China's Emergence As A Global Superpower

[quadraphonics]

You even cotradict your self in the immediately prior two sentences: Make up your mind. Do the funds come from the higher level of the lower classes or from the wealthy of society!!!

The funds in your other examples come from the governments, which get most of the tax revenue in question from wealthier portions of the economy.

The funds in the case of a minimum wage hike do not come from the government. They come from decreased employment in exactly the sector that is effected by the minimum wage.

I get the impression that you didn't read my post with much care or thought before making this reply.

 

[Billy T]

The factory owners will not end up paying more overall. They'll make up for the increased salaries by hiring fewer people ...

That is simply false: If you search back in this thread you will see that the coastal factories are desperate for workers to hire - see the photos of their recruiters standing in the street with placards begging for workers. Signs telling of the greatly increased benefits, such as free lunches, insurance, bus fair, usually better factory living space etc.

The conditions in the heart land are improving so rapidly that no longer are farmers coming east to work in factories for low wages. Many have leased their tiny plots and now collect rent. The assembled land packages are much more efficient producers. With their land rents they are moving to the new nearby city being constructed - one of the 100 planned for population of 1 million, or more, EACH!! Now in China you do not need to go east to the coast to find a job. There are problems of course with this rapid social change. - for example these rent collecting former farmers still piss in the new city streets, etc.

 

[Billy T]

QUAD: Here is a specific report of what I am talking about (not your obsolete image of china):

" One highlight of the trip was my visit to Chengdu, the capital city of China’s western Sichuan Province. Traditionally hindered by its inland location, Chengdu—or the entire western part of China for that matter—had lagged behind China’s eastern coastline regions in economic development. However, since the Chinese central government initiated a full-scale campaign to develop its western regions a few years ago, the situation has undergone a sea change. Visiting the city for the first time I was positively surprised when I saw the level of urban development in the city. Not only is Chengdu upgrading its old city center with new commercial and residential development projects, the city is literally building a brand new Central Business District (CBD) catering to an entirely new set of industries, with information technology (IT) software and outsourcing as its main backbones.

Modeling itself as the “Bangalore of China,” (India's information technology hub) Chengdu has successfully attracted many domestic and global heavyweight technology companies to invest and set up operational bases. The city’s abundant IT engineering resources—supported by a half million university students each year—and cheaper land and labor costs, compared with cities on the east coast, have made Chengdu an ideal place for companies to establish large-scale IT outsourcing operations.

The trickle-down effect of this new IT industry boom on the city is immense. Talking to one local real estate developer, I was pointed to the contemporary office buildings sprouting up in the new CBD as evidence of strong demand from new corporate customers. Additionally, the new jobs created by the software and outsourcing industries are offering better wages, and the average residential property prices are still one-third of that in Beijing, Shanghai and Shenzhen, making Chengdu attractive with a firm long-term outlook.

Another obvious beneficiary of Chengdu’s development is the local infrastructure. With a population of 11 million and car ownership already over 2 million, Chengdu is building new roads and expanding its subway systems to support this rapid urbanization. A local toll road company I visited also confirmed that they are not only experiencing a rapid increase in traffic, they are also busy constructing new toll roads, expanding the current network to accommodate the growing traffic volume.

As China re-balances its growth model and allows its western regions to catch up to the east coast, cities like Chengdu (which have enjoyed a relatively low-cost advantage) are developing a lead in new, fast-growing industries and have the potential to be the next growth engine of China’s economic development. ..."

Yu Zhang, CFA
Research Analyst
Matthews International Capital Management, LLC "

(bold added by Billy T)

 

[quadraphonics]

That is simply false: If you search back in this thread you will see that the coastal factories are desperate for workers to hire - see the photos of their recruiters standing in the street with placards begging for workers. Signs telling of the greatly increased benefits, such as free lunches, insurance, bus fair, usually better factory living space etc.

To the extent that such is the case, it implies that increases in minimum wage will not have any substantial effect. It only affects the portion of the workforce working around minimum wage, and if that is not significant then neither is the impact of the wage hike.

In the sectors where it does have an effect, it will be compensated for by unemployment and/or inflation. It will not, on its own, have a discernable impact on the composition of China's GDP or other macro indicators.

 

[Billy T]

To the extent that such is the case, it implies that increases in minimum wage will not have any substantial effect. It only affects the portion of the workforce working around minimum wage, and if that is not significant then neither is the impact of the wage hike.

In the coastal areas that is correct - they are paying well about the minimum wage. It is in the more rural areas where it has an effect - just like Brazil's Bolsa Familia has effect in the tiny town where horses on the streets are as common as cars and many never had much money before Bolsa Familia gave them an opportunity to buy in town - why it has such a large multiplier effect. Fact that it is 100% spent in that town also is a great stimulus to the local town. Horses are giving way to motor bikes now, motor cycles in a few years and cars in decade! (BTW car sale were at an all time high in May - toady newspaper states.)

In the sectors where it does have an effect, it will be compensated for by unemployment and/or inflation. It will not, on its own, have a discernable impact on the composition of China's GDP or other macro indicators.

Not true -it will do for china's rural development what Bolsa Familia has done for Brazil's rural areas - greatly expand local economies. It may contribute to inflation -that will mainly depend upon what local productive capacity expansion is possible.

 

[fedr808]

China really isnt a superpower...

 

[Billy T]

China really isnt a superpower...

The thread was retitled by a mod, for no good reason IMHO and apparently others in control of sciforums (Mod was reprimanded) and I was pissed as wasted nearly an hour looking for it by old title.

Original title was something like "Do you think China will surpass the US someday?" or "When do you think China will surpass the US?" I.e. did not claim China was in process of becoming a "superpower" but we are now stuck with this new title.

I think most would agree with your statement but of course that depends upon how "superpower" is defined. Certainly, not a superpower in ability to project military power, not even "emerging" but it is armed with nuclear ICBMs, so not likely to be invaded etc.

In economic power it is certainly more than emerging. I.e. it already has (at great cost to itself) the ability to destroy the US economy - dump its treasury bonds on the market, collapsing both the value of the dollar and the US's ability to borrow. Five or so years ago, I predicted what China is doing now - I.e. using dollars from it reserves as rapidly as possible to buy real (not paper promises) assets it will need in the future in long term, paid up front contracts for the delivery of energy (especially oil and natural gas via large new pipelines from Russia and the Mid East but also metallurgic coal), minerals and food stocks (mainly by buying farm lands). It is also rapidly growing its domestic economy as percentage of GDP - i.e. faster than it export economy. Thus, as time passes China needs less buying from the US & EU.

These measures (of prior paragraph) will make it less painful to China to destroy the US (and EU) economically in the future. IMHO there will come a time approximately a decade from now when it will be to China's economic advantage to take a ONE TIME loss on the dollars it still hold as US treasury bonds to greatly reduce the demand EVERY YEAR from US and EU for the raw materials and energy China needs to keep it economy booming at several time US and EU growth rates.

When that day comes, don't expect any mercy from China. They will do it. The collapse of the Dollar and Euro, from Chinese POV will be vindication that their economic system is the most stable, most productive, greatest advance in economics in human history etc.

IMHO, there is some truth to that. I.e. China has long term (a 50 year investment plan, not just project that yield benefits before the next election) in the basic infrastructure of the society combined with a very "free market" oriented consumer economy.

I think, currently China has more corruption distortions than the US and EU, but they are being reduced and IMHO not worse than the distortions lobbyist make in the US economy. (I don't know how much lobbying distorts the British's and EU economies to favor special interests, but assume it is about the same as in US)

For example, the foolish corn to alcohol program in US benefits the few at great expense to the many. When the tax for corn (largest of all) subsidies and other direct aid to alcohol aspects (blender's bonus, etc.) are added to the price at the pump, your per mile cost of driving is twice what it would be if your car was running on tropical alcohol permitted into the US without the 54 cents / gallon duty. And this does not include the higher prices you pay at the grocery store for food (now at a 26 year high), due in large part to the diversion of farm land to alcohol production. Part is also due to fact richer China is buying more US soy beans etc, than ever before, thus you pay more for chickens, beef, (soy beans converted) etc.

Also in this whole distorted by lobbying* mess is the self-serving union between "big oil" and Detroit that lasted for decades. They lobbied to make the US tax on gasoline half the rate of Europeans so you bought gas guzzles that profited both big oil and GM, Ford etc. China is avoiding all this and the suburban infrastructure that is very ill-suited to the high cost liquid fuel energy era that is coming by building public transport and high speed rail between cities etc.

Thus in some ways, one can argue that China is LEADING the world into the future already. I don't know if that makes it a "superpower" but sure is likely to be one within the decade.
------------------
* For example: "... In 2009, BP spent $16 million on lobbying, according to the Center for Responsive Politics. This year, it has spent $3.5 million through the end of March. ..." From: http://money.cnn.com/2010/06/04/news/economy/BP_Washington_power/index.htm

 

[Billy T]

Mainly for Quadraphonics:

Here is more evidence for what I have been saying (and predicting for years) that China is switching (almost has!)to a domestic economy:

" ... China's economy has diversified enough through domestic consumption and trade with other markets to be insulated from Europe's falling demand. China's biggest overseas customer is currently the E.U., accounting for 20% of the country's total exports, but China's dependence on external trade has been falling, according to Credit Suisse.

The investment bank said in a recent note that exports accounted for 36% of China's GDP in 2006, but fell to 25% by 2009. If exports to the E.U. fall by 20%, Credit Suisse predicts that it would only affect China's GDP by 1%. But, that prediction comes with a caveat. If Europe's troubles worsen and the economy suffers another major downturn, then the impact on Chinese exports* could be "huge." ..."
{I think "huge" is much too strong. I.e. drop of 20% on 20% of exports is 4% drop in exports by my calculations. I think China's exports to US & EU are already falling about 5% each year now and growing more than that, as a percentage, but not absolute, with other Asian nations. Note also that Credit Suiss thinks this 4% drop in exports would only be a 1% hit in GDP - I.e. increase in domestic GDP and to other Asian nations trade, still relatively small, would offset most of it but as domestic GDP is much larger that is mainly growth in domestic GDP as exports continue to decline as fraction of GDP.}
From: http://blogs.forbes.com/china/2010/06/01/chinas-decoupling-debate/?partner=contextstory

Billy T comment & SUMMARY: MORE THAN 3/4 OF CHINA'S GDP IS ALREADY DOMESTIC, according to Credit Suisse.

* Note that EXPORTS may drop greatly, if EU has bigger problems but as exports are less than 25% of GDP now that will not have great effect on their GDP. Exports to US have been falling in part because Joe American is trying to get out of debt. Not buying Chinese junk, toys etc. as he once did.

Also note that China is building trade with other Asian nations, has recently formed a currency exchange union with more than a dozen etc. I.e. the day when China says to US:

"WE DON'T NEED YOU TO BUY OUR EXPORTS ANYMORE. GO TO HELL. YOUR GREEN PAPER IS WORTHLESS. WE WILL NOT FINANCE YOUR DEBTS."

is no longer far in the future as it was when I first posted the above irritating all caps notice.

 

[quadraphonics]

Here is more evidence for what I have been saying (and predicting for years) that China is switching (almost has!)to a domestic economy:

Billy T comment & SUMMARY: MORE THAN 3/4 OF CHINA'S GDP IS ALREADY DOMESTIC, according to Credit Suisse.

The issue was not about "domestic" economy, but rather "consumption-led economy." You've indulged this same canard many times in the past, and this instance isn't any different:

GDP is made up of three components: consumption, investment and trade. A sustainable domestic economy relies on consumption growth - and not investment growth or trade. So the number to look at is what percentage of China's economy consists of consumption - and that number is currently around 35%, down from 50% back in 1990. I.e., consumption, as a share of the economy, has consistently shrunk in China for the past 20 years. They are a long, long way from where they were a few decades ago, let alone where actual consumption-led economies are.

Getting back to the point: showing a decline in exports does not translate to growth in consumption, since you still have to account for investment. And it is emphatically the case in China that investment has played a huge role in the economy, especially lately. China's stimulus plan was basically to take a bunch of money and funnel it through state-directed investments. Investment constitutes something like 45% of the Chinese GDP.

And while investment is "domestic," it doesn't inherently translate into future domestic activity. To the extent that what is invested in is factories geared towards export markets, it works the other way. To the extent that it goes into bubbled assets or non-productive enterprizes, it's just money being poured down the drain. So it's not interesting to go on about what percentage of China's economy is "domestic" without further parsing which parts are consumption and which are investment - the two have vastly different implications, both for China and for your line of predictions.

For emphasis: reductions in export reliance do not necessarily imply increases in consumption reliance.

 

[Black Jack]

I know I'm chiming in a little late into the thread, but my .02 is that China is powerful, and their global assets are impressive... but they are not a superpower... at least not alone. The United States and China are so profoundly codependent upon one another at this point, for various reasons, that either one standing alone could not be considered a global power in it's own right.

Without the United States, China would be thrown into a crippling depression without anybody to sell their goods to. Their investment in the dollar would go sour and trillions of dollars of their investment in the United States itself (through loans) would simply be lost. In order to recoup their lost investments, they would be forced to either invade the mainland U.S. or gain property rights through legal action to just about everything here in order to regain compensation for their losses. In fact, I think a similar scenario may be used in the upcoming Red Dawn remake in November.

Without China, the United States would go bankrupt almost immediately because they would be far over-extended financially to the rest of the world, and would have to scale back the government by unprecedented amounts. The economic backbone of the United States (retail) would essentially be broken, and it would be years, or decades before proper production levels could be restored in the States to make up for the loss. Since a majority of the remaining production economy in the United States (which is really the ONLY part of the economy that ever really matters in a country) is military based, it's likely that the United States would (just like the Soviets in the original Red Dawn did) turn to war with countries that possess what we need out of desperation to survive. (Not just like Oil which is a limited commodity and an asset on the global market, but other essential materials like steel, iron, wheat, corn, etc etc... things that we may no longer be capable of producing on our own in the quantities we require)

 

[Billy T]

A quick reply to Quad and Black Jack (more later, I hope, when I have found some data. While looking I came across the Rare Earth article at end of this post I wanted not to lose.)

To Black Jack: I basically agree with your post because of three words in it: “At this point" (in time), which will not apply, IMHO, in no more than a decade (After China not only does not need to export to the US and EU, but also needs all of its productive capacity to service domestic demand and honor the long term contracts (some for 30 years) it has signed for energy and minerals, mainly in the lesser developed world.
While those contracts with emerging countries, like Brazil are usually “paid in full up front” (to help China get rid of US treasury paper in its reserves) most in Africa and poorer countries are to be paid by China building railroads, (including the rolling stock), ports (both air and sea), School & hospitals, telecommunication and TVs, hydro-electric dams, etc.- the infrastructure of the modern world which they lack.

To Quadraphobics: (1) I have some difficultly understand why who pays for the development of, for example, the high speed rail transportation is so important in your POV. If this investment were a company like Southern China Rail Ways (after it has been fully privatized, not still mainly an SOE) or an already private company raising capital via bond market or stock issue does that somehow make it more productive investment in China, than when the government pays for the high speed rail?

Perhaps I have been using the term “domestic economy” incorrectly from your POV? I did not mean to limit that to domestic consumption (Chin Chow buying new shirt or eating a Big Mac, etc.) I meant: economic activity “In China, for Chinese use.” That includes most of the capital investments made by the government.

I have several times made the point that although Chinese GDP is only about 1/3 that of the US, it has a much higher percentage of long term productive items than the US’s GDP does. For example in the US GDP of 2007 there was all the money spent on entertainment (Trips to Disneyland, Broadway shows, the super bowl, Basketball games, restaurant food, etc,) plus the huge fraction in the “service industries” (Getting hair cuts or shaped or dyed, psychiatric help, face lifts, the latest style cloths, fine wines and fancy restaurant foods, rock concerts, new CDs, pornography and drugs, jail guard salaries, etc.) NOT ONE DIME OF WHICH HAS PRODUCTIVE BENEFIT NOW.

If one could measure the “long term productive benefit GDP, I bet China’s is greater than that of the US already, especially if closing factories collapsing bridges, etc. is included as a negative contribution.

(2) You said: “while investment is "domestic," it doesn't inherently translate into future domestic activity.” Certainly that is true, especially for the USA. Read last two paragraphs of (2) again. Chin Chow will work to be able to pay to ride on the new high speed trains or to use the electric power china’s huge investment in dams, windmills, solar cells, nuclear power plants, solar cells his government is making. I don’t think that much true of the expense of the US’s wars, military, Social Security, Medicare, etc. I.e. more than 90% US government expenditures. Again a point I have long made: US make very few investments that do only show significant benefit (other than job creations) only after the next election. Hell the US cannot even keep the infrastructure it has in good repair.

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“… China produces 97 percent of global supply of rare earths that are composed of 17 elements and are indispensable in many high-tech arenas ranging from wind turbines and hybrid cars to missiles and mobile phones. But the minerals' price rose by only a little more than 20 percent from 1979 to hit an average of $8,500 per ton in 2009 despite soaring demand that has tripled to 120,000 tons in the past decade. {almost sure these tons are for the oxide ore.}
… The MLR {Ministry of Land and Resources} announced in March that production of rare earths will be capped at 89,200 tons in 2010, up 8.36 percent from 2009. The government has also stopped issuing new licenses for domestic exploitation of rare earths until June 30, 2011.
Analysts and industrial experts said that Inner Mongolia-based Baotou Steel Rare-Earth High-Tech Co is likely to monopolize reserves of light rare earth elements in the autonomous region. The company controls most of the rare earth resources in the northern parts of the country. China Minmetals Co and Aluminum Corporation of China are likely to control the major reserves of middle and heavy rare earths in Jiangxi province, while Jiangxi Copper Corporation and China Nonferrous Metal Industry's Foreign Engineering & Construction Co are likely to control the reserves in Sichuan and Guangdong provinces respectively.
Figures from the US Geological Survey show that China's basic reserves of rare earths reached 89 million tons of REO (rare earth oxides) in 2008, accounting for 59.3 percent of the world's total. Some developed countries, such as the United States, which holds 15 percent of the world's reserves, almost entirely depend on imports from China because they have long stopped exploitation. {Billy T comment: China cleverly held price very low for ~25 years to crush US ability to produce. The lower grade ore is still there but US no longer has the technology to process –that will need to be recreated. As the REs are essentially chemically identical, they are hard to separate. China will probably continue to price the REs so that no private company will make the required investment to process the REs and reduce financing of US debt to make it hard for the US to. – More urgent needs for its dollars and credit. China is as ruthless a capitalist as John D Rockefeller bankrupting competitors by under pricing them.}

China's recent move to consolidate the industry to prevent excessive* tapping of the strategic resource, which would lead to reduced exports, has sparked discontent in the West. In a report prepared by the World Trade Organization (WTO) for China's two-yearly trade policy review that started on Monday, the global trade arbitrator questioned the legality of curbs on exports of some raw materials. But Chinese experts said China's move does not violate WTO rules and is aimed at legally protecting its resources. "WTO rules stipulate that its members can take measures to protect their raw materials from being exhausted, and China's measures are in line with them," said He Weiwen, managing director of the China Society for World Trade Organization Studies. China's move is "proper" according to WTO rules, said Tong Zhiguang, former vice-minister of commerce and former chief WTO negotiator.
From: http://www.chinadaily.com.cn/china/2010-06/02/content_9919736.htm
-------------
* “Excessive” Ha Ha – Spin for the WTO. The real reason is in my blue text above but will never be stated by any Chinese source.

Later by edit: China's "spin masters" later had more to say:

"... Economy Limits on resource exports in line with WTO rules: experts (Xinhua) Updated: 2010-06-02 18:22

BEIJING: China's curbing of exports of some raw materials to protect the environment and reduce its trade surplus is in line with World Trade Organization (WTO) rules, experts say.

In its biennial review of China's trade policies, the WTO alleged Monday China may be giving its manufacturers an unfair advantage by restricting exports of some raw materials. China uses restrictions such as prohibition, licensing, quotas and partial tax rebates to manage exports of certain resources so as to conserve resources and energy, the WTO report said.

"Usually, the WTO is concerned about import restrictions rather than export restrictions," Wednesday's Economic Information Daily quoted Tu Xinquan, vice president of China National Institute of WTO, as saying. "The WTO report may be related to the US and European Union (EU) appeal last year to the WTO over Chinese restrictions on raw material exports," Tu said in an interview with the newspaper, Xinhua affiliate. ...
Related readings {as links in the original}:
Limits on resource exports in line with WTO rules: experts Govt tightens controls on rare earths {the above article}
Limits on resource exports in line with WTO rules: experts Legal resources limited for risky derivative trading
Limits on resource exports in line with WTO rules: experts Tax resources properly
Limits on resource exports in line with WTO rules: experts Equal distribution of resources needed

China has reduced its exports of energy-intensive and other environmentally destructive goods to address its trade imbalance and to protect the environment, Tu said. China's practices are consistent with GATT obligations and Article XX as the restrictions achieve health and environmental goals, an unnamed expert at the Beijing WTO Affairs Center said.

The US and the EU have restrictions on exports, too, said Lei Yanhua, a researcher with the Chinese Academy of International Trade and Economic Cooperation, an affiliate of China's Ministry of Commerce. ..."

From: http://www.chinadaily.com.cn/bizchina/2010-06/02/content_9925376.htm

Billy T comment: Ha Ha. The US & BP could learn from China how to twist the real power and greed reasons, my blue text above, with smooth environmental spin. For example, with help of China's spin doctors, BP could say:
There was oil naturally leaking into the Gulf of Mexico, so at great expense we tried to relieve the subterranean pressure which was forcing the oil into the Gulf of Mexico by drilling a relief well to protect the environment. - Unfortunately the drill platform we rented for Transocean failed and sank. - This only made the problem worse! None the less, BP is a very responsible citizen of the world greatly concerned with environmental protection, so we are now spending millions more to protect the environment and creating US jobs (BP has hired thousands of people who were out of work in this environmental effort.) ..."}

 

[quadraphonics]

To Quadraphobics: (1) I have some difficultly understand why who pays for the development of, for example, the high speed rail transportation is so important in your POV.

I don't recall saying anything about who pays for what.

But it does have an effect. To the extent that investment is funnelled through corrupt state-controlled institutions, it ends up less efficiently deployed. To the extent that it's FDI streaming in from abroad, a lot of it goes towards export-oriented businesses (and the assets it buys aren't owned by Chinese entities in any case).

If this investment were a company like Southern China Rail Ways (after it has been fully privatized, not still mainly an SOE) or an already private company raising capital via bond market or stock issue does that somehow make it more productive investment in China, than when the government pays for the high speed rail?

To the extent that the government investment processes are more corrupt than private ones (and the typically are, especially in China), it certainly does. A lot of the recent investment stimulus is buying nothing more than decreased performance of state bank balance sheets.

Perhaps I have been using the term “domestic economy” incorrectly from your POV? I did not mean to limit that to domestic consumption (Chin Chow buying new shirt or eating a Big Mac, etc.) I meant: economic activity “In China, for Chinese use.” That includes most of the capital investments made by the government.

You haven't established that - for all you know, the majority of those capital investments are in export industries or simply non-productive loans to politically-connected players. Or investments in bubbled assets that will shortly lose most of their value.

The thing is that what you're really interested in is domestic consumption - that's what you've mostly talked about in the past, and your endorsement of the present investment spending is premised on the idea that it will end up translating into increased consumption. But that's a silly assumption - lots of it will go towards exports (China has repegged to the dollar in the face of the collapsing Euro) or waste (again, state-directed lending is notoriously corrupt) or bubbled assets (coastal China is in the midst of a real estate bubble). Don't count your consumption until it materializes.

I have several times made the point that although Chinese GDP is only about 1/3 that of the US, it has a much higher percentage of long term productive items than the US’s GDP does.

Yeah, that's how you can tell that China is a developing country, and the USA isn't. We've already spent 100+ years building long-term productive infrastructure, and so we don't need to spend 50% of our GDP on new factories. There wouldn't be anyone to buy all the goods, anyway.

For example in the US GDP of 2007 there was all the money spent on entertainment (Trips to Disneyland, Broadway shows, the super bowl, Basketball games, restaurant food, etc,) plus the huge fraction in the “service industries” (Getting hair cuts or shaped or dyed, psychiatric help, face lifts, the latest style cloths, fine wines and fancy restaurant foods, rock concerts, new CDs, pornography and drugs, jail guard salaries, etc.) NOT ONE DIME OF WHICH HAS PRODUCTIVE BENEFIT NOW.

Every single one of those things is productive, and also found in China (whom you may recall just hosted the most garishly extravagent Olympics ever, has a prison population comparable to America's, and is currently building its second Disneyland resort). You seem wedded to some kind of outdated mercantilist idea of productivity, where only factories producing industrial machinery are worthwhile. The Soviets had the same idea, and look where it got them.

If one could measure the “long term productive benefit GDP, I bet China’s is greater than that of the US already, especially if closing factories collapsing bridges, etc. is included as a negative contribution.

China has no shortage of factory closures and collapsing infrastructure - that's what state-directed, corrupt lending and regulation gets you.

And, again, it would be perfectly normal for more of China's GDP to be spent on infrastructure development. They are a developing country, and have a lot less productive infrastructure already built up. That the US economy isn't organized like a developing country is not something to worry about, since the US isn't a developing country, and hasn't been for generations.

I don’t think that much true of the expense of the US’s wars, military, Social Security, Medicare, etc. I.e. more than 90% US government expenditures.

None of which are accounted under "investment" when calculating the US gdp. Try getting the basics right before phrasing a stance - the stuff you list is consumption and transfer payments. The place to go looking for "long term productive" spending is in the investment portion of the GDP. And, thankfully, the government isn't so heavily involved in that in the USA, and so doesn't have state investment banks with balance sheets full of failed loans to political patrons.

Again a point I have long made: US make very few investments that do only show significant benefit (other than job creations) only after the next election.

You haven't said anything to substantiate that contention. There's plenty of investment going on, and plenty of that is productive in the long term.

Hell the US cannot even keep the infrastructure it has in good repair.

Another canard. US infrastructure is doing fine - it's groups like associations of civil engineers and various state construction and development agencies that push this nonsense in the hopes of attracting federal largesse. Those guys will say whatever it takes to get a boost in infrastructure spending, since their jobs depend directly on that.

 

[kmguru]

I can not remember the interview details at Charlie Rose show. But remember that China will be #2 economy next year. Then in 6 years who knows...

 

[Billy T]

... The thing is that what you're really interested in is domestic consumption - that's what you've mostly talked about in the past, and your endorsement of the present investment spending is premised on the idea that it will end up translating into increased consumption. But that's a silly assumption - lots of it will go towards exports (China has repegged to the dollar in the face of the collapsing Euro) or waste (again, state-directed lending is notoriously corrupt) or bubbled assets (coastal China is in the midst of a real estate bubble). Don't count your consumption until it materializes.

I may be wrong, but think I have NEVER spoken of "domestic consumption" I say "switching from an export economy to a domestic economy." You are reading into that "domestic consumptions." The numerical data I was looking for is the FDI as a fraction of GDP. I know China is far from a closed domestic economy but think if one counts both the value sent out (exports) and the FDI coming in the net import of wealth is small part of the wealth the Chinese are creating each year.(Much of what is sent to the US is not really paid for - China advance the US the money to "pay" for it. The FDI is however real capital influx for China.)

... You seem wedded to some kind of outdated mercantilist idea of productivity, where only factories producing industrial machinery are worthwhile. The Soviets had the same idea, and look where it got them.

Guilty, almost as charged. Yes I do think building things (not just production equipment) that have some lasting value, increase productive capacity, is more important than, for example, me cutting your hair in exchange for you washing my car as GDP items.

I also think that POV also quickly transformed the USSR into a great world power from total destruction at the end of WWII. However, when they started to turn their attention to services for their people instead of new steel plants, etc. they applied their stupid central direction to everything that should hav been left to the free market, as China does.

I have several times told of my conversation with attractive Russian girl on train in Hungry so now just remind you that she read 8 books in English at her work station in the tomato canning plant one summer because the central planners had forgotten that the cans needed lids. Her two other summer there were equal economic disaster for the USSR. - That is why the USSR collapsed and Why China, by doing otherwise (than US with no long term planning and USSR with micro management) has 30 years of double digit GDP growth.

...China has no shortage of factory closures and collapsing infrastructure - that's what state-directed, corrupt lending and regulation gets you.

I think it is much more "creative destruction" than neglect without replacement as in the US. Yes, for example China did have some extremely inefficient facilities (Mao almost destroyed China with his cultural revolution. -professors sweeping streets, everyone to build a tiny blast furnace in their back yard to make steel etc.) That has all been creatively destroyed and with lots of FDI, China now has some of the most modern factories in the world. For example Warren Buffets 10% of BYD's electric car plant. etc. A lot of GWB's tax relief for the wealth transformed China's factories into world class facilities. (And put Joe America out of work as his closed or outsourced his job to stay competitive.)

... US economy isn't organized like a developing country is not something to worry about, since the US isn't a developing country, and hasn't been for generations.

We will just need to disagree here. I think it is very important that US can produce real goods for its needs or to trade for its needs. Currently that is not needed as the rest of the world is willing to send what we need for green pieces of paper. - How much longer do you think they will be so stupid? When they get smart and we have no ability to produce for ourselves and for trade, what do you expect will happen? Riots and martial law, I think. Perhaps a military dictatorship eventually.

...Another canard. US infrastructure is doing fine - it's groups like associations of civil engineers and various state construction and development agencies that push this nonsense in the hopes of attracting federal largesse. Those guys will say whatever it takes to get a boost in infrastructure spending, since their jobs depend directly on that.

Probably some truth to their saying that (both their motive and fact it is true). Bridges have collapsed. Many need scrapping and repainting to limit rust but states have little money for what can be delayed a year more, etc. NYC gets most of its drinking water from pipe line along the Hudson river which is more than 100 years old and leaking. Some day a disaster will happen and a lot of people will be without clean water, except rationed from trucked in supplies. Most of the older East coast cities lose up to half of the water in the distributions system. Less than two years ago a main line in Maryland (near DC in Silver Springs, as I recall) broke and so flooded street that helicopters had to be used to rescue some people from tops of their cars. - I saw that on TV here in Brazil!) Not only does US have no high speed trains, but the best it has, Amtrack must slow down in sections as the track is in such sad state of repair. Etc. Etc.

 

[Billy T]

GDP ratios, Now vs1980:
US= 13/6
China= 4.33/0.4 >10, ~11 fold & China's is accelerating as a percentage! For proof just click here: http://www.wolframalpha.com/input/?i=GDP+of+china+
There you will see a logarithmic graph of China's GDP (1970 to 2008, ~ 4 decades!) that is not straight line but is turning ever upwards for the last decade!

Thus, as China gets larger it is growing even faster as a percentage.
This fact tend to undermine the standard argument that China's growth is 4 times higher than the US's because it is from a lower base.
If that were true then in four decades of high growth its GDP should be slowing down (Log graph's line turning down, as US's is.)

While it is true that mature countries have harder time keeping high percentage growth, IMHO, part of reason why this is not yet true in China (this year world's 2nd largest economy) is that they have a better economic system with much more long range planning (10 five year plans) for increasing their productive infrastructure and are locking up in long term contracts their needed imports of energy and minerals. (Also buying up foreign farm land to assure food supplies and will not import as much from the US in the future as now.) Yet China has not repeated the USSR's mistake of micro-managing the consumer economy - that is managed by the invisible hand of Adam Smith.
---------------
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"... “Chinese officials are smarter than some folks in the market give them credit for,” Patterson said. “Of the policy makers around the world, they’re in a unique situation: China is starting from a position of strength.” China’s small budget deficit, huge foreign reserves, and huge current account surplus mean that even if global growth slows, it has room to respond, according to Patterson. “Even if the U.S. and Europe fall off a cliff, China can act,” she said. “It can do something to keep growth up and if growth is getting too tight, boom, they put on administrative measures and they prick the bubbles before they overheat. China is actually able and is trying very hard to engineer its own version of Goldilocks.” ..."

From: http://www.bloomberg.com/apps/news?pid=20601087&sid=a2pp43bo85hY&pos=5

 

[Billy T]

Bloomberg gave me data on the FDI into China which I was looking for today (and more evidence that China is shifting to a domestic economy):

“… Foreign investment in the first five months of the year rose 14.3 percent to $38.9 billion, the ministry said.
China’s economy will expand by 9.5 percent this year, three times the pace of the U.S, the World Bank forecast this week. Companies including Volkswagen AG and PepsiCo Inc. are boosting investment in the world’s third-largest economy to tap rising consumer spending fuelled by the government’s stimulus package and higher wages. ...

“China will remain an attractive investment destination as the government spurs consumer spending, ” said Xing Ziqiang, a Beijing-based economist at China International Capital Corp. “The expansion of infrastructure, including transport links, in central and western regions is also opening up a vast inland market for consumption and investment.” … More than 20 Chinese provinces and cities raised minimum wages this year, the Shenzhen city government said June 9. {Typically by 15 to 20% as part of the policy of switching to a domestic economy as is the increased health services, retirement benefits, etc.|

Retail sales rose by more than 18 percent for the third straight month in May, government data showed this week. Passenger-car sales last month rose 26 percent from a year earlier to 1.04 million units, {in May - the annual total passed that of the US in 2009, before this high rate of increase.} the China Association of Automobile Manufacturers said on June 8. ...”
From: http://www.bloomberg.com/apps/news?pid=20601087&sid=aztqLBfAShoo&pos=6

Billy T comment:
Thus currently annual FDI into China is about 100billion per year, which is up considerably (why it is news) from that of 2009 when GDP was about 4.5 trillion dollars (or 4,500 billion). By my way of calculating that means the FDI is about 2% of the GDP.

In post 1029 Quadraphonics stated that investment was 45% of China’s GDP. That may be true, (I am still keeping my eye open for real data) but even if it is, that means 43% of GDP is investment by Chinese (government and private) in the Chinese economy.

Unlike the US, most of this investment is in things that have long range returns such as high speed trains, improved education at all levels, new power (nuclear and super-heated steam coal, which is nearly 50% more efficient) plants, smart grids, hydroelectric dams and wind farms, world’s largest solar cell power plant, new sea port terminals, new airports, new bridges, new jets to reduce imports from Boeing and Airbus, hospitals and clinics, especially in rural areas, 100 new cities of 1 million population each (or more) located more inland than the coastal area. (They require subways, sewer plants, roads, as well as new high rise buildings, etc. - huge investment in productive growth, etc.)

 

[Billy T]

Echos of China's one child policy:

"The population of people over 60 years old reached 167.14 million, a 4.53 percent increase from last year as figure shows in a report from the Ministry of Civil Affairs, people.com.cn reported Friday. The number of people over 65 years old increased 3.22 percent, to 113.09 million. {With total population of 1350 million that is 12.4% 60 or older.}

Along with the growing elderly population, caring centers and welfare agencies for the elderly are also growing fast. There are 40,250 social welfare companies and 38,060 elder-care agencies, increases of 7.1 percent and 9.1 percent respectively from last year."

From:http://www.chinadaily.com.cn/china/2010-06/11/content_9967805.htm

 

[Billy T]

"... China's demand for oil jumped by an "astonishing" 28% in January compared with the same month a year earlier, the International Energy Agency (IEA) says.

The body added that demand for oil in 2010 would be underpinned by rising demand from emerging markets, with half of all growth coming from Asia. But the IEA predicted demand in developed countries would fall by 0.3%.

The IEA has increased its global oil demand forecast for 2010 by 1.8% to 86.6 million barrels a day. ..."

From: http://news.bbc.co.uk/2/hi/business/8563985.stm

Are you ready for $4/gallon gas before Christmas? Brazil is. (Most of our cars don't use any.)

 

[quadraphonics]

I may be wrong, but think I have NEVER spoken of "domestic consumption" I say "switching from an export economy to a domestic economy." You are reading into that "domestic consumptions."

There is no other reasonable way to read that statement. You can either depend on foreign markets to sell your products ("export-led economy") or depend on domestic markets to sell your products ("consumption-led economy"). You can't have a "domestic economy" that isn't fueled by consumption - the only other part of the GDP is investment, and investment isn't demand for factory outputs (generally).

The numerical data I was looking for is the FDI as a fraction of GDP. I know China is far from a closed domestic economy but think if one counts both the value sent out (exports) and the FDI coming in the net import of wealth is small part of the wealth the Chinese are creating each year.

That true as such, but misses the reasons for the labels. I.e., labels like "export-led" refer to where the growth in the economy is coming from, and also what sort of strategy the investment spending is geared towards, how the monetary policy is structured, etc. China is export-oriented because it pursues a devalued currency, directs considerable investment into export-oriented infrastructure, and generally relies on external markets to fuel growth and prop up the entire system. What exact percentage of GDP exports account for is secondary to that issue: the point is that the GDP growth (including investment and consumption) is itself premised on the export-oriented strategy to begin with.

(Much of what is sent to the US is not really paid for - China advance the US the money to "pay" for it.

And that (i.e., monetary policy designed to devalue the currency and so prop up big, developed export markets) is exactly a hallmark trait of an export-oriented economy.

The FDI is however real capital influx

Yes, as are the (even larger) flows of FDI into the United States. So what?

Guilty, almost as charged. Yes I do think building things (not just production equipment) that have some lasting value, increase productive capacity, is more important than, for example, me cutting your hair in exchange for you washing my car as GDP items.

That's great, but it doesn't mean you can have an economy that consists entirely, or even primarily, of the former types of production. China can't just build factories that build ever more productive factories - the more "domestic" the economy becomes, the larger of a share of the actual factory outputs they will be buying. And that's going to be the same consumer goods that they've been selling.

I also think that POV also quickly transformed the USSR into a great world power from total destruction at the end of WWII. However, when they started to turn their attention to services for their people instead of new steel plants, etc. they applied their stupid central direction to everything that should hav been left to the free market, as China does.

Their basic problem was that they never turned their attention away from the steel plants. They were wedded to the same idea as you are, that only certain production was really valuable (in that case, the ones that could be used, or easily retooled, for munitions and armaments production). So instead of developing a consumer base, they forged ahead building way more heavy industry than they had any need for, which left them anemic and dysfunctional. China has learned that lesson somewhat (Mao subjected them to the same idiocy at around the same time, after all), but is still worryingly invested in the pretext for central political control that accompanies development of heavy industry (especially in a country with a state-run investment banking system) and export-oriented growth.

There's going to come a day when they must reckon between what's good for the development of the country, and what's good for the entrenched system of patronage and control - they haven't yet had to face any such difficult choices, and my confidence in the ability of an authoritarian one-party system to derrogate its own power in favor of the people is, shall we say, rather low. The last time Chinese people asked for a say, the regime sent in tanks and killed hundreds of them. We're talking about a regime that still runs slave labor camps for political prisoners, after all, so let's not get too rosy about their beneficence and wisdom, especially when it comes to issues where their power is at odds with developmental goals.

Her two other summer there were equal economic disaster for the USSR. - That is why the USSR collapsed and Why China, by doing otherwise (than US with no long term planning and USSR with micro management) has 30 years of double digit GDP growth.

Well, that, and the tiny little fact that they were starting from a massively impoverished baseline. Simple adoption of common-sense planning ideas and modern technology and practices, along with a few steps to attract some FDI and facilitate trade, are sufficient to produce spectacular growth rates in a large country that has been mismanaged and neglected to the degree China had by 1980 or so.

Also China has not exhibited 30 years of double digit GDP growth if measured in real terms (the average is probably around 7-8% over that period, although there have been many years >10%). There is substantial inflation in the yuan these days, typically 3-5% higher than in the US (just before the crash in 2007, inflation in China was running at nearly 9%, and is currently running along at 3% while inflation in the US is near-zero). Additionally, China is showing signs of a real estate bubble, with property prices growing dramatically faster than inflation or the real GDP. A lot of your big "domestic economy" investment activity is purchases of apartments at drastically inflated prices, by speculators (they don't even rent them out for income, as they think this will devalue the assumed future price by more than they stand to make in rent - the hallmark sign of a speculative bubble).

I think it is very important that US can produce real goods for its needs or to trade for its needs.

Of course it is, and the disagreement is not on that premise, but the supposition that the US doesn't produce or export anything of note. The growth rate of industrial production in the US is positive, and in value added terms is double what China exhibits. Likewise, the United States exports nearly as much per year as China does.

The point of being a developed country is not that you don't need to do those things, but that you have so much strength in both those areas and others that you no longer depend crucially on growth in exports and manufacturing, and so don't need policies that are narrowly focussed on fostering those specific features.

The decline has been in US manufacturing employment, not the output. Partially that's fueled by competition with developing countries (which puts labor-intensive production in the US at a disadvantage) and partially it's technology and automation (which transforms what used to be labor-intensive production into capital-intensive production). More to the point, the real advantages in a manufacturing sector lie in the realm of efficiency, not volume.

China has used its supply of cheap labor and a devalued currency to boost up its competitive advantage, but such a strategy will cease to be workable exactly as China becomes developed: there won't be enough cheap labor, and there will be much greater demands for currency appreciation. Note that currency devaluation - one of the primary policy features intentionally pursued by China - is central to your nightmare scenarios for America. So while you're correct in noting that such would be a step back for America, that also implies that China's economy remains a step back from America's. It's an artificial and, ultimately, costly way of boosting your competitive position, and so the last resort for developed countries for whom improvements in actual efficiency are clearly preferable (should they decide their competitive position is lacking to begin with - most developed countries aren't really interested in mercantilist style policies at all).

When they get smart and we have no ability to produce for ourselves and for trade, what do you expect will happen?

If the day ever comes when the United States is anything less than a juggernaut of production and exports, then I'll start to worry about it.

It's starting to worry me that you continue to trumpet this canard, despite my having apprized you of the relevant facts more times than I can recall.

Bridges have collapsed.

That kind of thing happens in China too: and with greater frequency, and of newer projects, owing to the corruption.

Meanwhile, I can name plenty of nicely-maintained bridges in the US, and plenty more new ones being built to replace aging ones. The Bay Bridge is currently being replaced, for example. I can't name a single time I've ever thought twice about crossing a bridge in the US, and the supposition that the situation is otherwise is a fantasy. US infrastructure is in good shape, generally; the insistence to the contrary comes from groups with a vested interest in boosted infrastructure spending (civil engineers, construction contractors, etc.).

NYC gets most of its drinking water from pipe line along the Hudson river which is more than 100 years old and leaking.

Your understanding of the NYC water system is erroneous on its face. They use a network of many different pieces of infrastructure, are building expansions and new parts, investing in maintenance of old parts, etc. The provision of water to NYC remains one of the most impressive ongoing infrastructure projects in the world. There's an entire custom work submarine used by special divers to work on leaks in the tunnel systems for extended periods of time (they actually live inside the submarine for weeks on end).

It's become rather obvious that you are cherry-picking misrepresentative data for rhetorical value. You should either take a genuinely scientific approach, or cite those who have.

Some day a disaster will happen and a lot of people will be without clean water, except rationed from trucked in supplies.

That is true of essentially every major city on Earth, no matter the state of their infrastructure.

Not only does US have no high speed trains,

Remind me again what we need high speed trains for? We have these great inventions called "airplanes" and facilities called "airports" instead, and they're a lot more appropriate for our demographics (which features drastically lower population densities than the sorts of places that high speed rail is appropriate).

 

[Billy T]

To Quad:

I think we should call a truce on this debate (as to whether or not China is trying to boost its domestic or export economy more) for a couple of years and then come back to let the facts / data answer it. I cite the many huge expenditures that China is making to develop the interior regions and you cite that they have pegged the Yuan to the dollar to boost exports. - I don't think fixing it value to the dollar is "devaluating the Yuan" - that seems more like keeping it fixed, unless you are stating that the US policy is to devaluate the dollar.

Until about three years ago (perhaps a little less?) they did let the Yuan appreciated wrt the dollar. I, like many others, think they will again let it increase in value wrt to the dollar. I think this mainly because that will further increase the domestic economy and further cut back on the export economy. I believe China, like me, does fear at least a "DOUBLE DIP" recession in US and EU so they will not be able to sell as much as they once did.

Everyone can see that Joe American is already "deleveraging" - paying down his debts, saving and buying mainly the essentials. The Chinese are not dumb - they know they really have no choice but to produce more for the internal market to keep job growth up and keep the support of the population. (US retails sales dropped more than expected in May. That triggered a sale-off in the stock market, which only recovered last week because it leaked out that China's sales were sharply up, both domestically and in exports mainly to Europe, China's biggest customer now.

As far as your question: Why high-speed rail when US has airplanes and airports? - The answer is that planes use more energy per passenger mile than trains and in the long run are less economical. - By a huge factor when you start to speak of moving bulk goods like grains or coal by plane instead of rail, but then the US slower trains can be used for this too.

I only mention it to forcefully drive home that trains are much cheaper than airplanes as well as more suited to the high cost energy era soon to be upon everyone. (BTW a post or two back, in this thread I think, I documented that China's petroleum use was up 28% YoY in May* - and warned all to get use to paying $4/gallon for gas by Christmas.) There will be fuel surcharges for airplanes then too. - So by Christmas 2010, perhaps you will better understand why trains instead of airplanes.

*From: http://news.bbc.co.uk/2/hi/business/8563985.stm (earlier stated, from memory, as 26% was an error.)