Bharat Rakshak

Is the weak renminbi really the main problem? One analyst thinks China's health care spending and lack of a consumer-driven economy are to blame for U.S. trade woes.

In the world of politics, China's monetary policy has proven to be an easy target to attach blame to for everything from the trade deficit to the weak dollar. But in the world of economics, the topic is much more complex than America's politicos would have us believe.

For the past decade, exports have overwhelmingly driven China's tremendous growth, which is expected to slow only slightly from its double-digit peaks in the coming years. But the value of its currency, which many agree is undervalued, isn't the only reason, perhaps not even the most important reason, that the economics successes of the East Asian giant has relied so heavily on exports.

But China's imbalanced economy also has much to do with problems beyond the value of the renminbi. The country exports way more than it consumes. It's also a nation of savers as opposed to spenders.

First, for many, access to adequate health care and education is far from reach, Wang says. This typically makes people save more than consume. This is the trend that's been playing out in China. What's more, China's state-owned companies generally don't distribute dividends. So much of a company's profits get re-invested instead of distributed to investors.

The country will have to consume more, economically, and export less. Increasing government spending on health care and education is the path Wang thinks China will take to spur this change. In other words, the weak renminbi looks a lot more like a symptom of a broad economic problem that China is facing over the coming years, not the primary disease that the world has to be worrying about.

New Delhi is buckling down to deal with India's need for electricity. In its upcoming five-year plan from 2012-17, India is expected to aim for 100 gigawatts in new generating capacity, compared to current installed capacity of 165 gigawatts. That involves spending billions of dollars.

This is clearest in the deal, announced late last month, in which Reliance Power agreed to buy some $10 billion in clean-burning coal-fired generation capacity from Shanghai Electric Company. This overshadows the $2.5 billion deal GE signed during President Obama's trip to sell Reliance gas-fired generators. It's about equal to the total $10 billion in all product lines that GE hopes to sell in India in coming years.

Two challenges the Chinese face should offer some solace to Western companies.

First is the burden of China's overcapacity. From afar it looks like an advantage. Companies are willing to sell generation equipment at lower prices than their peers simply to keep the overbuilt Chinese assembly lines humming. And they can deliver quickly. Overcapacity of cash means Chinese banks, such as the four that are financing the Reliance-Shanghai Electric deal, are able to offer favorable terms.

Second is the peril of leaving an environment where you enjoy the unquestioned forbearance of your regulators.

In that light, the dollar value of China’s GDP should be revised higher in comparison to America’s. For 2009, the World Bank has American GDP near $14.3 trillion and Chinese GDP at $9.1 trillion using ppp, where using normal GDP China was at $4.9 trillion. ( Indian GDP is 1.7T in White Numbers/3.7t in PPP) Moreover, China almost always revises GDP higher after the fact and boasts much faster growth than the U.S. It’s not going to pass the U.S. in 2012 but, in current ppp terms, it could get close. Hence the headline.
Now the part headlines miss: prices change. What a dollar’s worth of money buys in the PRC is slipping. Chinese prices are rising faster than American prices, arguably much faster. The ppp comparison between the U.S. and China’s is going to change, making China’s economy look smaller.This has happened before. The last time the World Bank adjusted its ppp measurements, the ostensible size of the Chinese economy fell 40 percent. PPP has advantages but, as you move farther in time from the price measurements that give purchasing power across economies, ppp can tell a very inaccurate story.The Conference Board might have adjusted for prices changing over time but they gave no indication of having done so. More important: most commentators will not adjust for changing prices; they will take the current ppp measurement and run. That will in turn generate a lot of false claims that China’s economy is soon to be bigger than America’s.
The second mistake the Conference Board made is already common: fast-growing economies drive global growth. That seems sensible but it gives fast-growing economies too much credit. Fast-growing economies may be helping everyone but they may be only helping themselves.In 2010, China will not add to the rest of the world’s GDP, its trade surplus means it will take almost $200 billion away from the rest of the world’s GDP. This is just a function of how GDP is counted. The PRC does contribute to the world economy in many ways but it is badly misleading to suggest that it is doing the most to help the rest of the world. China is raising the average of GDP growth among countries but doing so in part by continuing to drain GDP from the rest of the world.In terms of adding to the rest of the world’s GDP, even though we’re growing slowly, the U.S. remains by far the biggest contributor.

American negotiators may want to take note of this startling testimonial to the productivity of Chinese workers: A construction crew in the south-central Chinese city of Changsha has completed a 15-story hotel in just six days.

Vasu wrote:oh I am aware of that. I didn't really mean to ask that. In terms of scale of course their steel consumption will be very high given the huge amount of construction.

What I wanted to know more was about the penetration of steel construction, for example, prefabricated steel housing, or pre-engineered steel buildings, make use of a lot more steel than a regular modern housing structure. Just like bridges, for example, use pre-fabrication techniques, in which various parts of the bridge are made in concrete at an off-site and then transported to the bridge site and assembled, similarly, pre-fab steel buildings use this method, in addition to replacing concrete/cement with steel in many applications.

I had heard that this concept is fairly new and catching on fast, so was just curious about it, especially since China is so good at building huge things in such short time. My bigger interest is to learn about the civil construction techniques used in China in general.

VinodTK wrote:American negotiators may want to take note of this startling testimonial to the productivity of Chinese workers: A construction crew in the south-central Chinese city of Changsha has completed a 15-story hotel in just six days.

Rishirishi wrote:

Vasu wrote:oh I am aware of that. I didn't really mean to ask that. In terms of scale of course their steel consumption will be very high given the huge amount of construction.

What I wanted to know more was about the penetration of steel construction, for example, prefabricated steel housing, or pre-engineered steel buildings, make use of a lot more steel than a regular modern housing structure. Just like bridges, for example, use pre-fabrication techniques, in which various parts of the bridge are made in concrete at an off-site and then transported to the bridge site and assembled, similarly, pre-fab steel buildings use this method, in addition to replacing concrete/cement with steel in many applications.

I had heard that this concept is fairly new and catching on fast, so was just curious about it, especially since China is so good at building huge things in such short time. My bigger interest is to learn about the civil construction techniques used in China in general.

Prefab housing has been arround for a long time, and is nothing new. But it has never really taken off. If you make things in a hurrry, the quality and finish usually suffer. An the cost reduction is not at all that great. I would like to see that quality of piping, painting, electrical work etc.

In large building is reinforced with iron and steel. There are global norms for this, and pretty much the same standards world over (but in places like India, the builder may mix more sand in the concrere or use thinner iron bars)

Katare wrote:Chinese currency has risen ~20% since they loosened dollar peg but trade surplus has kept increasing with this appreciation. Lets see how far it goes and when that elusive crash comes. The vultures have been predicting it's around the corner for last 3 decades. After 3 decades of 10-12% sustained growth does a setback/recession/crash would mean anything. Chinese have done it for there economy, infra, human/social indicators. Political and human rights are two areas where they would need to improve for that India should help them by exporting Laluji, Medha Patkar, Arundhati Roy and Mani Shankar Iyer.

Hari Seldon wrote: Sure, one can always argue that democracy can also foster growth - look no further than Gujarat. But even there, growth was fostered by a stable, unwavering, forward-looking hand at the political helm.

Hari Seldon wrote:^^^You're still around? Why, I wonder.

Hari Seldon wrote:

Katare wrote:Chinese currency has risen ~20% since they loosened dollar peg but trade surplus has kept increasing with this appreciation. Lets see how far it goes and when that elusive crash comes. The vultures have been predicting it's around the corner for last 3 decades. After 3 decades of 10-12% sustained growth does a setback/recession/crash would mean anything. Chinese have done it for there economy, infra, human/social indicators. Political and human rights are two areas where they would need to improve for that India should help them by exporting Laluji, Medha Patkar, Arundhati Roy and Mani Shankar Iyer.

Excellent points, Katare san.

Couldn't agree more. Even if a major PRC economic crash happens followed by a Japan style 2-decade slump, they'll still be hajaar better off than us SDREs riding some moral high horse.

In fact, I can't help but notice that there are indeed two major types of economies that industrialised fast - (1) authoritarian in the rapid-growth phase (PRC, SoKo, Imperial Japan) and (2) the Imperial/Colonial powers that weren't authoritarian domestically perhaps but ruthlessly exploited and carted away every drop of economic surplus they could from the colonies decade-after decade for the crucial capital-formation process early on in their industrialization process.

Yindia is stuck only, in a democrazy experiment at a crucial time in its rapid economic growth stage - hampered, hindered and hobbling. Pathetic, really. Sure, one can always argue that democracy can also foster growth - look no further than Gujarat. But even there, growth was fostered by a stable, unwavering, forward-looking hand at the political helm.

I have no doubt that PRC can only go faster and higher and farther, here on. Regardless of what happens in the rest of insolvent deficit countries. And I fear we are set yet again to miss the bus, as we too often have in the past decades.

Yup, Jai ho whatever and all that.

The Indian experience has been quite different; that country sent 15,192 undergraduates last year, fewer than five years earlier. And the number of Indians coming to the United States for graduate study dropped by almost 4 percent last year

“The educational-advising people say that the job market is so hot in places like Mumbai and Bangalore that students thinking about grad school decide it’s not worth it,” Ms. Blumenthal said, “since they can just go out and get a good engineering job.”

Theo_Fidel wrote:Hmmm! Odd this one.

http://www.nytimes.com/2010/11/15/us/15 ... ?ref=world

China Surges Past India as Top Home of Foreign Students

The Indian experience has been quite different; that country sent 15,192 undergraduates last year, fewer than five years earlier. And the number of Indians coming to the United States for graduate study dropped by almost 4 percent last year

More than 50 percent of families in seven cities, including Beijing and Shanghai, will adopt consumption compression plans in the coming year, and half of the interviewees said they are suffering greater stress in daily lives, according to a recent survey from China's Horizon Research Consultancy Group.
This was mainly because there was no substantial improvement in income levels under the increasing consumer price index (CPI), which lead to more vulnerable of price volatility tolerance and weak consumer confidence, the survey said.

According to the survey, there were nearly 58.8 percent and 64 percent of interviewees in urban and rural areas, respectively, said they could not cope with the current price fluctuation. In the group that can handle this situation, the majority was just barely able to cope with it, while only no more than 2 percent interviewees said they were fully capable of handle this situation.

The survey also showed that in cities and towns, about 48.3 percent and 46 percent of households planned to compress consumption in 2011, respectively. While in rural areas, this proportion increased as high as 62.8 percent, at the current stage.

The survey was conducted in mid-October of this year in seven cities, including Beijing, Shanghai, Guangzhou, Wuhan, Chengdu, Shenyang and Xi'an and seven small towns and affiliated rural areas in Shaoxing of eastern China's Zhejiang Province and Fuzhou of southern China's Fujian Province.

Theo_Fidel wrote:Katare,

Good to see you on this side of BR after quite a while.

krisna wrote:China Amps Up to Compete in India

This is clearest in the deal, announced late last month, in which Reliance Power agreed to buy some $10 billion in clean-burning coal-fired generation capacity from Shanghai Electric Company. This overshadows the $2.5 billion deal GE signed during President Obama's trip to sell Reliance gas-fired generators. It's about equal to the total $10 billion in all product lines that GE hopes to sell in India in coming years.

Singha wrote:an article in TOI states that indian students are preferring UK these days (I dont know why).
maybe all those thames/times edu supplements that rate all UK univs highly had their impact
or maybe students figured out that a MS in US + job is less lucrative than a local MBA from IIM and then on to banking, FMCG....

its a good thing the free meal the US has been having for last 5 decades be curtailed but the chinese will take up any slack.

Christopher Sidor wrote:I wonder how much of these 12 Billiion USD could have been spent in India, to enhance Indian manufacturing and create jobs in India. I also wonder how much of this was due to "policy guidance" by Reliance.

jamwal wrote:Reliance seems to be in love with Chinese maal !
Reliance communications is all Chinese, metro they are constructing in Mumbai is Chinese and now even the power sector is all Chinese ! what gives ?

After what I've seen of Chinese stuff, right from the notorious electronics, clothing, stuff like that of daily use to even commercial industrial stuff like telecom and networking equipment, motors etc, it'll be a cold day in hell if I'd ever trust Reliance for quality .

True that BHEL is stretched to it's limits, but what's stopping companies like L&T, Godrej, Tata or even Reliance from filling in the gap ?