Alicia García-Herrero, multi accredited academic and Chief Economist for Asia-Pacific and the Middle East at Natixis takes a closer look at China’s most pressing economic conundrum.
China produces more than it can consume.
The idea has been consumers will eventually catch up in this process and that production, logically, must proceed consumption. The problem with this model is it requires savers to pay for the investment in production.
So, consumption must be suppressed to achieve this (savings) but there seems no mechanism to unleash it. Compounding the problem the consumption-impulse has been crushed by the collapse in price of most household’s principle asset, their homes.
Which takes us to here.
Precautionary savings remain high and consumption depressed. The worry is this may have become a structural issue and is not a temporary state of affairs that will somehow in time right itself.
It gets worse. The very technologies that China is seeking to be at the forefront of are themselves likely to have deflationary consequences for the price of labor. Traditional businesses meanwhile are being propped up leading to ‘involution’ where margins are compressed leading to more pressure on the ability of labor to command a higher price.
Ms. Garcia-Herrero ends her analysis ticking off three standard remedies that could be applied: “monetary easing to stimulate private demand, fiscal expansion directed at household incomes, and debt restructuring to allow zombie firms to exit.” At the same time though she notes the governments lack of willingness and/or ability to progress any of them.
She sums up as follows: “The involutionary spiral—falling margins, stagnant wages, weak consumption, more aggressive price competition—has no self-correction mechanism within the current model. If AI accelerates labour displacement faster than it generates new productivity, the spiral could tighten. And as global protectionism closes export markets, the pressure valve through which excess supply has historically escaped will itself close.” Er, yikes?!
You can read the paper in full via the following link When Strategic Ambition Hollows Out the Foundation.
Happy Sunday.