The author points at supposed “overproduction” as proof that China is outgrowing demand, but this ignores the role of central planning. An alternative explanation is that they’re actually trying to get prices down to distribute more commodities to more people.
Also, I don’t get deflation. It seems extremely easy to solve? Just give people free money and they’ll spend it and heat up the economy.
Since the reform and opening up, China’s economy has become highly decentralized. The central government grants a lot of autonomy to the local governments to drive local development, while it controls the behavior of the local governments and sets national priorities through controlling the promotion of the local officials. A main KPI is GDP numbers. It is no coincidence that Chinese officials are obsessed with raising GDP numbers by any means necessary.
The reckless over-investment in property market and manufacturing sector that China is facing today is the direct consequence of the lack of control, or planning, from the central government.
The clearest example of the lack of central planning on the technology front is the case of semi-conductor. When Taiwan’s TSMC broke through the 80nm barrier in 2004, China’s SMIC was only one year lagging behind. The gap has only grown larger since the past decade and now China is desperately trying to catch up.
To be clear, such laissez faire attitude has been central in driving innovation and the fierce competition allowed Chinese companies to leap and advance significantly faster than many other countries. However, the lack of planning also means they end up eating their own, as we are seeing happening today.
This is also why you see so much amazing development, productivity and technological advances in China since the past decade, but at the same time, we are working longer hours, the retirement age has gone up, the increase in productivity has not translated into wage growth and increase in purchasing power. And why China is having deflation today - because people are afraid of losing their jobs in the coming months and prefer to save. The post-Covid recovery just never happened, and the economic downturn has made everyone cautious about spending on unnecessary stuff. The term 消费降级 (consumption downgrade) has almost become an everyday terminology that everyone hears from the news, social media etc. None of this is a coincidence, and very much conforms to what we understand about an economy that adheres to neoclassical economics.
Just give people free money and they’ll spend it and heat up the economy.
Here’s the problem. The Chinese government has fully bought into the neoliberal ideology. In order to issue more currency, they have to earn export revenues first and put the foreign currencies on the asset side of the central bank balance sheet to offset the liability side when they issue more money. This is so they can reduce their deficit spending to less than 3% as advised by the IMF.
That’s why instead of the central government directly injecting new money to finance China’s infrastructure development, the local governments had to borrow massively, first through shadow banks (LGFVs), then after 2015, through issuing municipal bonds. The government is highly allergic to the concept of deficit spending. It’s all about fiscal responsibilities as taught by the Western academia. And why so many local governments are heavily in debt since Covid and the property market imploding.
The author points at supposed “overproduction” as proof that China is outgrowing demand, but this ignores the role of central planning. An alternative explanation is that they’re actually trying to get prices down to distribute more commodities to more people.
It would be a fair argument if it were say, bread prices. But is solar production that elastic in demand? normal people don’t buy solar panels or giant batteries, its mainly a capital good. the issue is China ‘wants’ other countries (say poorer countries) giving China US Dollars and other first-world currencies or their equivalents (which they need to obtain themselves by selling whatever they have to west or trying to attract capital inflows). China should give their solar panels to third world countries for free and help them break oil import dependencies.
Also, I don’t get deflation. It seems extremely easy to solve? Just give people free money and they’ll spend it and heat up the economy.
Most potent way would be to raise minimum wages sharply and set a floor wage (so that minimum wage can’t be broken) by providing right to employment. Sound finance brainworms clouds what is possible.
Deflation kills off industrial profit and the ensuing capital expenditure (investment in fixed capital) and wage growth for the average people. Furthermore, it makes their debt more expensive to service.
This is even worse because China’s central government is highly allergic to deficit spending, so they either have to earn foreign currencies through export first, or from borrowing. The huge infrastructure investment since the 2010s were heavily borrowed from the financial institutions, and because value-added tax is the main source of tax revenues for both the central and local governments, deflation is now causing their tax revenues to plummet (and combined with the plunging property market and land price, a main non-tax revenue for the local governments) and is screwing with local government expenditures. Somebody’s got to run the city infrastructures, subways, rails, public utilities, you know.
There is a reason why you see so much amazing development in China and yet people are working longer hours and the increase in productivity has not been translated into wage growth and increase in purchasing power. That’s because the wealth is being funneled into slowing down the plunging property market and the over-investment in industries from the local governments.
Think solar panels: China has dominated the world market with 90% of global share, yet every single major solar panels company is making a huge loss last year. Their workers have not experienced any wage growth from China leading in solar panels industries. In fact, the local governments that had spent billions into subsidizing these industries (again, coming from people’s wealth) are now facing with sunk costs that they cannot afford to lose out from. If they let solar panel industry to implode, then all the billions and billions of investment would be lost, and the local governments would find themselves in even more precarious financial position as they lose out on value-added tax revenues. As such, more and more wealth have to be funneled into saving these failing companies, and driving wealth gap even further.
As I have said again and again, China has to give up on its neoliberal ideology and start injecting money directly into the economy through deficit spending. Deflation is only a symptom - the root cause is wealth inequality.
I was looking for you in the comment section. The article sounded like the kind of stuff you warn about with regards to China, except for the conclusion they came to that China is incentived to go to war to solve their problems.
I hope they don’t obviously. I would way rather they just purge any neoliberals in charge.
The article is actually kind of run-of-the-mill analysis you get in mainstream financial press in China. Standard neoclassical thinking but one that is now becoming quite ubiquitous if you follow economic or financial news in China. A lot of “now that our economy is becoming more developed, we cannot expect to have high growth all the time… look at advanced Western countries and Japan… we have to get used to the new reality…” etc.
Unfortunately, when you take it to the conclusion under such framework, it means militarization because the ideological indoctrination from the IMF prevents them (most Global South countries, actually) from seeing running permanent government deficit as an economic solution. China has increased investment in militarization in response to Western threats, and military recruitment is being used as a way to alleviate the youth unemployment problem. Applicants for public services, especially military and police academy, has shot through the roof this year, because it’s guaranteed employment with good salary compared to private sector. The vibes for your average new graduates have certainly changed from “I’m going to work hard in the private sector and make good money to settle down with a family and a house” ten years ago to “I’d rather take a stable pay in the public sector with limited career progression and make sure I don’t lose my job over the next ten years”.
And this is not just China. Arguably, the EU and US militarization is even more intense within the last few years.
I sound like a broken record here, but the Global Majority needs a new economic framework that is radically different from neoliberalism if it is serious about decoupling itself from the West. As Michael Hudson often says, Capital Vol. 2 and 3 aren’t taught in China. Most of their knowledge in finance and the monetary system came from emulating the Western system.
Bouncing off this, the only thing worse than inflation is deflation because it means your stuff is worth less than what you paid for it. Money itself is a commodity used to transfer debt. The use-value of a commodity is where its real value is located. Money is just a way of tracking who is currently liable for what in the production chain.
When money deflates, its use-value as a debt tracker hasn’t changed. Only its exchange-value. This debt is held by anyone currently in possession of the money and whoever is at the end of the production chain. This is usually the worker, who traded their labor for wages and are now consumers buying commodities to transfer the debt (money) back to manufacturers. Any possessions held by workers and any means of production have gone down in exchange-value, while their use-value remains the same (or has declined due to normal wear and tear).
During inflation, the opposite effect happens where the debt held by workers is worth less than the use-value of commodities. This means workers benefit from releasing their debt (AKA spending money) and acquiring commodities they want or need. In capitalist nations, runaway inflation occurs faster than workers’ wages deliberately as the bourgeois holds the majority of the nation’s wealth both in terms of the means of production and money in possession. This allows them to have riskier behavior as they are incentivized to liquidate their money in search of commodities they can use to generate more passive income.
market economies rely on profit, if prices drop, then profits will be squeezed which doesn’t help future investments and can result in downsizing. subsidies are a way to maintain profitability, but then the question becomes where should the subsidies be going which helps workers over capitalists, and as xiaohongshu has said, local Governments which rely on revenues are trying to run deficits, which without adequate transfers from the central gov squeezes their budgets.
The idealized fully price flexible market system is ironically mainly only possible under a centrally planned economy where the state can run deficits. That is the contradiction between China being an economy where employment and output are kept stable even during deflation with the help of central government deficits, or one where everyone tries to run surpluses, which is impossible.
The author points at supposed “overproduction” as proof that China is outgrowing demand, but this ignores the role of central planning. An alternative explanation is that they’re actually trying to get prices down to distribute more commodities to more people.
Also, I don’t get deflation. It seems extremely easy to solve? Just give people free money and they’ll spend it and heat up the economy.
The problem is the lack of central planning.
Since the reform and opening up, China’s economy has become highly decentralized. The central government grants a lot of autonomy to the local governments to drive local development, while it controls the behavior of the local governments and sets national priorities through controlling the promotion of the local officials. A main KPI is GDP numbers. It is no coincidence that Chinese officials are obsessed with raising GDP numbers by any means necessary.
The reckless over-investment in property market and manufacturing sector that China is facing today is the direct consequence of the lack of control, or planning, from the central government.
The clearest example of the lack of central planning on the technology front is the case of semi-conductor. When Taiwan’s TSMC broke through the 80nm barrier in 2004, China’s SMIC was only one year lagging behind. The gap has only grown larger since the past decade and now China is desperately trying to catch up.
To be clear, such laissez faire attitude has been central in driving innovation and the fierce competition allowed Chinese companies to leap and advance significantly faster than many other countries. However, the lack of planning also means they end up eating their own, as we are seeing happening today.
This is also why you see so much amazing development, productivity and technological advances in China since the past decade, but at the same time, we are working longer hours, the retirement age has gone up, the increase in productivity has not translated into wage growth and increase in purchasing power. And why China is having deflation today - because people are afraid of losing their jobs in the coming months and prefer to save. The post-Covid recovery just never happened, and the economic downturn has made everyone cautious about spending on unnecessary stuff. The term 消费降级 (consumption downgrade) has almost become an everyday terminology that everyone hears from the news, social media etc. None of this is a coincidence, and very much conforms to what we understand about an economy that adheres to neoclassical economics.
Here’s the problem. The Chinese government has fully bought into the neoliberal ideology. In order to issue more currency, they have to earn export revenues first and put the foreign currencies on the asset side of the central bank balance sheet to offset the liability side when they issue more money. This is so they can reduce their deficit spending to less than 3% as advised by the IMF.
That’s why instead of the central government directly injecting new money to finance China’s infrastructure development, the local governments had to borrow massively, first through shadow banks (LGFVs), then after 2015, through issuing municipal bonds. The government is highly allergic to the concept of deficit spending. It’s all about fiscal responsibilities as taught by the Western academia. And why so many local governments are heavily in debt since Covid and the property market imploding.
It would be a fair argument if it were say, bread prices. But is solar production that elastic in demand? normal people don’t buy solar panels or giant batteries, its mainly a capital good. the issue is China ‘wants’ other countries (say poorer countries) giving China US Dollars and other first-world currencies or their equivalents (which they need to obtain themselves by selling whatever they have to west or trying to attract capital inflows). China should give their solar panels to third world countries for free and help them break oil import dependencies.
Most potent way would be to raise minimum wages sharply and set a floor wage (so that minimum wage can’t be broken) by providing right to employment. Sound finance brainworms clouds what is possible.
In March, China donated solar panels to Cuba, adding 120 megawatts (MW) to the country’s ailing electrical system.
They are making strides in this!
“deflation” is just a scary word western capitalists like to use when they see China selling domestic electricity at 7 cents a kilowatt
seems to me that real people who buy things think prices going down is GOOD
Deflation kills off industrial profit and the ensuing capital expenditure (investment in fixed capital) and wage growth for the average people. Furthermore, it makes their debt more expensive to service.
This is even worse because China’s central government is highly allergic to deficit spending, so they either have to earn foreign currencies through export first, or from borrowing. The huge infrastructure investment since the 2010s were heavily borrowed from the financial institutions, and because value-added tax is the main source of tax revenues for both the central and local governments, deflation is now causing their tax revenues to plummet (and combined with the plunging property market and land price, a main non-tax revenue for the local governments) and is screwing with local government expenditures. Somebody’s got to run the city infrastructures, subways, rails, public utilities, you know.
There is a reason why you see so much amazing development in China and yet people are working longer hours and the increase in productivity has not been translated into wage growth and increase in purchasing power. That’s because the wealth is being funneled into slowing down the plunging property market and the over-investment in industries from the local governments.
Think solar panels: China has dominated the world market with 90% of global share, yet every single major solar panels company is making a huge loss last year. Their workers have not experienced any wage growth from China leading in solar panels industries. In fact, the local governments that had spent billions into subsidizing these industries (again, coming from people’s wealth) are now facing with sunk costs that they cannot afford to lose out from. If they let solar panel industry to implode, then all the billions and billions of investment would be lost, and the local governments would find themselves in even more precarious financial position as they lose out on value-added tax revenues. As such, more and more wealth have to be funneled into saving these failing companies, and driving wealth gap even further.
As I have said again and again, China has to give up on its neoliberal ideology and start injecting money directly into the economy through deficit spending. Deflation is only a symptom - the root cause is wealth inequality.
I was looking for you in the comment section. The article sounded like the kind of stuff you warn about with regards to China, except for the conclusion they came to that China is incentived to go to war to solve their problems.
I hope they don’t obviously. I would way rather they just purge any neoliberals in charge.
The article is actually kind of run-of-the-mill analysis you get in mainstream financial press in China. Standard neoclassical thinking but one that is now becoming quite ubiquitous if you follow economic or financial news in China. A lot of “now that our economy is becoming more developed, we cannot expect to have high growth all the time… look at advanced Western countries and Japan… we have to get used to the new reality…” etc.
Unfortunately, when you take it to the conclusion under such framework, it means militarization because the ideological indoctrination from the IMF prevents them (most Global South countries, actually) from seeing running permanent government deficit as an economic solution. China has increased investment in militarization in response to Western threats, and military recruitment is being used as a way to alleviate the youth unemployment problem. Applicants for public services, especially military and police academy, has shot through the roof this year, because it’s guaranteed employment with good salary compared to private sector. The vibes for your average new graduates have certainly changed from “I’m going to work hard in the private sector and make good money to settle down with a family and a house” ten years ago to “I’d rather take a stable pay in the public sector with limited career progression and make sure I don’t lose my job over the next ten years”.
And this is not just China. Arguably, the EU and US militarization is even more intense within the last few years.
I sound like a broken record here, but the Global Majority needs a new economic framework that is radically different from neoliberalism if it is serious about decoupling itself from the West. As Michael Hudson often says, Capital Vol. 2 and 3 aren’t taught in China. Most of their knowledge in finance and the monetary system came from emulating the Western system.
Bouncing off this, the only thing worse than inflation is deflation because it means your stuff is worth less than what you paid for it. Money itself is a commodity used to transfer debt. The use-value of a commodity is where its real value is located. Money is just a way of tracking who is currently liable for what in the production chain.
When money deflates, its use-value as a debt tracker hasn’t changed. Only its exchange-value. This debt is held by anyone currently in possession of the money and whoever is at the end of the production chain. This is usually the worker, who traded their labor for wages and are now consumers buying commodities to transfer the debt (money) back to manufacturers. Any possessions held by workers and any means of production have gone down in exchange-value, while their use-value remains the same (or has declined due to normal wear and tear).
During inflation, the opposite effect happens where the debt held by workers is worth less than the use-value of commodities. This means workers benefit from releasing their debt (AKA spending money) and acquiring commodities they want or need. In capitalist nations, runaway inflation occurs faster than workers’ wages deliberately as the bourgeois holds the majority of the nation’s wealth both in terms of the means of production and money in possession. This allows them to have riskier behavior as they are incentivized to liquidate their money in search of commodities they can use to generate more passive income.
market economies rely on profit, if prices drop, then profits will be squeezed which doesn’t help future investments and can result in downsizing. subsidies are a way to maintain profitability, but then the question becomes where should the subsidies be going which helps workers over capitalists, and as xiaohongshu has said, local Governments which rely on revenues are trying to run deficits, which without adequate transfers from the central gov squeezes their budgets.
The idealized fully price flexible market system is ironically mainly only possible under a centrally planned economy where the state can run deficits. That is the contradiction between China being an economy where employment and output are kept stable even during deflation with the help of central government deficits, or one where everyone tries to run surpluses, which is impossible.