China's taxes are implicit, rather than explicit. That is, in the US or Japan the government taxes companies and spends the money to Do Stuff. In China the government does some of that as well, but since the Party has Party Committees in every company of reasonable size, it can simply cause companies expend their own resources to Do Stuff that the Party wants done, without the necessity (or accountability) of ever having the government involved.
Much of our economic analysis divides the economy into "private" and "public" sectors, but for China an accurate analysis needs to divide actions into "private", "government", and "party" categories. The fact that the opacity of Party control makes this nearly impossible to do is, in Party eyes, one of the benefits of their system.
Eh, maybe in a ceteris parabis kind of way but the reality is that all communist countries are less-developed and have less state capacity. Less developed countries just have fewer taxes all around. The US didn't have an income tax until the 1920s, yeah? And many developing countries are still poorer than the US circa 1920. I live in Vietnam and we don't have any property taxes here yet. And just because a country is communist doesn't mean it is completely immune to the popular discontent, so the government has dropped several plans to implement a property tax due to public outcry.
Less state capacity means it is harder to extract whatever taxes are actually on the books. There is a kind of "stamp duty" on house sales here. But it is extremely common to make up a fake contract with a lower selling price in order to pay less stamp duty. There is a tax on selling second homes but with no strong record of house ownership (and with most house transactions being in actual cash with no mortgage) it is almost 100% reliant on self-reporting....which happens about as little as you'd expect.
I noticed that mass media usually report *youth* unemployment for China, whereas for other countries an *overall* unemployment is typically reported. That is also the case in this blog. Is there a reason for this? Shouldn't we be comparing apples-to-apples
Well, sort off. Even overall unemployment is not an apples-to-apples comparison because China only counts unemployment in *urban* areas, so when people without the right hukou don't have jobs, China just kicks them out of the cities and they disappear from the unemployment number. Also, China defines who's "unemployed" a bit differently than we do. Also they probably lie.
So the best thing we can do is just to look at *changes* in their own internal measures, rather than comparing across countries and trying to gauge whether their *level* of unemployment is high or low.
I think it's pretty significant. It's a barrier to urbanization and agglomeration. It's fundamentally a form of segregation, driven by deep-rooted classism.
I live in Vietnam which has a similar system. One example of the drag is that cheap childcare is tied to your family book registration. So if you move to a new city for a job, you can't get cheap, government subsidised child care. Which acts as a drag on the job decisions people make and also it just a deadweight loss as people have to spend more money on private child care instead.
Another example is that a lot of paperwork needs to be in your "hometown" (i.e. where your family book registration is; moving your hometown is not easy). This means things like: you want to get married? Prepare to have to take several days off of work to travel back to file the paperwork in your hometown. This is a minor annoyance if your hometown is 1 hour outside of Saigon. A huge headache if you live a 4 hour bus ride away in the Mekong. And a full on migraine if you live up north and you need a plane flight to get there is under 20 hours.
I can't speak to China but in Vietnam it isn't really a form of segregation or classism here. But it is an outdated bit of bureaucracy that is (slowly) being dismantled.
Very interesting! By the way I went to see the China exhibition currently showing at The British Museum today for the second time. If for any reason you goto London before the exhibition finishes on 8th October I definitely recommend it https://www.britishmuseum.org/exhibitions/chinas-hidden-century
Fed tightening and PBoC inflating should help their export industry. What infrastructure to invest in? I would consider moving factories westward to ease unemployment for those areas. Complete the BRI westward towards Central Asia and Russia as well as to Pakistan and Iran for delivering finished goods from the western Chinese provinces. But honestly if China is reaching post-industrialization, they may need to move in the footsteps of Japan, S. Korea, and the US -- that is less reliance on exporting goods and more towards exporting services. $0.02 :-)
Well, maybe! Fed tightening can hurt China by reducing demand for their exports, with exchange rate-driven changes being a second-order effect. That's what a lot of people are talking about now.
China's exports have been dropping, so *something* is causing that drop...
One wonders how much the decrease in Chinese exports is from a global recession and how much is political. For certain internal Chinese consumption is in recession; however, the current US economy is not yet. The number one Chinese export is now cars and is the largest in the world this year. A number of global Chinese companies are under sanction, such as Huawei.
Interestingly, a week ago I was sitting next to a fellow whose family business is the construction and operation of hospitals, and he told me that the firm had received a large loan from the government for five hospitals - as part of a major expansion of healthcare spending.
"Although China nominally has universal health coverage, it’s actually pretty patchwork and subpar"
Can you name a large, universal healthcare system anywhere that isn't subpar? My friends in the UK, Canada, and France all complain about their healthcare systems (mostly waiting periods, especially Canada). Only tiny Singapore has somewhat pulled this off, and it isn't free to use.
"It’s also something China is just going to have to do anyway. A huge cohort of Chinese people in their 50s is about to enter old age"
I wonder if this isn't overblown. The "live forever" tradition of the WEIRD is just that, historically weird. Are we sure the Chinese people will demand the kinds of expensive, last-year-of-life care that is bankrupting most of the Western universal systems? A mostly rural (as China still is) culture rooted in Confucian / collectivist values may well choose differently than ours. At 73, maybe Grandma needs morphine not chemo. (Even in America, many families are quietly making the same choices, just not talking about it. I know of what I speak.)
"if you lower the amount of time that young people have to spend taking care of grandma and grandpa, you free up young people for more productive work."
Perfect example... only someone from a WEIRD country would say this. In every other culture in the world, caring for Grandma isn't an economic decision. It's a ethical one.
Western, Educated, Industrialized, Rich and Democratic
If you want to communicate, you might want to spell out the acronym at least once in your post. It wasn't easy for me to find even on Google. Succeeded with weird + death + acronym
I live in Vietnam and while your comment contains some truth, it is overstated to the point of being wrong.
Even in Vietnam, elderly people spend tons of money trying to stave off death. I personally know of 3 families where the elderly parent bankrupted the family with their medical treatments. And similar stories are rife when talking among friends, colleagues, and reading the news. If anything, I'd argue that a culture of filial piety increases the chances of families spending money they can't afford on "live forever" treatments for elders.
Even in Vietnam, caring for grandparents is very much an economic decision. The streets of Ho Chi Minh City -- and every other city in Vietnam -- are full of old ladies who aren't supported by their families because they can't afford it. They sell vé số -- lottery tickets -- and live 10 or 20 to a room in a flop house.
What's more, the culture of taking care of grandma is hardly an unmitigated positive as the constant stories in the news here of elder abuse by family members who don't have the skills or temperament or money to deal with aging parents make clear.
Interesting. Vietnam is definitely outside the WEIRD world, but appears to have imported some of our habits. Time will tell if China has as well.
You're correct that taking care of grandma certainly isn't always positive. But it is often preferable (both for grandma and the family) to the alternative of expensive institutional care. While there are great rest homes and abusive families, I suspect most societies are actually significantly biased in the opposite direction. Blood is thicker than water... or than money.
"Even in America, many families are quietly making the same choices, just not talking about it. I know of what I speak.)"
I'm 61. How much longer do I have before the kids just "quietly" pull the plug instead of me at least trying to get me another year or two, however miserably?
I will not go into specifics in a public forum, but I am familiar with this. If you truly want to be kept alive at all costs, put that in your living will. But most people actually don't want that.
If you haven't read a book called Being Mortal by Atul Gawande, I highly recommend it.
Great column. Insightful. Contributed to my elementary education.
The options you offer here as best fixes for China regarding GDP, growth, debt structure, productivity, short- and long-term aftereffects, etc., seem to me to coincide nicely with, for instance, Pettis' analysis of the relationship between debt and growth in economies with different characteristics (specifically China and the US) , in https://carnegieendowment.org/chinafinancialmarkets/86397.
I barely understand all the relationships invoked here, or in Pettis' analysis, but it seems to me that his conclusions about the eventual growth path of China's economy are not optimistic, in view of the apparently fictitious wealth underpinning China's current GDP value.
I think there's room here for more analysis from you.
Don't the Chinese already save too much and therefore the effect of helicopter money might be muted? When I saw the title I thought one of the recommendation you were going to make was to flip the switch from real estate and infrastructure focused investment to a full on consumer economy. This would be a suggestion from from the Pettis/Klein camp. Thinking it through, one of the reasons for the high savings rate is the relatively thin safety net, among other things. Perhaps a knock-on effect of investing into healthcare would be to lower up the Chinese consumers propensity to save.
China already has world class healthcare ... for top party officials. Significantly expanding that would eliminate one of its major 'class' based benefits. Similar to the restrictions on migrant workers when they leave their home province, enforcing various class distinctions is vital for the powerful to remain above the others. They don't let go easily.
Xi is not just an awful leader, but an awful leader at a pivotal time. China needed a leader to promote domestic demand, expand migrant worker rights, and really harness green energy (not shunt it while burning coal). All that Xi cares about is consolidating personal power, so that's all we'll see.
China doesn't need more subsidies for demand; it needs fewer subsidies for supply. As long as 30%+ of GDP is earmarked for construction and real estate regardless of profit, the rest of the economy will be weighed down automatically.
In most countries, expensive subsidies are for consumer goods, so the waste shows up as inflation. In China, the expensive subsidies are for state-affiliated land development. That makes the waste show up as unrepaid loans.
As Michael Pettis observes, all China's mid-ranking elites are implicit beneficiaries of these shady-accounting financing arrangements. So the leaders stand to wreck their own political clients if and when they cut off the money flows.
Demand subsidies might help at the margin. But China's real trouble is its existing subsidies, the politically crucial subsidies, in supply.
There may come a time soon when a similar article could be written about America, substituting for "real estate" "the stock. private equity, private credit and real estate markets."
However, the ratio of Household Net Worth to GDP is historically high, even after moderating somewhat recently. Occam's razor explanation: asset values have not adjusted to a higher interest rate regime. (sorry for the long link!)
China having lower taxes than the USA and Japan is…news to me. I’m surprised for some reason but not sure why.
What's even weirder is that China has *always* been a low-tax country, even back in the imperial days.
One expects a nominally communist country to have high taxes and/or high public sector share of the economy!
China's taxes are implicit, rather than explicit. That is, in the US or Japan the government taxes companies and spends the money to Do Stuff. In China the government does some of that as well, but since the Party has Party Committees in every company of reasonable size, it can simply cause companies expend their own resources to Do Stuff that the Party wants done, without the necessity (or accountability) of ever having the government involved.
Much of our economic analysis divides the economy into "private" and "public" sectors, but for China an accurate analysis needs to divide actions into "private", "government", and "party" categories. The fact that the opacity of Party control makes this nearly impossible to do is, in Party eyes, one of the benefits of their system.
Eh, maybe in a ceteris parabis kind of way but the reality is that all communist countries are less-developed and have less state capacity. Less developed countries just have fewer taxes all around. The US didn't have an income tax until the 1920s, yeah? And many developing countries are still poorer than the US circa 1920. I live in Vietnam and we don't have any property taxes here yet. And just because a country is communist doesn't mean it is completely immune to the popular discontent, so the government has dropped several plans to implement a property tax due to public outcry.
Less state capacity means it is harder to extract whatever taxes are actually on the books. There is a kind of "stamp duty" on house sales here. But it is extremely common to make up a fake contract with a lower selling price in order to pay less stamp duty. There is a tax on selling second homes but with no strong record of house ownership (and with most house transactions being in actual cash with no mortgage) it is almost 100% reliant on self-reporting....which happens about as little as you'd expect.
I noticed that mass media usually report *youth* unemployment for China, whereas for other countries an *overall* unemployment is typically reported. That is also the case in this blog. Is there a reason for this? Shouldn't we be comparing apples-to-apples
Well, sort off. Even overall unemployment is not an apples-to-apples comparison because China only counts unemployment in *urban* areas, so when people without the right hukou don't have jobs, China just kicks them out of the cities and they disappear from the unemployment number. Also, China defines who's "unemployed" a bit differently than we do. Also they probably lie.
So the best thing we can do is just to look at *changes* in their own internal measures, rather than comparing across countries and trying to gauge whether their *level* of unemployment is high or low.
Does that make sense?
Yep, makes sense to me. Speaking of hukou system, how much drag do you think it is on China's economy
I think it's pretty significant. It's a barrier to urbanization and agglomeration. It's fundamentally a form of segregation, driven by deep-rooted classism.
Can you expand more on this deep rooted classism? I haven’t heard that as related to the hukou system.
I live in Vietnam which has a similar system. One example of the drag is that cheap childcare is tied to your family book registration. So if you move to a new city for a job, you can't get cheap, government subsidised child care. Which acts as a drag on the job decisions people make and also it just a deadweight loss as people have to spend more money on private child care instead.
Another example is that a lot of paperwork needs to be in your "hometown" (i.e. where your family book registration is; moving your hometown is not easy). This means things like: you want to get married? Prepare to have to take several days off of work to travel back to file the paperwork in your hometown. This is a minor annoyance if your hometown is 1 hour outside of Saigon. A huge headache if you live a 4 hour bus ride away in the Mekong. And a full on migraine if you live up north and you need a plane flight to get there is under 20 hours.
I can't speak to China but in Vietnam it isn't really a form of segregation or classism here. But it is an outdated bit of bureaucracy that is (slowly) being dismantled.
Thanks for the info. Wasn't aware of this even though my wife is Vietnamese :-)
Very interesting! By the way I went to see the China exhibition currently showing at The British Museum today for the second time. If for any reason you goto London before the exhibition finishes on 8th October I definitely recommend it https://www.britishmuseum.org/exhibitions/chinas-hidden-century
https://kathleenweber.substack.com/p/are-the-united-states-and-china-at
I just wrote my first sub stack post in response to Noah's July 7 post on China. I hope you'll check it out!
https://www.noahpinion.blog/p/china-at-the-peak
Fed tightening and PBoC inflating should help their export industry. What infrastructure to invest in? I would consider moving factories westward to ease unemployment for those areas. Complete the BRI westward towards Central Asia and Russia as well as to Pakistan and Iran for delivering finished goods from the western Chinese provinces. But honestly if China is reaching post-industrialization, they may need to move in the footsteps of Japan, S. Korea, and the US -- that is less reliance on exporting goods and more towards exporting services. $0.02 :-)
Well, maybe! Fed tightening can hurt China by reducing demand for their exports, with exchange rate-driven changes being a second-order effect. That's what a lot of people are talking about now.
China's exports have been dropping, so *something* is causing that drop...
https://www.bloomberg.com/news/articles/2023-07-13/china-s-exports-drop-for-second-month-in-blow-to-slowing-economy
One wonders how much the decrease in Chinese exports is from a global recession and how much is political. For certain internal Chinese consumption is in recession; however, the current US economy is not yet. The number one Chinese export is now cars and is the largest in the world this year. A number of global Chinese companies are under sanction, such as Huawei.
Interestingly, a week ago I was sitting next to a fellow whose family business is the construction and operation of hospitals, and he told me that the firm had received a large loan from the government for five hospitals - as part of a major expansion of healthcare spending.
"Although China nominally has universal health coverage, it’s actually pretty patchwork and subpar"
Can you name a large, universal healthcare system anywhere that isn't subpar? My friends in the UK, Canada, and France all complain about their healthcare systems (mostly waiting periods, especially Canada). Only tiny Singapore has somewhat pulled this off, and it isn't free to use.
"It’s also something China is just going to have to do anyway. A huge cohort of Chinese people in their 50s is about to enter old age"
I wonder if this isn't overblown. The "live forever" tradition of the WEIRD is just that, historically weird. Are we sure the Chinese people will demand the kinds of expensive, last-year-of-life care that is bankrupting most of the Western universal systems? A mostly rural (as China still is) culture rooted in Confucian / collectivist values may well choose differently than ours. At 73, maybe Grandma needs morphine not chemo. (Even in America, many families are quietly making the same choices, just not talking about it. I know of what I speak.)
"if you lower the amount of time that young people have to spend taking care of grandma and grandpa, you free up young people for more productive work."
Perfect example... only someone from a WEIRD country would say this. In every other culture in the world, caring for Grandma isn't an economic decision. It's a ethical one.
Western, Educated, Industrialized, Rich and Democratic
If you want to communicate, you might want to spell out the acronym at least once in your post. It wasn't easy for me to find even on Google. Succeeded with weird + death + acronym
Sorry. :-) I usually do since not the acronym is still pretty new. The book it comes from is decent too (The Weirdest People in the World).
I live in Vietnam and while your comment contains some truth, it is overstated to the point of being wrong.
Even in Vietnam, elderly people spend tons of money trying to stave off death. I personally know of 3 families where the elderly parent bankrupted the family with their medical treatments. And similar stories are rife when talking among friends, colleagues, and reading the news. If anything, I'd argue that a culture of filial piety increases the chances of families spending money they can't afford on "live forever" treatments for elders.
Even in Vietnam, caring for grandparents is very much an economic decision. The streets of Ho Chi Minh City -- and every other city in Vietnam -- are full of old ladies who aren't supported by their families because they can't afford it. They sell vé số -- lottery tickets -- and live 10 or 20 to a room in a flop house.
What's more, the culture of taking care of grandma is hardly an unmitigated positive as the constant stories in the news here of elder abuse by family members who don't have the skills or temperament or money to deal with aging parents make clear.
Interesting. Vietnam is definitely outside the WEIRD world, but appears to have imported some of our habits. Time will tell if China has as well.
You're correct that taking care of grandma certainly isn't always positive. But it is often preferable (both for grandma and the family) to the alternative of expensive institutional care. While there are great rest homes and abusive families, I suspect most societies are actually significantly biased in the opposite direction. Blood is thicker than water... or than money.
"Even in America, many families are quietly making the same choices, just not talking about it. I know of what I speak.)"
I'm 61. How much longer do I have before the kids just "quietly" pull the plug instead of me at least trying to get me another year or two, however miserably?
I will not go into specifics in a public forum, but I am familiar with this. If you truly want to be kept alive at all costs, put that in your living will. But most people actually don't want that.
If you haven't read a book called Being Mortal by Atul Gawande, I highly recommend it.
Great column. Insightful. Contributed to my elementary education.
The options you offer here as best fixes for China regarding GDP, growth, debt structure, productivity, short- and long-term aftereffects, etc., seem to me to coincide nicely with, for instance, Pettis' analysis of the relationship between debt and growth in economies with different characteristics (specifically China and the US) , in https://carnegieendowment.org/chinafinancialmarkets/86397.
I barely understand all the relationships invoked here, or in Pettis' analysis, but it seems to me that his conclusions about the eventual growth path of China's economy are not optimistic, in view of the apparently fictitious wealth underpinning China's current GDP value.
I think there's room here for more analysis from you.
Do you think that the trend of Western companies leaving China will continue to accelerate or stay at the same pace?
I think it'll accelerate, as more companies learn how to move investment to other places, and as they copy each other and bandwagon.
Don't the Chinese already save too much and therefore the effect of helicopter money might be muted? When I saw the title I thought one of the recommendation you were going to make was to flip the switch from real estate and infrastructure focused investment to a full on consumer economy. This would be a suggestion from from the Pettis/Klein camp. Thinking it through, one of the reasons for the high savings rate is the relatively thin safety net, among other things. Perhaps a knock-on effect of investing into healthcare would be to lower up the Chinese consumers propensity to save.
If they save the helicopter money it would help them repair their balance sheets.
Financial institution balance sheets, consumer or both?
Let's hope they indeed choose healthcare over military, which is another plausible area for government spending
China already has world class healthcare ... for top party officials. Significantly expanding that would eliminate one of its major 'class' based benefits. Similar to the restrictions on migrant workers when they leave their home province, enforcing various class distinctions is vital for the powerful to remain above the others. They don't let go easily.
Xi is not just an awful leader, but an awful leader at a pivotal time. China needed a leader to promote domestic demand, expand migrant worker rights, and really harness green energy (not shunt it while burning coal). All that Xi cares about is consolidating personal power, so that's all we'll see.
Tiny typo: There are 4 parents for the couple with 8 grandparents, not 2.
Well, they'll never run out of babysitters for the kid(s).
It's possible that he means the young couple, plus one set of parents, plus all grandparents of the young couple.
But to a western mind that seems quite bizarre.
China doesn't need more subsidies for demand; it needs fewer subsidies for supply. As long as 30%+ of GDP is earmarked for construction and real estate regardless of profit, the rest of the economy will be weighed down automatically.
In most countries, expensive subsidies are for consumer goods, so the waste shows up as inflation. In China, the expensive subsidies are for state-affiliated land development. That makes the waste show up as unrepaid loans.
As Michael Pettis observes, all China's mid-ranking elites are implicit beneficiaries of these shady-accounting financing arrangements. So the leaders stand to wreck their own political clients if and when they cut off the money flows.
Demand subsidies might help at the margin. But China's real trouble is its existing subsidies, the politically crucial subsidies, in supply.
There may come a time soon when a similar article could be written about America, substituting for "real estate" "the stock. private equity, private credit and real estate markets."
Maybe, but our household debt-to-gdp ratio remains 25% below where it was in 2008.
https://fred.stlouisfed.org/series/HDTGPDUSQ163N
True.
However, the ratio of Household Net Worth to GDP is historically high, even after moderating somewhat recently. Occam's razor explanation: asset values have not adjusted to a higher interest rate regime. (sorry for the long link!)
https://fred.stlouisfed.org/graph/fredgraph.pdf?hires=1&type=application/pdf&bgcolor=%23e1e9f0&chart_type=line&drp=0&fo=open%20sans&graph_bgcolor=%23ffffff&height=450&mode=fred&recession_bars=on&txtcolor=%23444444&ts=12&tts=12&width=718&nt=0&thu=0&trc=0&show_legend=yes&show_axis_titles=yes&show_tooltip=yes&id=BOGZ1FL192090005Q_GDP&scale=left&cosd=1987-10-01&coed=2023-01-01&line_color=%234572a7&link_values=false&line_style=solid&mark_type=none&mw=3&lw=2&ost=-99999&oet=99999&mma=0&fml=a%2Fb&fq=Quarterly&fam=avg&fgst=nbd&fgsnd=2008-02-01&line_index=1&transformation=lin_lin&vintage_date=2023-07-22_2023-07-22&revision_date=2023-07-22_2023-07-22&nd=1987-10-01_1947-01-01