Outstanding piece on China

[Supercilious]

I'm talking about the latest entry in China Financial Markets Blog:
http://mpettis.com/2009/04/the-death...lopment-model/

IMHO it is very insightful and worth reading in full for those interested in China.

[Verrocchio]

Re: Outstanding piece on China

Like most articles that are purportedly about China, this one is as much about the US as much as it is about the PRC.

[Chomsky]

Re: Outstanding piece on China

Thanks, great read.

[thousandmilemargin]

Re: Outstanding piece on China

Interesting. I'll have to browse through his older posts.

I have to agree that the export-led development model is dead. At least for the forseeable future. It may still work for a few small countries with populations under 10 million, but the circumstances that permitted a nation of over a billion to experience export lead growth were unique and not likely to be seen again in our lifetimes. Namely, you need a superpower to spend itself into oblivion. I don't supose we'll see that happening again any time soon.

I think China can transition to an economy based around domestic growth, but that seems to me a task that will take a decade or two to accomplish. I don't think they will be in a postion to be a global growth "engine" for the rest of the world any time soon.

Which implies that for the next decade, and beyond, we'll have a world without major trade surpluses or major trade deficits. If no country is capable of running a large trade deficit ( in absolute terms) then no country will be able to run a large surplus either. (Obviously there may be a few small countries that run a big surplus in percentage terms.)

Looks like a decade long depression is in store while the world rebalances - the big importers learn to live within their means, the big exporters see a savage cut in their exports and then slowly develop domestic demand to compensate. There will be huge overcapacity in all export focused industries in the short to medium term. And the knock-on effects will hit domestic demand too, forcing domestic demand to grow from a low base.

In such an environment I would expect most governments to choose a monetary policy that tolerates a degree of inflation.

[allenjs]

Re: Outstanding piece on China

Thanks for the find. Lots of interesting stuff on that site. His piece about Zhou being a closet Bernanke-ite was really thought-provoking.

[oddlots]

Re: Outstanding piece on China

Wow. Really dense with good points and insight. Thanks for this!

The points about the symbiotic relationship between surplus and deficit countries are not new but fleshed out very well so the constraints on actions are clear. A good antidote to the more politically heated commentators such as Hudson. Not saying that there isn't an important political aspect to it all obviously but its good to see it laid out as a system of relationships where each player has necessarily limited options regardless of biases.

[c1ue]

Re: Outstanding piece on China

The problem with the Michael Pettis (and CFR/Brad Setser/ University of Chicago/Obama) view is that the assumption made is that exports must only be to consumption nation of last resort - i.e. the US.

This might be true, but it might equally be bulls**t.

Ultimately productive capacity can be oriented in a number of ways - all not exclusive or inclusive:

1) To ROW ending in US as consumer of last resort
2) To ROW as replacement for low end of scale
3) To internal consumption only
4) To ROW and internal consumption
5) To ROW as replacement for existing 3rd world capacity
6) To ROW as a better alternative to home grown demand
7) To ROW as replacement for full spectrum of scale

No doubt there are other examples.

The assumption the Setser/Pettis/$#*/U-Chicago types make is that productive capacity only fulfills 1).

Certainly the other examples mean less easy growth, but that's a far cry from no growth...

After all, we're already in the throes of US consumer retrenchment.

[Supercilious]

Re: Outstanding piece on China

Ultimately productive capacity can be oriented in a number of ways - all not exclusive or inclusive:

1) To ROW ending in US as consumer of last resort
2) To ROW as replacement for low end of scale
3) To internal consumption only
4) To ROW and internal consumption
5) To ROW as replacement for existing 3rd world capacity
6) To ROW as a better alternative to home grown demand
7) To ROW as replacement for full spectrum of scale

No doubt there are other examples.

The point is that export made artificially competitive by currency manipulation with respect to dollar (or euro) can can survive only if it oriented as trade surplus ending in US (or EU) as a consumer of last resort. If the Chinese trade surplus was only a result of higher productivity and lower wages the rmb would appreciate with respect to dollar (euro) and problem solved.

The assumption the Setser/Pettis/$#*/U-Chicago types make is that productive capacity only fulfills 1).

I'm honoured you associate me with Setser and Pettis, but I don't have the debt and expertise they have in their fields. Otherwise I would not quote them when I belive they were right. I would write my own essays And by the way, you should have figured by now I'm not what you would call a member of the Chicago crowd (and about my affinity for CFR, Obama and the Fed things also should be clear)

Certainly the other examples mean less easy growth, but that's a far cry from no growth...

After all, we're already in the throes of US consumer retrenchment.

And your credential in macro economy are? Can you bring some solid data and provide some proof or it is just the editorial position of Russia Today? I thought you were just a specialist in ballistic missiles ...

[thousandmilemargin]

Re: Outstanding piece on China

The problem with the Michael Pettis ..view is that the assumption made is that exports must only be to consumption nation of last resort - i.e. the US.

I think his assumption is that an export-led growth model requires SOMEBODY to run a trade deficit. The follow on argument from that it is that only a superpower can run a deficit big enough support the export-led model for an entire region.

Ultimately productive capacity can be oriented in a number of ways - all not exclusive or inclusive:

1) To ROW ending in US as consumer of last resort
2) To ROW as replacement for low end of scale
3) To internal consumption only
4) To ROW and internal consumption
5) To ROW as replacement for existing 3rd world capacity
6) To ROW as a better alternative to home grown demand
7) To ROW as replacement for full spectrum of scale

No doubt there are other examples.

The assumption ...is that productive capacity only fulfills 1).

No, you are confusing exports with "productive capacity". Productive capacity can be dedicated to internal consumption, but exports be definition require somebody somewhere to be importing. Now it is possible for lots of exporting and importing to occur without anybody running a deficit, and indeed Pettis argues that China and the US must head in this direction to address the current imbalances.

The whole point of his argument is that China currently has an export-led model, and it will take a long time and a lot of adjustment to re-orientate their productive capacity toward satisfying domestic demand, or to find balanced demand in other countries to replace the current American deficit.

I really think you are misrepresenting his argument, and lumping him in with a bunch of people he doesn't even agree with.