China’s September data suggest that the long-term overcapacity problem is only intensifying

Mpettis.com ^ | 10/16/09 | Michael Pettis

[TigerLikesRooster]

China’s September data suggest that the long-term overcapacity problem is only intensifying

/snip

Industrial policies create overcapacity

I agree with the last paragraph, but otherwise I am pretty skeptical about the fight against overcapacity. According to my model of China’s overcapacity problem, the source of the imbalance is a set of industrial policies that systematically shift income from households to producers, and as long as these policies continue there is little chance of resolving the problem of excess production. I have a longish piece coming out next month as a Carnegie Brief on the Carnegie Endowment website, in which I discuss this as part of a discussion about why I expect a rising US savings rate to lead almost inexorably to trade tensions. Here is the relevant section from the first draft:

/snip

Although the “wage flexibility” enjoyed by Chinese corporations may seem like a huge advantage, remember my earlier comments about how sluggish household income growth relative to GDP growth is the source of the overcapacity problem (consumption is likely to grow as fast as household income grows). If I am right, it means that measures that can improve China’s export competitiveness are not good for the rebalancing effort if they exacerbate, rather than reverse, the process of transferring income from households to corporations. Lower wages, of course, do just that, and so they cannot be a solution to China’s underlying overcapacity problem except to the extent that they allow China to expel trade competitors. This is not a permanent solution by any means, especially in a world of rising trade tensions.

/snip

[blam]

This article mentions internal and international 'upheavals' to come.

Social Upheaval, How Close Are We?

[TigerLikesRooster]

China would rather continue to depress wage of domestic consumers in order to keep its competitive advantage in export. Thus it is the logical conclusion that the overcapacity won't be dealt with by rising domestic demand. It will still have to be met by overseas demand.

China is setting up itself for trade war in which it has to take on the rest of the world.

[PGR88]

It is certain that any large industry in China has either implicit or even explicit Gov’t support. China’s recent stimulus, again distributed through the old-fashioned communist central-style old-boys network meant huge amounts of money going to those in strategic or favored industries, while small business of course got nothing. Needed or not, this money will be used, and probably most of it has been used on stock or commodity speculation.

These big industries, being on the Gov’t dole, need only sell at variable cost. Fixed costs in plant and equipment is the bank’s problem.

[WellyP]

China's economy is export based plus the 150 to 200 million Chinese who can afford to buy something. It appears that China forgot about the other 800+ million citizens who live in abject poverty and require State aid to exist. With the Chinese currency tied to the Dollar and the US buying less and less from China, China has less and less money to help their poor, who also, something like US can't buy anything!

[Last Dakotan]

China is setting up itself for trade war in which it has to take on the rest of the world.

You are undoubtedly correct, but like all wars fought by Democrats, we will fight this one with half measures and with totally the wrong strategy.

[blam]

I’ve read that there are 1.3 billion people in China and that 1.2 billion of them live in serious poverty.

[bruinbirdman]

"China is setting up itself for trade war in which it has to take on the rest of the world."

A war they could never win. I can see the campaign now:

Don't buy Communist products!

yitbos

[traumer]

non-working link

[TigerLikesRooster]

I checked again. It works. Please try it again.

[TigerLikesRooster]

need only sell at variable cost.

Won't surprise me if some of them even sell below variable cost.:-)

[eyedigress]

Are they still pegged to the dollar?

[TigerLikesRooster]

They went off the peg for a while, and slowly appreciated it. Now they are re-pegged it to a dollar.