The world’s economic fortunes depend more than ever on China’s performance. So when an expert claims that the Asian giant is facing formidable challenges his arguments should be considered carefully.
Fraser Howie certainly qualifies as a specialist in Chinese finance. He has written three books on the subject including most recently Red Capitalism:The fragile financial foundations of China’s extraordinary rise. In addition, he was worked in Asian stockmarkets for two decades, is fluent in Chinese and is married to a Chinese woman. I was therefore particularly interested to hear him speak at a recent Lombard Street Research seminar.
The thrust of his argument is that China’s growth model is changing. “China for many years was a miracle growth story has now become a debt story,” he says. ‘We’re just at the beginning of the problem of bad debt in China”.
Despite a laudable reform agenda relatively little has changed over the past 18 months. The Chinese authorities recognise the need for extensive legal and regulatory change but its implementation is painfully slow. One notable exception is the tie-up between the Shanghai and Hong Kong stock exchanges.
Even the liberalisation of the currency is going far more slowly than many breathless headlines suggest. The renminbi is still relatively little used for international transactions considering the size of the Chinese economy.
Howie draws a vivid analogy between Beijing’s Forbidden City and the country’s financial system. The huge grounds of the former imperial palace are divided into numerous distinct palaces and courtyards. In a similar way the financial markets are segmented into multiple isolated areas. For that reason he regards the system as “dysfunctional”.
Charles Dumas, the chairman of Lombard Street Research, also discussed China at the event but from a macroeconomic perspective. He described the economy as “wildly out of balance” with its extremely high levels of investment – accounting for almost half of GDP – and low levels of consumption.
Dumas also pointed to the likely impact of a Chinese slowdown on the global economy. For example, Germany’s bonanza from selling capital goods to China is likely to come to an end.
China’s economic slowdown is a huge subject and it would be unfair to expect too much to be crammed into a single morning’s session (which covered other topics in the global economy as well). However, it was surely right to ask awkward questions on the subject rather than embrace the orthodoxy that China is enjoying an orderly slowdown.
Nor is the common assertion that China is coming to the end its catch-up growth phase as helpful as is often assumed. The same claim could have been made a few years ago and will still probably be plausible in a few years’ time. After all China is still far poorer in terms of income per head than the advanced economies. The challenge is to substantiate the argument if it is indeed true.
Perhaps the most difficult task is to divine what exactly is happening on the productive side of China’s economy. Unfortunately conventional economic measures are of even less use here than in the developed world.
Understanding these trends is perhaps the single most urgent task confronting those who want to understand the global economy.
This blog post was first published today on Fundweb.
The Worldbytes citizens’ TV channel recently interviewed me on contemporary anti-semitism. You can watch the video here.
My recent FT book review was cited on Andrew Sullivan’s Daily Dish today.
This is the text of my book review from last Friday’s Financial Times.
Any serious attempt to understand the US’s current impasse by moving outside the conventional framework should be welcome. The stale pairings of liberal and conservative, right and left, no longer cut it.
Joel Kotkin, an American academic and author, has come up with the unlikely proposal of understanding the country’s predicament in terms of class conflict. But his conception is a world away from the old socialist notion of a combative proletariat battling against an intransigent ruling class. Instead, his is an innovative attempt to rethink the main contours of US society.
For a start, he sees the American elite as split between two mutually antagonistic oligarchies. On one side is a new elite based largely on information technology, although with substantial support from Wall Street. On the other is the old plutocracy centred on sectors such as agribusiness, construction, energy and manufacturing.
The new oligarchy differs from the old in important ways. Its technology wing is concentrated in and around San Francisco, with a secondary cluster in Seattle, and it employs far fewer people than traditional industries. Kotkin estimates that in 2013 the leading social media companies together directly employed fewer than 60,000 people in the US. By contrast, GM employed 200,000, Ford 164,000 and Exxon more than 100,000. The different nature of technology firms, with far less dependence on cheap energy, helps explain why they are predisposed to green thinking. They also tend to be both geographically and emotionally distant from middle America.
Meanwhile, the financial sector, which has traditionally favoured the Republicans, has benefited from enormous government largesse. This includes federal bailouts, cheap money and low interest rates. As a result, it has become more amenable to the progressive causes usually associated with the Democrats.
These new oligarchs are in alliance with what Kotkin calls the clerisy. This is the burgeoning class of technical specialists ensconced in government, law firms, the media and foundations. The technical class has swollen in line with the increased role of the state. Almost instinctively, the clerisy advocates increased regulation as the solution to any problem it encounters.
Together, the tech oligarchs and the clerisy tend to favour what Kotkin calls gentry liberalism. This outlook has an almost aristocratic disdain for the mass prosperity that long characterised the US. It typically favours sustainability over economic growth. It dismisses the suburbs in which most Americans choose to live as ugly “sprawl”.
The yeomanry – the class of small business owners – is the big loser in this new arrangement. Not only are its members being squeezed by offshoring, globalisation and technology, but excessive government regulations are undermining their livelihoods. The restrictions so beloved by the clerisy are breaking the traditional backbone of US prosperity.
Kotkin believes the new oligarchy and the clerisy together provide Barack Obama’s support base. Although the president often rails against excessive inequality, he has widespread backing from the ultra-wealthy of Silicon Valley and Wall Street. His predilection for government regulation also sits well with the interests and outlook of the clerisy.
Kotkin does not advocate supporting the Republicans as an alternative. Their ties to the old plutocracy are transparent. Meanwhile, self-proclaimed progressives rail against the excesses of the “1 per cent” while disenfranchising the middle and working class from popular prosperity.
His solution is for a renewed emphasis on broad-based economic growth. This means shifting government priorities away from lavish pensions and benefits towards investment in physical infrastructure. It involves greater emphasis on education and training, with particular attention to adult learning. Kotkin also advocates a resurgence of blue collar industry and the creation of new homes and businesses on the periphery of metropolitan regions.
Although his framework is superior to the platitudes of liberals versus conservatives, it has weaknesses. It does not sufficiently explain why an elitist technocratic outlook has such a grip on American life. The ever-increasing role of government is only part of the story. Nor does he acknowledge how many leaders in traditional industries, not just the tech oligarchs, have embraced notions such as sustainability.
But in having the courage to junk the old nostrums, he has taken an important step forward. The challenge is for others to go even further.
My latest book review for the Financial Times is on Joel Kotkin’s The New Class Conflict (free registration may be necessary to read). I will post the full text at a later date.
This blog post from Portugal was first published yesterday on Fundweb. Although I do not draw out the point in the piece it seems to me that the European Union, as an elitist technocratic project, has played a considerable role in inculcating the fatalist mood I describe.
It was not originally planned that way but I was hoping that a visit to Portugal would give me some insight into the country’s economic plight. In the event it did but not quite in the way that I expected.
For the large football-loving section of the population there was a sense of national disaster but not over economics or politics. The Portuguese national team suffered a shock home defeat to Albania in its first Euro 2016 qualifying match. I cannot speak Portuguese, nor am I an expert in body language, but Paulo Bento, the team manager, looked embattled in the numerous television interviews he gave after the game. A few days later he announced his resignation.
Beyond that I am more wary than most writers about drawing sweeping conclusions about a country on the basis of a short visit. I certainly do not believe that the standard journalistic technique of interviewing a local taxi driver is a reliable gauge of public opinion.
It would be easy to draw the misleading conclusion that the relatively large number of unoccupied shops and other buildings (although no more than in many British high streets) are a symptom of economic retrenchment. There probably is some truth in this but it is also the case that from as far back as the 1970s many shops and business have migrated to the outskirts of Portuguese cities. Although tourists tend to stick to seaside resorts and historic city centres many Portuguese prefer to spend spare time in American-style malls.
Young volunteers are a ubiquitous sight in many towns and on the transport system. Typically they travel in groups of three or more and they are set tasks such as aiding commuters or helping to keep beaches clean. No doubt this phenomenon is a reflection of the high levels of youth (16-24) unemployment. The rate of about 35 per cent is grim but down from a peak of over 40 per cent in February 2013. Presumably the young volunteers, who are evidently paid a small stipend, are not classified officially as unemployed.
High migration, particularly by the well educated, is another effect of unemployment. Some go to Portugal’s former colonies, such as Brazil and Angola, while others migrate to European destinations such as Germany. German classes at the local Goethe Institutes are reportedly full of young graduates learning the language in preparation for a working life in central Europe.
Talk to older adults and a different although parallel picture emerges. Incomes for public sector workers have been slashed while many aged 50 or over have come under pressure to retire early with a reduced pension entitlement. Whole sectors, such as construction, appear to be largely idle.
There is also much talk of privatisation of such entities as the airport operator and the insurance arm of the state-owned bank. Such initiatives appear to be a result of EU pressure to raise revenue rather than by what is sometimes derided as an ideological commitment neoliberalism.
However, the most striking feature of Portugal’s plight is the widespread fatalism of the population rather than the economic challenges themselves. People talk about “the crisis” as if it is a natural disaster. There seems to be little sense that the eurozone’s recent woes are at least partly the product of the monetary bloc’s structural flaws as well as bad economic policy.
Resigned acceptance is a poor starting point for working out how to generate a new round of prosperity.
I will be speaking at two sessions at this year’s Battle of Ideas weekend festival in London’s Barbican Centre on the weekend of 18-19 October.
On Saturday I will be debating the plight of the “Pigs” – Portugal, Italy, Greece and Spain – in the eurozone crisis. Philippe Legrain and Vicky Price will also be on the panel while Nikos Sotirakopoulos is the chair.
The entire weekend is well worth attending.
A reminder that Daniel will be introducing a discussion of America’s new technocratic elite at the Institute of Ideas Economy Forum in London tomorrow evening.
While most of you were off on your summer holidays the world’s top economic policymakers were up to something else. Although they enjoyed more salubrious surroundings than many they kept busy doing what they do best: blaming others for the economic mess they have played a key part in creating.
The summer’s top gig was the annual do for top financial types in at therustic resort of Jackson Hole in Wyoming. Its use as the event’s venue dates back to 1982 when it was evidently chosen to entice Paul Volcker, then chairman of America’s Federal Reserve, with its excellent fly fishing.
This year it was the turn of an Italian, Mario Draghi, to star. The president of the European Central Bank told the select audience that: “it would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy”. In other words an area of policy outside his own remit should be used more actively.
He also emphasised the need for structural reforms. In particular he focused on labour markets, product markets and the business environment.
His call came shortly after Eurostat, the EU’s statistical agency, released miserableflash estimates for economic growth in the second quarter of 2014. It showed GDP in the eurozone was flat compared with the previous quarter. The poor performance comes several years after the emergence of the eurozone crisis in 2009.
It is striking that technocrats such as Draghi seldom accept any responsibility for the region’s morass. The fundamental structural weakness of the eurozone itself – that is its attempt to tie highly disparate economies into a monetary union – is not addressed. If anything the solution is seen as further integration – under the leadership of elite technocrats of course – rather than the dissolution of the currency bloc.
As I argued in a Fund Strategy cover story back in 2010 the eurozone is a bit like a layer cake. Its members exist on three levels: national, regional and global. Whereas all countries are subject to global problems, and all have national weaknesses to a degree, the design of the eurozone poses formidable additional challenges.
The structure of the eurozone inevitably leads to imbalances between the relatively strong economies, most notably Germany, and weaker ones, such as Greece and Portugal. Until 2009 these helped create a bubble in the region’s periphery, as cheap capital flowed into southern Europe, followed by savage austerity when the bubble burst.
A unified economy, such as the US, can deal with these problems by shifting resources from one area to another. However, this is a difficult process in Europe as it still consists of distinct nation states.
To be sure this design weakness is not all the fault of Draghi. The region’s politicians should take most of the blame. Rather than take responsibility for tackling economic problems they preferred instead to abdicate responsibility to central bankers and other unelected technocrats.
Meanwhile, in Lindau, a Bavarian town on the banks of Lake Constance, the fifth annual meeting of Nobel laureates in economics also took place in August. Although several were critical of the eurozone their perspective was not that different from Draghi’s. Joseph Stiglitz, for example, called for further moves towards in integrated Europe and a more active fiscal policy.
Both the policymakers and the supposed critics seem to share the same deadening technocratic consensus on the challenges facing the eurozone. It is high time that a new approach is tried.
This blog post was first published today on Fundweb
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