The following was written a month ago for my newsletter but because of the virus problem I had on my site I wasn’t able to post it until today [August 17].China Financial Markets
Has the Great Rebalancing already started?
Michael Pettis | Professor, Guanghua School of Management, Bejing University
8 comments:
"The key to raising the consumption share of growth, as I have discussed many times, is to get household income to rise from its unprecedentedly low share of GDP. This requires that among other things China increase wages, revalue the renminbi and, most importantly, reduce the enormous financial repression tax that households implicitly pay to borrowers in the form of artificially low interest rates. But these measures will necessarily slow growth."
Why is that an enormous financial repression tax? Couldn't it also be called controlling rent-seeking?
Of course, favoring the export market is rent-seeking in so far as it is parasitic on circular flow. Labor is being used to work for the real benefit of foreigners and is not being compensated adequately in return. Thus the gains in the Chinese standard of living are not being distributed equitably but rather the bulk is going to rent-seekers rather than workers. This is, of course, a violation of the fundamental principle of Marxism.
I said, "This is, of course, a violation of the fundamental principle of Marxism." I should have added "and Classical economics," as Michael Hudson does. Economics per Neoclassical was about eliminating rent-seeking.
Marx correctly saw that the landed gentry and aristocracy of feudalism where being replaced by capitalists. IN Marx's time, capitalists were chiefly the owners of industrial capital as factory replaced field. Since then, financial and non-financial capital has emerged as not only a dichotomy but opposing forces, with financial capital now taking command.
The state controls a large swath of both financial and non-financial capital and it is being operated for the benefit of those in control at the expense of the Chinese people, who are not sharing proportionally in the gains.
This is a political problem in a country where the educational system is based on socialism as an ideal. In the US, the educational system is based on capitalism as the ideal, so worker exploitation by rent-seeking is much easier to put across in the name of meritocracy.
reduce the enormous financial repression tax that households implicitly pay to borrowers in the form of artificially low interest rates.
Pettis seems to believe in a "loanable funds doctrine," which makes him see low interest rates as a "repression tax" on savers. I suppose he knows something about China, since he lives there, but it makes me wonder if he has too much ideological baggage there for his analysis to be as useful as it could be.
"Labor is being used to work for the real benefit of foreigners and is not being compensated adequately in return".
The compensation labor gets is full employment.
Y = C + I + G + NX. With high exports and low consumption the Chinese regime has been providing the level of GDP that guarantees full employment to the work force, a result that has eluded state managers in both the U.S. and Europe.
Not bad for an emerging economy that barely 30 years ago still had 80% of its labor force working at subsistence levels in the countryside.
That's true, Jose, and if it weren't, China's leadership knows that they would be threatened with revolt. People will put up with financial repression as long as they have a livelihood and things are gradually improving. But the fact is that the consumption portion of GDP is stuck at about 35%. In the US is it 70%. Would US voters put up with going to a consumption ratio of 35%? I doubt it very much. China does not have voters, so has long as things are good enough not to revolt the leadership is safe.
"China does not have voters".
Well, Tom, a cynical guy (not me...)might comment that the situation of voters in the U.S is similar to China's in the sense that, in practice, they end up being forced to choose one of the two right wings of the single pro-corporate party (Gore Vidal).
Anyway, I sometimes wonder if in southern Europe, where unemployment is at near depression levels, a platform of lower private consumption, lower private debt and full employment might not attract a huge slice of voters.
Jose, the problem in liberal representative democracies lies ultimately with the voters. There are a lot of reasons that the voters in the US are the way they are, but the responsibility for the government they choose ultimately falls on them, and when they get sufficiently fed up they can and will change it. That option does not yet exist in China For this reason, the Chinese leadership has to be much more aware of the possibility of revolt, since that is the only recourse. They do take this possibility very seriously, since that is how they came to power in the first place and know that revolt is a real possibility there. Revolt is remote in the liberal Western democracies, since the possibility of peaceful change is available. Unless TPTB in the EZ move to contain social unrest, political change is inevitable eventually.
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