, LD look tame. Those are places with ~10x price-to-income ratios. PRC added ~150 MILLION new graduates in the last 25 years, which high skill sets and earning potential, all competing for 10s of millions new housing units in T1.
Regardless, the real prudent management was in urbanism. I remember in 2000s-2010s discussion around densifying T1 (mostly from western urbanisms during exchanges). PRC T1s are not dense relative to other cities. Instead PRC went to grow T2+ cities to shift opportunies outside of main T1s (coast to interior), now you have hubs like Hangzhou and many generally very nice livable T2s+. That's the holistic strategy, of make "houses for living in", macro to keep prices stable in T1s, distribute supply:demand curve in T2s (which graduates into new T1s). There's a reason Chinese city patterns one of the extreme Zipf law outliers.
Another way of describing "how a real estate market might work." A local govt official arrives in a village which has been there for a thousand years and announces: "everyone has to leave; we have nice new apartments for you and will even give you a few yuan." But the people don't want to move. The next day the bulldozers arrive. Soon the village has been "developed" into rows of ugly, cheap cement and steel apartments.
It doesn't really look like this. Watching Katherine's journey to the east vlog for quite some years now (a young American woman that relocated herself in China and ended up marrying there an Uighur) I cannot say I have seen evidence of such things:
What, do you think Kate has pink glasses? There are many such stories available out there. And this is what pops up to the surface, not some Falung Gong fabrication funded by the US deep state.
Very informative. Adam was thought to be the expert of European and German economic history; but this piece on China shows he is also an expert on China!
Think you misunderstand the experience of deflation in Japan (which seems common). It may have been bad for equity investors but for the average Japanese it wasn't a big deal and life during the alleged lost decades got better (just visit the place). Interestingly people in East Asia get this and don't share the Western opinion (ask Singaporeans about Japan say). I think the Chinese leadership see it the same way and would be happy to end up like Japan. A high trust, generally contented society with essentially single party rule.
China’s challenges are real, as are those facing “the West.” It looks to me that the biggest difference is that the Chinese government and its people are trying to DO something about those challenges, while “the West’s” misleadership class is engaged in various strategies of denial and delay — anything to maintain a status quo upon which they rely for their sinecures, yet increasingly immiserates larger and larger segments of the citizenry. What can’t continue, won’t continue …
Thank you for your anlysis.
Xi Jinping took a big risk when he decided to pop the real estate bubble.Perhaps it could have been done differently and not all the consequences had been sufficiently pondered.But it was a proof of macroprudential management to prevent the bubble from growing for another one or two decades.Now the cure is proving costly,later it might have been far worse.
Eugenio Bregolat,former Spanish Ambassador in China
Great piece as usual, but as I drew to your concluding thoughts on development as conceptualized by China itself, I began to feel an important absence- one almost might say, a "specter"- haunting the text...
hahaha nice
Quite a ballanced essay I might say and this is why I look into Chartbook, for pearls like this, devoided of any ideological bias.
Comments, quibbles:
"A huge trade surplus is a sign of inadequate domestic demand." It is also a signed that, not only by its own designed but propped by the already industrialized world, China HAS become the world's workshop. It produces for the entire world, and not only cheap stuff. As such, the trade surplus is to be expected, no? Americans liked providing funny money for all those goods. The problem started when they realized that China has accumulated enough economic/industrial might that it can produce military might which then stops any US attempts to pound China into submission (as they would do otherwise).
China has layers upon layers upon layers of cultural/historical baggage. As such, the latest MATERAIL development shouldn't be considered miraculous by any means. The latent potential that existed in China does easily explain this "miracle".
And yes, China is a developing country and is in the process of continuous development that will take some more generations towards... communism... One should keep the eyes on the ball all the time. For the Western world and its elites, the main imperative is not growth, but maintaining the present socio-economic-political structures.
Also, one needs to remember something, the way we measure "growth" will be very inadequate in a world with rapidly shrinking population...
I often wonder if the US can ever have coherent economic policy with the vicissitudes of its political structures and timeliness. There seems to be too much antagonism between how political parties view national economic policy and strategy to collaborate for long term planning such as China does. We have no functioning Congress that cares to determine long term strategy but is mired in the political and populist every budget cycle.
Timeliness not timeliness
Your discussion of the incredible number of engineers and scientists being trained in China sparked a new thought on my part. I'm always hearing about how most of the STEM post-graduate students in the USA are Chinese, and how this is a 'brain drain' because they mostly stay and end up heading up US faculties and corporations. What if this cohort are those that didn't have what it took to compete within their disciplines in China itself, bailed out, and still ended up heading up US faculties and corporations?
This has been known for a long time...
Brings to mind the Dylan line: "he who is not being born is busy dying."
A quibble with the idea that Xi’s decision to pop the real estate bubble was an example of astute macro management: this supposes that the bubble had been created by market forces and ended by regulation, which is how a real estate market might work in, say, the United States or United Kingdom. In China, the state created the bubble. It did so through a tax regime and fiscal system that passed the cost of urbanisation onto the provinces through a short-sighted and unsustainable “unholy alliance” between local governments and developers that went on 10 years longer than it should have. Indeed, it was under Xi that developers were allowed - nay, encouraged - to finance their growth through pre-sales of unfinished apartments. This caused China’s real estate market to reach historically absurd affordability levels of around 17x average incomes (three to four times that in the US and UK).
It pre-supposes Xi inherited the RE bubble built on policies of previous admin(s) and prudently dismantled it without breaking everything. The broad timeline is regulators started tighten credit in 2010s, Xi enters, policies led to residential construction slump in 2012-2017 where floor space completion and construction employment peaked, 2014 loosening monetary policy when people freaked at attack on RE, 2017 deleverage/crack down on shadowbanking which drove developers to turn to presales as financial instrument, pre-sales were not encouraged, then hard 3RL in 2020. Xi took 10 years to dismantle a system that might have gone on for 10 years too long, but managing RE (read: everyone's wealth) is a 10 year management problem, not just managing macro, managing expectations about core asset and associated believes (RE only goes UP). It took multiple wait and see, whack-a-mole policies and gradual wearing down of mental barriers, that had to span 10+ years just for mass psychology reprogramming around purpose of RE (living in not speculation).
>(three to four times that in the US and UK).
Chinese Tier1 RE markets. Have to compare to T1 markets else where (mostly 10x). And then have to be real and acknowledge 15-20x average income levels is _FAIR_ for tier1 cities. Chinese Tier1s where the premium jobs has to address supply:demand curve of internal PRC migration patterns which is greater than ANY other western country with immigration. Makes places like SF, NYC, LD look tame. Those are places with ~10x price-to-income ratios. PRC added ~150 MILLION new graduates in the last 25 years, which high skill sets and earning potential, all competing for 10s of millions new housing units in T1.
Regardless, the real prudent management was in urbanism. I remember in 2000s-2010s discussion around densifying T1 (mostly from western urbanisms during exchanges). PRC T1s are not dense relative to other cities. Instead PRC went to grow T2+ cities to shift opportunies outside of main T1s (coast to interior), now you have hubs like Hangzhou and many generally very nice livable T2s+. That's the holistic strategy, of make "houses for living in", macro to keep prices stable in T1s, distribute supply:demand curve in T2s (which graduates into new T1s). There's a reason Chinese city patterns one of the extreme Zipf law outliers.
Another way of describing "how a real estate market might work." A local govt official arrives in a village which has been there for a thousand years and announces: "everyone has to leave; we have nice new apartments for you and will even give you a few yuan." But the people don't want to move. The next day the bulldozers arrive. Soon the village has been "developed" into rows of ugly, cheap cement and steel apartments.
It doesn't really look like this. Watching Katherine's journey to the east vlog for quite some years now (a young American woman that relocated herself in China and ended up marrying there an Uighur) I cannot say I have seen evidence of such things:
https://www.youtube.com/@kats_journey_east
suggest you keep looking
What, do you think Kate has pink glasses? There are many such stories available out there. And this is what pops up to the surface, not some Falung Gong fabrication funded by the US deep state.
I spent 10 years in China teaching economics at a Chinese university - I have a Chinese wife; I don't rely on Falung Gong. Have you been to China?
Good for you. So you realize that no country is perfect, big deal.
National advancement is prefaced by cultural preparedness, and the fall of nations results from the loss of humility.
Outstanding analysis, thank you.
Very informative. Adam was thought to be the expert of European and German economic history; but this piece on China shows he is also an expert on China!
Typo: “significance difference” -> “significant difference“.
Thank you.
That was very comprehensive again - excellent work, thank you!
This is fantastic - thanks for sharing it with your readers.
I would be more than happy to subscribe if all your writings were like this, but for links to articles written by other people - not so much.