China can handle collapse of speculative inflows
Marshall Auerback here. This will be short, but I felt compelled to post with my views on China.
There was clearly a bubble in exports in the past four years, with exports serving to cover capital inflow (overinvoicing must have been a big part of that). So this is just part of the overall collapse of speculative capital flows, and not so much a decline in real effective demand. China can handle this, the population is not constrained by either income or debt.
This is an aspect of China’s economy that most people don’t understand. For the typical Chinese light-industrial firm, the optimal strategy for earning a profit is eventually to aim for exports, because export prices are multiples of those paid at home and therefore much more profitable. The typical Chinese manufacturing, firm, then, produces and produces and produces, gaining practice, improving quality and demonstrating reliability – in the hope of eventually selling part of the production onto the export market. For this, labour must be treated as a fixed cost. That is to say, that production must continue in spite of demand. The strategy will be defeated if firms interrupt production and dismiss workers simply because the output they are producing cannot be immediately sold at the Wal-Mart price.
So with the output that is not exported, it is dumped domestically at whatever price it can command. And the result is falling prices (deflation) for the Chinese consumer. Relative to a fixed money wage, this implies a rising real wage in terms of staples for the average Chinese consumer, the result of which is a well-fed, well-clothed population and a near absence of significant human depravity in the cities. That’s apparent to anybody who visits China.
So I don’t see any significant long term damage in China, even if it has a cyclical downdraft. I realise this is not the fashionable view, but I think the alternative is based on a very superficial understanding of the country.
Your comments are welcome.