Office vacancy rates in Pudong are over 50%. Many of the signs of excess capacity are readily apparent in China: it is only the massive currency injections, in keeping the currency pegged to the dollar, that have allowed such expansion unjustified by demand.
One way or another, China has borrowed from the future and will have to pay for this excess expansion. It could be a crash, or it could be years of stagnation as the nation attempts to use up the excess capacity it has built.
This is a good piece written by someone who understands the underlying economics.
Chanos has been criticized as just recently beginning to study the Chinese economy, but sometimes being fresh to a subject helps distance an analyst from recent past--which can be a good thing.
China is taking all the massive cash it is making now because there is no other really big and cheap factory, and sticking it into infrastructure. Buildings, roads, subways, minority villages - all of that is being built up.
Even if you have a crash, a built road is still there and a built office still exists. Pudong is empty because the offices are expensive and it's not really in town - if a crash happens that forces the government to reconsider whom they want to target pudong at, then there will be enough people moving in there when the prices are right.
China is not developed, it's developing. It's not borrowing from the future - the U.S is borrowing from the future and giving it to china. China is taking the money and building infrastructure.
Property is not expensive in china. There is no excessive inflation or speculation. China has the typical bubble of any rapidly growing economy, but the huge internal market, massive infrastructure development, and large population of highly educated people, and the introduction of chinese businessmen to secondary markets in Africa and South America mean that the fundamentals of the chinese economy are fine. If there is any bubble, it will blow over and growth will continue.
Infrastructure for infrastructure's sake? If it crashes and forces the government to re-think things, you think this happens instantly? That crash is figuring things out and filling up the excess capacity.
Long term that's a losing strategy. It means you are willing to export all your production facilities to another country, creating a massive trade-imbalance in the process.
Think about how strange it is that not just your macbook, but almost everything you can buy has been manufactured on the other side of the planet, can be transported, imported and still be sold cheaper than you could produce it locally.
It's a bit like selling your birthright.
Also, don't forget that those workers abroad are usually working in circumstances that local authorities would not tolerate.
A nice bit of backstory about moving production to China.
A few years ago, rubbermaid was forced to raise its prices because of the developments on the raw materials market.
Wall-mart refused to accept the rise, dropped the rubbermaid product line, rubbermaid filed for bankruptcy, and then the whole production was moved to China and wall-mart signed a distribution deal with the new owners of the moulds.
No, all it means I'd prefer Chinese people to do what they're good at, and Americans do what they're good at. If we can't manufacture cost-effectively in this country, then it's fine for it to happen somewhere else. I don't view manufacturing plants as a birthright.
Manufacturing cost effectively and manufacturing cost effectively while maintaining workplace safety, paying a living wage and respecting the environment are two different things, and it is the latter that you are comparing with the former.
So the only reason why you can buy that stuff manufactured in China cheaper is because of a combination of lack of respect for human beings, sloppy environmental controls and unsafe work place practices.
If those were brought up to the same standards that are held in the developed countries the prices would be roughly the same after import duties and transportation costs are figured in.
"So the only reason why you can buy that stuff manufactured in China cheaper is because of a combination of lack of respect for human beings, sloppy environmental controls and unsafe work place practices."
I wonder if it is so easy, though. I don't like the bad conditions in factories and exploitation of labor. On the other hand, if the alternative is no factories and no work, perhaps the awful factory is the better option? It's not as if those workers would go home to their luxury weekend lofts if the factories would be shut down.
Just a thought to throw into the ring - I am not sure what is wrong or right in this case (unless you look at the bigger picture, political system or whatever is causing poverty).
> Manufacturing cost effectively and manufacturing cost effectively while maintaining workplace safety, paying a living wage and respecting the environment are two different things, and it is the latter that you are comparing with the former.
It would be interesting to see some objective measurements about how much of the cost difference is explained by which differences in practice. For example, I think the "living wage" paid to manufacturing employees in the U.S. frequently exceeds the real living wage by a substantial margin, which they exact from their employers via a monopoly on labor (unions).
Let me give you just one example, not even looking at the cost of waste processing and such, because they don't apply to this story.
A friend of mine is an interesting character, something of a mechanical/electrical genius, he can literally fix any machinery.
One of his jobs involved flying to China to help with the repair of a machine that mass produced latex condoms.
While he was there the proud owner of the condom factory announced he had just finished the creation of a factory for car jacks that were sold in large numbers to the big three car manufacturers for inclusion with their vehicles.
He got a tour of the 'new' factory.
He described a scene straight out of the worst of the beginnings of the industrial age. Workers, mostly women and children stood at endless tables in very bad light operating hand operated machine tools and tool-and-die stamping machines.
Plenty of them were missing fingers or worse, and the pace was literally feverish, the noise deafening.
It was the most unsafe machine shop he has ever seen and he's been in quite a few of them. Now, arguably this is low tech stuff, not comparable with your macbook, and I'd hope that Apple held their suppliers to a higher standard.
But responsible waste management and safety cost a lot of money when you factor them in to the end price of a product, no matter whether it's a nike shoe, a macbook or a car jack.
Fair enough, but Apple apparently has very stringent inspection practices with the factories it maintains overseas in order to ensure things like this aren't going on. Yet they still choose to do business here rather than there. I admit it's possible they are simply lying about these practices, but I think it's more likely that a substantial portion of the savings have nothing to do with human rights or basic environmental issues.
Even supposing Apple has perfect inspections, the workers only need money to buy goods on their local market - and their local goods and services going to be much cheaper because they're manufactured under those same poor working conditions. So Apple still gains from Chinese working conditions.
The only thing Americans are better at than the Chinese are jobs that require a lot of America-specific knowledge (Lawyers, marketers) and doing service jobs that require proximity (doctors, gardeners).
This idea that people in developing countries can't compete with us in software or engineering or whatever is bizarre, slightly racist, and without a much basis in reality (since they already do).
I don't disagree with you, but the fact remains that they have a competitive advantage in manufacturing at the current juncture. That's what I meant by "what Chinese people are good at."
Wow, that's a pretty arrogant/offensive post. I would assume you were trolling if I saw this on any other site.
You are really suggesting that violating countless human rights laws, more or less using slavery, etc. is how one can "manufacture cost-effectively"? I wish people who felt like that were apprehended and forced to work in such places...
So they can go back to themselves and their family having almost literally nothing.
What is offensive about your post is the suggestion that the US is somehow "not good at" production because we don't have the option to utterly disregard human rights and abuse the employer power to give people an "offer they can't refuse".
We all buy, indeed rely on being able to buy, this cheap stuff, so I didn't intend to single you out as evil for also doing so. One just has to remember we have such low prices now because humans somewhere far away are being treated inhumanely. It is unlikely that this will continue indefinitely.
> built road is still there and a built office still exists
You could equally well say this of a house foreclosed on by a bank in the U.S. during the housing crisis. But do you really have any doubt that such houses lying fallow and the resources that go into reselling them are both economic losses? The same will be and is true of the empty offices and untravelled roads in China.
I remember reading the Friedman piece several weeks ago and thinking to myself, "This guy drank the China kool-aid too." It's part of the whole American declinism notion that pops up every ten years or so and I've never believed it. We were there with Japan in the 80s, The Soviet Union, the EU, and now China (and India too). It's easy to believe China is going to be the next superpower if you look at its growth relative to the U.S over the last decade. But the thing that's always made me skeptical about any country replacing the U.S as the world's lone superpower any time soon isn't our resources. It's our sense of mission and purpose in the world. It's something that nobody else has. Only we have it because it's in our cultural fabric. It's not something you create on purpose. It grows organically out of a hapenstance of historical events. It informs everything else about us. You see it when you travel to other countries and come back. Americaness is optimism and hope. It's a source of our soft power, which is extremely attractive to the rest of the world. It's why everyone wants to be American but nobody secretly wishes they were Chinese or Nigerian or Brazilian. China or Russia or the EU or India don't have that sense of mission and purpose in their psyche. No amount of military hardware or GDP growth can compensate for that.Superpowerdom is unsustainable without it. So China could be a paper tiger.
Except for China. They actually have a very similar concept of destiny and mission.
I think the issues with China are going to be much more practical. They remind me a lot of the Soviet Union. A closed society that is very effective at giving the appearance of prosperity, while under the covers things are very different. They'll be able to keep it up for a decade or two, but over time the whole thing crumbles as the base was never truly well built.
Our biggest advantage lies in the risk taking aspects of our culture. We're a people that celebrates the type of risk that leads to true innovation. The cool thing: It's not just the U.S. anymore. Europe has caught on as well.
I do think the United States is going to weaken (relatively) in the coming decade. We'll still be a world power, but I think we'll be sharing that with a re-awakened Europe.
Well you'll find that a history of being the "superpower(s)" and then wasting it all by bombing the crap out of ourselves results in a slightly different point of view in the world (from the EU).
Empire building was Europe's "sense of mission and purpose in the world" we made the natives "civilised". It was our belief of divine right and our ridiculous optimism in regards to war and "glory" (it will be over by Christmas) that led (in part) to our downfall.
Definitely not everyone 'wants to be an American'.
The only people that 'want to be American' in very large numbers are those that currently are below the standard of life that America offers, and plenty of those people would still be quite happy to be European, Japanese or even Australian.
As for your sense of mission and purpose in the world, that might be more of a problem than a part of the solution.
Far away from where? I'm 6 hours from Singapore, 7 to HK or 9 to Tokyo, and - more importantly - they're mostly straight up so there's no jetlag. I think you live far away from everything! ; )
Wow. I don't know where I got confused but for some reason, I thought you were Canadian. Oops. I love Europe, though - been to all of those cities except Brussels.
Let me know when you do make it down under - beers are on me!
I've lived in Canada for 5 years, I still have a 'token' paper presence there but I'll wind that down this year because I definitely won't be going back.
Also plenty of my domain names are still registered to the Toronto office.
Friedman is one of the worst sources of opinion I've ever read. The World Is Flat (which is, admitedly, his only substantial work I've read cover to cover) is filled with unwarranted conclusions and groundless generalizations and altogether horrible metaphors. I've learned to just tune out when he's mentioned.
I found The World is Flat to be a useful insight into conservative economic thinking. I also interpreted it as an attempt to persuade the conservative political and economic base to take a more global look at their activities using their own language, rather than as an accurate treatise on globalization.
In that context, I was able to get past his obeisance to the corporate superpowers of America and his other inaccuracies, and see points that may be valuable. Even though I frequently disagree with their opinions, Friedman and another conservative, George Will, are two of my favorite editorialists. Maybe the fact that I'm neither liberal nor conservative contributes to my enjoyment of their writing.
yea really. the original story cites him as a middle east expert... who cheered and approved of the invasion of iraq. now that's a record to be proud of.
EDIT: i do agree with him though that the US should invest in sustainable energy.
> It's our sense of mission and purpose in the world. It's something that nobody else has. Only we have it because it's in our cultural fabric.
Really, you believe that stuff? That sounds like some kind of propaganda or something you would tell a child. Do you think the Chinese tell each other "We have no purpose in the world, we are a silly nation, we'll never amount to anything."? On the contrary!
Yes, we are what we are because of culture, but mostly because we won WWII, and happened to have lots of nukes, tanks, ships.
It's our sense of mission and purpose in the world. It's something that nobody else has.
Whether that's true now is debatable in my opinion. I think the American dream has been perverted into a lust for enhanced mediocrity. People where I live seem to want to get a job with good benefits, a decent house, and a nice TV, so they can just get through their lives by watching sports and reality shows. Everyone wants to be the best middle-class, Prozac-popping average Joe they can be.
You know, there is nothing wrong with leading a quiet life and enjoying the little things. Waking up next to your wife every morning, having breakfast together, packing the kids off to school, having an honest job that pays the rent and doesn't induce tortured battles in the darkest chambers of your soul every day. You are the embodiment of mission and purpose parent was talking about, but make no mistake, that does not mean mission and purpose is in any way more honorable than peace and quiet. Live and let live.
I suppose my post was more inflammatory than necessary. I don't really have any problem with people who know what makes them happy and manage to achieve it. What I don't like to see in the community around me is people who have no desire to see the "big picture" or how they fit into it, trusting their senator/boss/etc. to do that for them. People seem to me to be lacking a concept that they are part of a bigger system, except when the media reminds them of the fact.
True of most people, but this tends to be true of most people in every circumstances.
What seems to be different about America is that we provide the opportunities and to a degree the encouragement for those who do not want to be like that to succeed, or at least make valiant efforts and often make some progress in those efforts.
That's a good test when viewing these arguments for the "next superpower". I'd always ask the author; what do you feel made the USA successful in the past? Why has that changed?
Most of the American declinism supporters still cite WWII as the only reason for American economic ascendancy. I'm skeptical that markets take 65 years to correct.
65 years to correct?
Consider the British Empire in 1914 and then again in 1971. It's more or less the same for all European nations. We lost our minds, a generation, many of our cities and all of our empires. 65 years is not going to correct that, it was a one-way street.
Do you have ANY understanding of the state of Europe's economy following WW2? We were heading for WW3 after the US pulled the mat on the debt repayments. Luckily Marshal understood this and hence the Marshal Plan prevented WW3 in Europe.
Ok, but all those empires, what were they built on? They were built on the megalomaniac greed of a bunch of predatory monarchs and their clerical stooges. None of it came from the people. That's very different from today's US.
Only if you think that our democracy is a sham. I don't think that's entirely the case, and I don't see how that prevents broad access to the resources needed to start a startup.
Our democracy is at most only 50% a sham. I think if we're looking for scapegoats for all of the problems of society, we should go a higher level and blame corporate personhood itself rather than individual sociopathic executives.
What has changed is the easy part. It is Richard Hilton vs Paris Hilton. Born to power and an easy life has made the US soft. The average US citizen demands that the government fixes their problems.
Ironically your post has shown the true power the US has. Abnormal levels of patriotism. America has declined. Drastically. Look at what the middle class has today compared to years prior. Did you know there was a time that middle class in the US meant you had servants? Money has vacated the middle classes and flooded into the upper classes in the last 20 or so years.
I grew up in the US and I live in western Europe now. I don't see myself ever going back long term. I feel like my standard of living here is much better.
I tend to agree with you, albeit reluctantly, but let me ask you this: If another country, say China, had that sense of purpose, would you know?
We don't speak their language (at least I don't), so we cannot watch their version of Hollywood movies or read their version of Hacker News. Therefore I wouldn't be too confident in my beliefs. They might turn out to be cliches.
It's easy to tell. You just need to use what I call the boast test. It works on countries just as well as it does on individual people because countries are made up of the sum character of the people. Basically, it says that the harder someone tries to let others know about their abilities, the less animated they are by a deep sense of purpose. People with real, deep power and deep purpose don't boast. They're calm. But you know they have power. A second rate power like Russia is eager to boast about their military capabilities. China's Olympic spectacle last summer was a classic example of this notion. The only recent power I can think of that had that sense of calm was Great Britain. They just had the right stuff. And they changed the world. Churchill's speeches could have been written by any U.S. president. The EU sort of has it, but it's not willing to back it up with muscle...not necessarily war...but just declaration of purpose in their leaders. Maybe it's because they're secular. I don't know. But they don't really have it. No one does.
If not boasting was a test for anything the US would fail miserably. Just listen to all the ridiculous shock and awe rhetoric from the Iraq war or cultural pearls like this: http://en.wikipedia.org/wiki/Independence_Day_(movie).
I think we need to know much more than official grandstanding and parades in order to judge wether enough individuals in a particular country are driven by a will to innovate and succeed and are willing to take some risks as well.
It's not so much that China is going to be the lone superpower - it's going to be more of a multi-polar world again as the US is still light years ahead at least in terms of military tech.
The US will eventually decline economically relative to China, but the US has other advantages, besides military tech. The US has exported its political model to Western Europe over the past 100 years. A lot of middle-class people in China want to live in the US, Canada, Australia, and Europe, and will do so as fast as those countries let them in. The English-speaking countries will let them in the quickest, perhaps to buy those empty houses. Such emigration out of China, coupled with their one-child policy, means China will hit a demographic wall quicker than Japan ever did.
And of course, because of Western countries' tradition of federation and democracy, the US and Canada can slowly merge with the EU, treaty by treaty, just as fast as it needs to to counterbalance China. NATO is just the beginning of this. I'd imagine Russia will eventually, perhaps in 20 or 30 yrs, join the EU, Euro, and even the Schengen zone one day. Such a combined US/Canada & EU/Russia would have well over a billion people, with most people probably speaking English, and be centred around the Arctic Ocean, which by then would be the best land on the planet because of climate change.
But who's China going to federate with? They've had trouble keeping their Western provinces in check, and keeping their own people inside the country. They'll probably get Mongolia, maybe even Burma, within 50 yrs, but none of their other neighbors will trust them enough to let them too close. Russia will look to Europe to help defend its Siberian resources before it lets China in. Perhaps their immigrants to the West will stay loyal as part-time spies, but their children certainly won't.
In 50 yrs, a combined US/EU/Russia will be top dog, with China lagging in 2nd place, and Japan, India, Brazil, in the third tier.
You reckon? Who do you suppose gets the most bang for their military buck? Who's got the bigger manufacturing base, which is what all big wars come down to in the end?
The USA still has the superior military, yes. But even now, it would be a very nasty fight indeed. In ten years' time, when China has handsomely exceeded the ship numbers of the US Navy, it's anyone's guess who would win, and let's hope we never have to find out.
So Chanos may turn out to be wrong, but not for the reasons Friedman thinks he is. This is probably a reasonable view.
Professor Pettis is also correct in asserting that the role of central bank reserves is one of the most misunderstood concepts in economics. In fact, nowadays, almost any economic concept as it relates to governments or sovereign states are routinely misunderstood. Probably because that is precisely the part of the economy that the average person feels they understand so well.
For instance, many people worry, rightly by the way, about our USD1.4 Trillion deficit. They feel qualified to comment on its implications authoritatively since we can SORT OF understand the concept. Yet you see no publicly expressed concern at all over the USD500 Trillion house of cards that is the derivatives market. Very few people understand derivatives markets well enough to know the implications of this situation. I think this causes us not to think about it and to hope that someone else will deal with it before the bottom falls out.
Now understand that these guys are not average at all. I have attended Pettis' talks and he is definitely not average. But I think the same sort of intellectual dynamic goes on even in their circle.
This is because it is about central bank reserves, a topic that to my dismay probably generates more confused and mistaken thinking than any other topic in economics.
not understanding the basics of sovereign accounting is understandable. could you make heads or tails of a companies finance if they did all their accounting in their own stock?
A good counterpoint to the title quote would also be "Never expect a good thing to last forever".
At some point growing investments gain a momentum all their own. I.E. everyone invests in China because of their double digit growth; and China has double digit growth because everyone invests in them.
The problem with a compounding growth curve is that it gets so steep that it shoots past the place where it should have found equilibrium.
Wow, Michael Pettis melts one particular face in specific and lays out a historical precedent analogous to China's current horde of foreign reserves. Without cribbing his article too much, my main takeaway is the underlying economic imbalances at play in China that have resulted in their accumulation of foreign reserves, particularly 2 trillion US dollars.
His argument is that large reserves do not protect from economic problems. This is in response to Friedman's assertion that the Chanos analysis is wrong because despite excess capacity, China can use its currency reserves to stave off recession, which isn't true.
In the article he states explicitly that large reserves do not necessarily cause economic problems.
A country that can draw from a larger pool of "geniuses" can afford channeling that resource into a larger set of activities. Dividing China into 4 will result in a set of nations with a reduced set of talent to distribute in key national industrial and scientific efforts.
For example, it could help you to increase your level of military technology, but it doesn't provide markets for all those factories who's export markets are drying up.
Haven't we learned that central planning doesn't work (for long) for this sort of thing? See Japan, Inc.
You've misunderstood [my] post. The article is arguing that China's massive population (and consequently the size of a cream of the crop brainiacs slice) is irrelevant, which made little sense. [edit]
One way or another, China has borrowed from the future and will have to pay for this excess expansion. It could be a crash, or it could be years of stagnation as the nation attempts to use up the excess capacity it has built.
This is a good piece written by someone who understands the underlying economics.
Chanos has been criticized as just recently beginning to study the Chinese economy, but sometimes being fresh to a subject helps distance an analyst from recent past--which can be a good thing.