I'd really like to see that graph of the real estate sector as a % of the economy pushed back another decade or so, to see what Japan looked like in the Crichton-panic era.
The party doesn't think it can afford a recession. So they're making the bet that they can reduce reliance on unproductive sectors without letting companies fail and their stakeholders suffering economic consequences. But that creates the same moral hazards that allowed those sectors to become so prevalent.
Maybe they can thread the needle. Maybe they can't. I suspect the task is too delicate and complicated, but might be wrong.
China won’t allow a property crash; it’s far too risky. So they will continue plowing money into increasingly unproductive real estate construction and speculation; somewhat less to avoid further bubble inflation; but still a lot. This also means they will continue to see mediocre productivity growth since so much capital, labor, and skill will get poured into constructing not-so-great housing. The infrastructure spending that kept them going in the ’10s won’t help much now; the first bridge over a river allows all kinds of efficiencies but a second adds little. But they’ll keep wasting money on it because a) it worked earlier and b) corruption.
So, working population has roughly peaked; productivity won’t grow much; and capital will be diverted to marginal or even counterproductive uses. So, little real economic growth. On top of that, they’ll fudge their economic numbers to not look so bad, but like US Republicans they’ll start believing their own BS and that will make them even less capable of dealing with a difficult situation. Again, China won’t allow a crash, and doesn’t have to, so this will all drag on endlessly. It’s going to be Japan’s lost decade, times 20.
The good part of this is that housing prices will remain sky-high, so Xi will never get that baby boom for his army.
It definitely increases the risk of war. A strong, confident country that is still growing has no reason to rush the cookie jar. While a country that has peaked earlier than expected might rush to grab the prize before the window closes.
Well, growth has already slowed substantially and productivity growth has dropped to a very low level since 2009, so I'd say that at least some of the predictions came true...?
Love your posts analyzing the Chinese economy. They combine the right balance of technical details and explanation so non-economists can understand them.
So if the party kicks this can down the road forever, productivity falls as everyone spends all their time and energy HODLing real estate. Any other examples where something like this has happened?
>> Obviously Xi will arrange things so that his friends and allies within the Party get to keep the real estate and related assets that hold their value, while sticking political enemies with the assets that go to zero. But the real question is how many “friends of Xi” there are and how many get left on the outside.
Also, Xi may not be able to perfectly allocate said assets to his friends.
One question I have is - are there limits to the government's ability to keep the growth going? Can they keep taking on more debt as necessary, or does it run out eventually? They have control of the economy that other governments can't match, but not total control...
They can't keep actual growth going. Eventually productivity just falls, and there's no way to grow. What they CAN do is keep the illusion of growth going for a couple years by assigning fake prices to stuff, but eventually this becomes too obvious and everybody realizes it's fake.
I'd really like to see that graph of the real estate sector as a % of the economy pushed back another decade or so, to see what Japan looked like in the Crichton-panic era.
The party doesn't think it can afford a recession. So they're making the bet that they can reduce reliance on unproductive sectors without letting companies fail and their stakeholders suffering economic consequences. But that creates the same moral hazards that allowed those sectors to become so prevalent.
Maybe they can thread the needle. Maybe they can't. I suspect the task is too delicate and complicated, but might be wrong.
I think the path forward is clear.
China won’t allow a property crash; it’s far too risky. So they will continue plowing money into increasingly unproductive real estate construction and speculation; somewhat less to avoid further bubble inflation; but still a lot. This also means they will continue to see mediocre productivity growth since so much capital, labor, and skill will get poured into constructing not-so-great housing. The infrastructure spending that kept them going in the ’10s won’t help much now; the first bridge over a river allows all kinds of efficiencies but a second adds little. But they’ll keep wasting money on it because a) it worked earlier and b) corruption.
So, working population has roughly peaked; productivity won’t grow much; and capital will be diverted to marginal or even counterproductive uses. So, little real economic growth. On top of that, they’ll fudge their economic numbers to not look so bad, but like US Republicans they’ll start believing their own BS and that will make them even less capable of dealing with a difficult situation. Again, China won’t allow a crash, and doesn’t have to, so this will all drag on endlessly. It’s going to be Japan’s lost decade, times 20.
The good part of this is that housing prices will remain sky-high, so Xi will never get that baby boom for his army.
Noah, can you comment on how this impacts tensions and the risk of war over Taiwan?
I suspect it increases tensions and the chance of war, but I don't really have any idea, that's just a suspicion.
It definitely increases the risk of war. A strong, confident country that is still growing has no reason to rush the cookie jar. While a country that has peaked earlier than expected might rush to grab the prize before the window closes.
Unless it becomes clear to them that the window has already closed, if it was ever open.
How can that be made clear?
Googling "failing chinese economy" delivers results back to 1989. Sooner or later such predictions will be correct.
Well, growth has already slowed substantially and productivity growth has dropped to a very low level since 2009, so I'd say that at least some of the predictions came true...?
Love your posts analyzing the Chinese economy. They combine the right balance of technical details and explanation so non-economists can understand them.
So if the party kicks this can down the road forever, productivity falls as everyone spends all their time and energy HODLing real estate. Any other examples where something like this has happened?
Japan after *their* real estate bubble popped. (was this intended to be a rhetorical question?)
>> Obviously Xi will arrange things so that his friends and allies within the Party get to keep the real estate and related assets that hold their value, while sticking political enemies with the assets that go to zero. But the real question is how many “friends of Xi” there are and how many get left on the outside.
Also, Xi may not be able to perfectly allocate said assets to his friends.
One question I have is - are there limits to the government's ability to keep the growth going? Can they keep taking on more debt as necessary, or does it run out eventually? They have control of the economy that other governments can't match, but not total control...
They can't keep actual growth going. Eventually productivity just falls, and there's no way to grow. What they CAN do is keep the illusion of growth going for a couple years by assigning fake prices to stuff, but eventually this becomes too obvious and everybody realizes it's fake.