EXTERNE ARTIKEL – Hoe China haar economie reguleert (ivm VS, Rusland en Japan)

Nog een artikel dat inzicht geeft in de werkingen van de Chinese economie. Dit keer over de verschillende uitkomsten in de aanpak van economische crises. De schrijver legt uit hoe de Chinezen een “harde landing” kunnen vermijden en landen als de V.S., Japan en Rusland minder.

De sleutelquotes heb ik vetgedrukt gemaakt.

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  • Is Senior Fellow at Chongyang Institute for Financial Studies, Renmin University of China

Why do Western economies have hard landings but China doesn’t?


The media outside China periodically carries predictions of a China ‘hard landing’. For example George Soros grabbed headlines earlier this year by declaring of China: ‘A hard landing is practically unavoidable.’ Soros himself has an inaccurate record of investing in Communist Party led, and ex-Communist, countries such as Russia and China – having lost approximately $1 billion in Russia’s Svyazinvest telecommunications company. But similar claims regularly appear in other media.

To anyone dispassionately examining the facts these claims are extremely curious – as they are clearly the exact reverse of reality.  The facts show the only real modern serious economic ‘hard landings’ were not in China but in so called ‘Western’ economies – for example the US after 2007, Japan after 1990, Russia after the introduction of capitalism in 1991. China’s economy for example has not suffered a year of negative growth for at least half a century – in contrast to every major Western economy. Therefore, the real question which has to be explained, and which is examined here, is why do Western economies suffer ‘hard landings’ but China doesn’t?

Defining a hard landing

First it is necessary to define what is meant by a serious ‘hard landing’ – as different usages exist in the Western media. Superficially there are two variants:

  • The first is an actual fall in output – as in the US post-2007 ‘Great Recession’ or in Russia after the introduction of capitalism in 1991,
  • The second is a prolonged period of near economic stagnation – as in Japan after 1990, where for a quarter of a century annual GDP growth averaged less than 1%.

It will be seen, however, that the fundamental mechanism is the same in both cases.

What causes a Western economy’s ‘hard landing’?

A seriously erroneous assumption is sometimes repeated in parts of the media that because consumption is the largest percentage of GDP it must be consumption which is the decisive influence in business cycles – including in ‘hard landings’. This is simply an elementary arithmetic error. Fluctuations in investment are so much more extreme than changes in consumption that although investment is a smaller proportion of the economy it is investment changes which dominate large scale economic downturns. This will be demonstrated in the three largest modern economic ‘hard landings’ – the US ‘Great Recession’ after 2007, Japan’s prolonged stagnation after 1990, and Russia after 1991. Analysing these three cases clearly demonstrates that the same mechanism operated in each – and also shows why China has not and will not have any serious hard landing.

The US ‘Great Recession’

The US ‘Great Recession’, accompanying the international financial crisis, was the deepest US economic downturn since the aftermath of World War II. Taking quarterly data, US GDP fell by more than 4%. On the eve of the Great Recession, in the 4th quarter of 2007, the largest part of the US economy was consumption – total consumption accounted for 82.5% of GDP. In contrast private fixed investment accounted for only 17.1% of US GDP. But the decline in US investment was so much more violent than the decline in consumption that it was the investment fall which dominated the ‘Great Recession’.

Measuring in inflation adjusted dollar prices the maximum fall in US household consumption during the Great Recession was 3% whereas private fixed investment fell by 23% – the percentage fall in private fixed investment was therefore seven times greater than the fall in household consumption. In inflation adjusted dollars, household consumption declined by $275 billion but private fixed investment fell by more than twice as much at $592 billion.

Taking into account government consumption and investment the US trends were even more extreme. World Bank data shows that in 2007-2009 US GDP fell by $461 billion in inflation adjusted terms. But US total consumption, private and government, in this period fell by $59 billion while total fixed investment, private and government, fell by $556 billion. The overall fall in fixed investment in the US during the ‘Great Recession’ was almost ten times as large as the fall in consumption.

The US ‘Great Recession’, in summary, was entirely dominated by the fixed investment decline.

Figure 1

16 04 01 US Great Recession


Japan’s post-1990 stagnation

Turning to Japan, since 1990 its annual average GDP growth has been only 0.9%. But Japan’s near stagnation over almost a quarter of a century was caused by entirely contradictory movements in different components of its economy. From 1990-2013, the latest World Bank internationally comparable data, Japan’s total increase in consumption was 41%, whereas Japan’s fixed investment fell 16% – see Figure 2. Japan’s annual average consumption rise was 1.5% while the average annual fixed investment fall was 0.8%.

The extreme severity of Japan’s stagnation was therefore due to its fixed investment decline.

Figure 2

16 04 01 Japan stagnation


Russia’s post-1991 collapse and stagnation

After the introduction of capitalism in 1991 Russia suffered the worst peacetime collapse in a major economy since the Industrial Revolution. By 1998 Russia’s GDP was 39% below its 1991 level. Then, following a devaluation and default on Russia’s debts in 1998, on the basis of the now ended commodities price boom of the first decade of 21st century, Russia’s economy recovered from extreme collapse – but nevertheless overall in 1991-2014 Russia’s average annual GDP growth was only 1.0%. Russia may therefore be analysed as a ‘hard landing’ in either of the senses considered – an example of an extreme economic recession or, over the longer term, as an example of stagnation.

This case of Russia after 1991 is particularly crucial for China given that Russia followed the theory proposed by Chinese neo-liberals and as advocated at the time by the World Bank. The claim was that privatisation would aid economic development as it would increase efficiency – in technical economic terms that Total Factor Productivity (TFP) would increase. Leaving aside any reasons for this, Russia’s TFP did indeed increase – taking the latest available data, Russia’s TFP during 1992-2014 increased by an annual average 0.9%, which was higher than any advanced major economy. But this increase in TFP was entirely overwhelmed by the consequences of negative trends in Russia’s investment which produced first an unprecedented peacetime economic collapse and then almost a quarter century of net economic near stagnation.

During the period of economic collapse from 1991-98, during which GDP fell 39%, both Russia’s household and total consumption rose in inflation adjusted prices by 1 trillion roubles above 1991 levels, whereas fixed investment declined to 4 trillion roubles below it – fixed investment fell by 81%. It was therefore the investment decline which caused Russia’s unprecedented economic collapse.

Taking the whole period since the restoration of capitalism, by 2014 Russian total consumption in inflation adjusted prices was 8 trillion roubles above its 1991 level while fixed investment was 2 trillion roubles below its 1991 level. It was this fall in investment which therefore accounted for Russia’s prolonged stagnation – i.e. only 1.0% overall growth over almost a quarter of a century during the 1991-2014 period (See Figure 3).

In summary both Russia’s economic collapse, and its prolonged stagnation, were dominated by negative trends in fixed investment – precisely as in the US post-2007 and Japan post-1990. An increase in TFP was overwhelmed by the investment fall – that is any ‘micro-economic efficiency’ produced was entirely crushed by the ‘macro-economic inefficiency’ of the investment collapse, producing Russia’s economic disaster.

Figure 3

16 04 01 Russia hard landing


The above data therefore make clear the mechanism by which the US, Japan and post-1991 Russia suffered severe, in some cases catastrophic, economic ‘hard landings’ – and in turn why China does not. The reason such severe falls in investment, causing ‘hard landings’, are possible in Western economies is because the overwhelming bulk of major companies, and therefore of fixed investment, are privately owned. Under such conditions the state therefore has no mechanisms sufficient to stop such investment collapses. In short these countries suffered ‘hard landings,’ driven by the investment collapses, because they were capitalist economies.

In China, in contrast, there are diverse forms of ownership but with a dominant state sector. This is the structure reaffirmed at the 3rd Plenum of the Central Committee of the 18th Congress of the CPC in November 2013: ‘We must unswervingly consolidate and develop the public economy, persist in the dominant position of public ownership, give full play to the leading role of the state-owned sector.’1 It was reiterated by Xi Jinping at a session of this year Chinese People’s Political Consultative Conference, by stating in China public ownership plays a dominant role with diverse forms of ownership developing side by side.2

Therefore, China possesses a large state sector which can be used to raise investment if the government requires to take anti-recessionary measures. In China existence of this state sector, which is ‘dominant’ not in the sense of being the majority of the economy but of being large enough to give the state the ability to set the overall investment level, therefore gives to China the means to halt or reverse an investment decline. In summary, China does not suffer a hard landing, that is an investment collapse, because it is not a capitalist but a socialist economy.

The reason neo-liberals engage in ‘stereotyped speech’, and avoid using numbers, is because this macro-economic efficiency of China’s ability to use its state sector to control investment levels, and also to avert hard landings, is far greater than any micro-economic processes neo-liberals attempt to point to. If China’s state sector lost its ‘dominant’ position due to privatisation, that is its ability to set the overall investment level, China would no longer have the mechanisms able to avert hard landings of the US, Japan and Russian type.

It is sufficient to compare post-2007 trends in China and the US, that is following the onset of the international financial crisis, to see the contrast between the two economic systems. Taking annual data, to allow a comparison of China and the US, US private fixed investment fell by 22% between 2007 and 2009, whereas China’s fixed investment rose by 35%. As a result, while annual US GDP fell by 3% China’s GDP rose by 20% – the trends for the US were shown in Figure 1 and those for China are shown in Figure 4. In 2007-14 China’s fixed investment rose by 105% creating economic growth of 81%.

Figure 4

16 04 01 China post 2007


In short, in China as in the West, it is fluctuations in fixed investment which determine whether hard landings occur (as in the West) or whether these can be averted (as in China). As the Wall Street Journal noted accurately, probably without understanding the significance of what it described: ‘Most economies can pull two levers to bolster growth: fiscal and monetary. China has a third option. The National Development and Reform Commission can accelerate the flow of investment projects.’

But the reason China has such a third mechanism of accelerating (or decelerating in the case of overheating) this flow of investment projects, which no Western economy possesses, is because of its dominant state sector – i.e. because China is a socialist and not capitalist economy. It is this ability to pull the ‘lever’ of investment, due to the large state sector, in contrast to the US, Japan, and Russia’s investment declines, which means that these latter countries have ‘hard landings’ while China does not.

But it is this large state sector which, of course, distinguishes China from any capitalist economy. Most fundamentally China hasn’t and doesn’t suffer ‘hard landings’ because it is a socialist not a capitalist economy.

*   *   *

A slightly edited version of this article originally appeared in Chinese at Sina Finance.



1. CPC. (2014, January 16). Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform. Retrieved February 2014, 2014, from China.org.cn: http://www.china.org.cn/china/third_plenary_session/2014-01/16/content_31212602_2.htm

2 Xinhua. (2016, March 4). Xi underscores adherence to China’s basic economic system. Retrieved March 21, 2016, from Xinhuanet: http://news.xinhuanet.com/english/2016-03/04/c_135156388.htm



EXTERNE ARTIKEL – Waarom de Chinese vastgoedsector niet te vergelijken is met het Westen

Hieronder heb ik een informatieve artikel gepaste van Forbes Magazine over Chinese “ghost cities” — steden volgebouwd met huizen, waarvan verwacht wordt dat die bewoond zullen worden, maar dat niet altijd gebeurd en daardoor leeg blijven. Vaak wordt er in het westen geschreven over de onhoudbaarheid van de Chinese vastgoedsector, maar wat dan meestal niet begrepen wordt is dat de Chinese economie niet te vergelijken is met elk ander land uit het Westen. China heeft haar markten in de laatste decennia weliswaar in meer of mindere mate geopend, maar het is de Communistische Partij die nog alles in handen heeft. Het stuurt de economie naar wens aan en kijkt verder dan de volgende kwartaal. Veel leesplezier!


What China Is Doing About Its 450 Million Square Meters Of Unsold Housing

I’d like to introduce some of China’s new ghost cities: Nanguan, Kerqin, Yuhong, Saihan, Yijinhuoluoqi, Dongling. They were uncovered by a Peking University study that used Baidu big data to find cities with large housing developments that the search engine’s users just weren’t going to very often. The rationale was that if nobody is going to these places then there is a good chance that they could be vacant — new “ghost towns” systematically built at the height of China’s urbanization boom.

Although when I looked at the list of places something stood out. Besides having under-populated new areas these cities also have something else in common: nobody’s ever heard of them before. Most are relatively small, relatively unimportant cities floating beyond the peripheries of China’s main economic powerhouses.

When we talk of China’s ghost cities we are no longer really talking about places like Shanghai’s Lujiazui, Guangzhou’s Zhujiang, and Zhengzhou’s Zhengdong New Area, who were once the recipients of international mockery for being under-populated. For the most part, these places have filled up and have become the economically vital engines they were envisioned to become — even Ordos Kangbashi now has 100,000 people. The places we’re focusing on now as having gluts of unsold homes are mostly diminutive new developments that were built by relatively minor cities. Oftentimes, these places are dusty, obsolete mining towns in the north of the country that are trying to develop new industries to become anything other than dusty, obsolete mining towns.

That said, there is a big difference between empty apartments that have been sold and unsold inventory. Purchased housing that’s empty for the short term — as is very common in China — isn’t a sign of any kind of economic calamity: the developers got paid, the local government collected their land sale and tax revenue, investors were often able to resell properties for a higher price than they paid. Beijing itself is technically 20% empty. But in China, just because an apartment is empty doesn’t mean it’s not being used. Vacant property in this country takes on multiple functions, from being a place to store savings to being a future home for offspring to move into when they get married, to a degree that’s unprecedented in the West.

Although there are also real ghost towns in China. According to the National Bureau of Statistics, the country currently has 450 square kilometers of unsold residential floor space, which is nearly enough to completely blanket Boston twice. This is an issue that has shot straight up to the country’s highest echelons of power. President Xi Jinping himself has declared the excess inventory of residential property one of the country’s “four battles of annihilation” that need to be won in order to for the economy to continue progressing, and the destocking of unneeded housing has become a national priority.


So what will China do about all of its unsold homes?

Tearing them down

A real estate developer in Heyuan, Guangdong province recently made headlines by tearing down 100 villas that remained unsold for a decade. While the cost of this demolition was reportedly upwards of $18 million, this allows the developer the opportunity to build something else that can actually be salable in their stead.
When we look at the recent wave of new city building that has overtaken China in the past fifteen years what we essentially see is a rough draft of urbanization. By law, developers cannot just sit on the land they buy and wait until a new area is built-up and the market matures around it. No, they must build something almost immediately — it is called urban construction land for a reason. As they take out freehold leases on residential land for 70 year periods and the buildings themselves hardly last half this long, developers essentially have multiple attempts to build something that can ultimately make a profit.

So when we look at China’s seas of empty apartments rest assured that if they don’t sell they will be knocked down and something else will be built in their place before crumble to ruins. Development land in China is just too valuable to allow unprofitable buildings to interminably take up space.

Cut back on building more houses

Municipalities and developers in China are very aware of their unsold housing stock and are often willing to take measures to remedy major imbalances. One of the ways they do this by applying simple supply/demand theory: the less new residential properties going on the market the higher the demand for the available stock.

Local municipalities in China control how much new land they make available for new residential constructions and developers can decide whether it’s in their interest to add to the existing housing stock or to hold off and sell what they already have. The big, unchecked urbanization boom in China is now over, and in places that currently have an excess of unsold housing we’re seeing a drastic cutting back of new inventory being added to the market.

Sell them to the government

I remember the ominous words of a property developer that I once met in Nanhui, a new city that was built to support the Yangshan Free Trade Zone 60 km outside of Shanghai. I asked him how he would fare in the event of a catastrophic crash in the property market, to which he replied, “Don’t worry, the government will take care of it. The government will lose a lot of money but we will be fine.”
In many ways China has a contrived economy. Municipalities, the banks, and many companies are all run by the same organization: the Communist Party of China. So when we talk about things like debt it doesn’t really mean the same thing as it does in the West. The communist party is also an organization that tends to value what it perceives as long term stability over short term profits, and they are often more than willing to bail themselves out — especially when it comes to the real estate market that so many of the country’s other industries depend on.

Guangdong province is currently in the process of enticing some large state-owned enterprises to buy up a large amount of its unsold housing stock, according to the SCMP. Over the next three years, Guangzhou has committed to reducing its unsold commercial housing by 20 million square meters through a program that will see unsold apartments being converted into public rental housing.

What Will Become Of China’s Ghost Cities?

While I wouldn’t say that this is yet a particularly widespread solution for China’s unsold housing inventory, it does show that some municipalities are taking action on a problematic side effect of decades of rampant urban expansion.

Big companies like Starbucks SBUX +2.18% can close hundreds of stores per year and remain a very successful because their gains ultimately outweigh their losses. Urbanization in China can be viewed in the same light. To get an accurate picture of China’s broader real estate situation we need mitigate the failures against the successes and look at the bottom line.

The bottom line here is that the numerous failures of minor developments simply do not measure up against the great urbanization successes that we see in Shenzhen, Shanghai, Wuhan, Guangzhou, Changsha, Zhengzhou, Chengdu — places that have become some of the most economically dynamic cities on the planet. According to Merrill Lynch, in 12 of 50 major Chinese cities there is currently a deficiency of available housing, and the housing supply in economically vital places like Suzhou, Zhuhai, and Nanjing is right on target.

While not every new city is going to be successful and not every expanse of countryside is going to support a forest of high-rises just because they’re planted there, to use the failures of minor new urban developments to make projections on the broader Chinese economy is like using Ironwood, Michigan as an indicator to judge the financial position of the United States. The scale is just too far off.