Twofish's Blog

November 6, 2008

Notes on the Chinese economy

Filed under: china, finance — Tags: , — twofish @ 8:23 am

http://blogs.cfr.org/setser/2008/11/06/how-severe-a-slump-in-china/

China is largely a reprocessing plant, so as exports go down, imports of raw materials are also likely to go down, and that will blunt the impact on growth. The big worry, I’d imagine isn’t growth, but rather 1) employment and 2) local finances.

For 1), the Chinese government was generating massive numbers of jobs. The thing is that it was generating massive numbers of jobs at the same time it was closing down the old state owned enterprises and shedding large numbers of jobs. Looking at net employment numbers gives you a very misleading impression of what is going on, since the companies that are creating and losing jobs are the same ones, and the people who are getting and losing jobs aren’t the same people.

One thing that will help China this time is that there isn’t an overhang of people that need to be laid off from the state owned enterprises.

For 2), local government have been heavily relying on land sales to cover expenses, and I think you are likely to see a lot of defaults on local government owned companies and a general recentralization of Chinese finances.

For 1), China is planning a massive fiscal stimulus package in rural areas. Getting local government officials to spend money on infrastructure is rather easy to do.

There’s likely to be an increase in health and education spending, however, it’s more difficult to use health and education to do fiscal stimulus. One problem is that basic health and education is cheap and really doesn’t have that much of a stimulus effect. The other problem is that what do you do once you’ve stimulated the economy. It’s not as if you can (or should) fire doctors and teachers once the economy gets going.

One final point is that this is not the first time that China has had an economic down turn, and it’s in far better shape now than it was in the previous downturns. The basic reason is that productivity in China is still extremely low, so its still easy through capital spending to find ways of boosting productivity

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