Chapter 7: Domestic and International Imbalance

China's rise has benefitted from globalization, but that rise has also hit the world pretty hard. After ascending to the WTO in 2001, China has been the world's factory, and value-added manufacturing exceeded that of the US in 2010, becoming first in the world. By 2019, China accounts for 28% of the world, and quality has increased so that 30% were considered "high tech products," or 25% of the world.
- In 2005, every $100 of export from China had 26% imported (including foreign-owned domestic factories), by 2015, that was 17%. See below for share of global manufacturing value-added by country: China (black line), G7 (dark dash), other countries (light dash).
- This astounding success has also resulted in major domestic economic imbalance: heavy production, heavy investment, relatively lighter social benefits, consumption, meaning that there is under-consumption, so all the goods that cannot be consumed internally must be exported. Which brings us to a second problem: unstable international demand and trade conflicts. In the last 20 years, as seen in the graph above, G7 share of exports declined from 62% to 37% and China's increased from 5% to 28% while other countries remained roughly the same. Of course trade wars would arise, this would be expected.

Low Consumption and Over Production

In 2018, personal consumption was just 44% in China, vs. 70% in US, and 55% in Europe and Japan. From the 80s to 2010, total consumption (residents + government) decreased from 65% of GDP to 50%, increasing slowly to 55%, and personal consumption went down from 54% to 39%. (The difference between government and personal though has remained steady at 11%.) Total personal consumption (black line), total consumption (dash).

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Since consumption is just income less savings, then if consumption % of GDP decreases, that means either disposable income decreased, or savings went up. In China, both happened (disposable income declined from 70% to 60%, then back up to 65%, but savings went from 25% to 35%, and is only starting to come down). Disposable income (black line), savings rate (dash).

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US savings rate is just 6-7%, Europe (Germany, France) 9-10%, Japan is just 12-13%. While there might be cultural differences, that doesn't explain the fluctuation in China. Currently, the mainstream explanation is: one-child policy (parents must save for retirement, less kids to spend on, kids must also save to take care of parents), insufficient investment from government into social services, rise in real estate prices (covered in Chapters 2 & 5).
- Because of poor social services, seniors in China have a high savings rate (it is the reverse in most countries). In addition, the hukou system (social services only offered to registered residents) exacerbates this as non-residents need to save.
- Consumption is low not just because of high savings though but also because people are truly poor. Industrialization and various policies meant that investment was going into capital equipment and not labor.
Notice we should focus on relative shares and not absolute numbers, all of which are growing rapidly. Since China completed industrialization in 40 years what the West took hundreds of years to do, it does make sense that the share of capital should increase. But there are unintended consequences, such as in order to spur industrialization, corporate loans needed to be low in interest rates, which affects savings interest rates, which decreased consumption.
Another point is the difficulty of sustaining investment into manufacturing. As infrastructure is already built out, it becomes harder and harder to invest. This is already the case in China, where local-government led investment needs to change (Chapters 3 & 6). There is also too much savings by the poor that cannot be turned into assets, and so this increases indebtedness and risk.
- The new "core contradiction" of unbalanced, insufficient development doesn't just mean regional and income disparities, but also refers to investment and consumption disparities in the economic structure. Insufficient means incomes are not a sufficiently high % of GDP.
  - That means incomes must grow at higher % than GDP. Thus the concept of dual circulation.
- To increase disposable incomes, a large part depends on decreasing "corporate savings." Private cos are more profitable than SOEs but use up the savings in investments. In 2017, the central government mandated that central SOEs turn 10% of their ownership to the Social Security Fund. That has largely completed and local SOEs are now doing the same.
- China's investment % of GDP is over 40%, much higher than developed countries' rate of 20-23%. (Net exports % is in black, dash is % of investment). There is a lot of wasted investment in China currently, and we cannot see the full effects, but they will doubtlessly show up at one point.
This imbalance has been a problem since 2005-2007, but the GFC in 2008 made it impossible for China to do anything but increase investment from the already very high amount to even higher. The European debt crisis in 2011 made the problem ossify further. Only in 2012 was the government able to start working on this problem.
International and domestic imbalances are interconnected. 9/11 & GFC for example greatly affected China. Foreign affairs are thus an extension of domestic affairs.

US-China Trade War

Since China relies on exports, then there is a current account surplus. Below we see what the current accounts look like for major regions: Middle East & North Africa (diagonal), Europe (grid), China (black), US (gray), other (plaid). And we can see that the imbalance really increased in the 2000s, but has gotten better after the GFC, within 1% of global GDP. Most of the deficit is by the US, surplus by the rest of the world. Since American has the foreign reserve currency, they can afford to run this deficit. The US has trade conflicts with multiple partners, it's just that China is its main enemy.

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One of the most often used arguments by US politicians is that Chinese manufacturing took away US jobs. But actually manufacturing jobs as % of total was already just 15% in the 90s. And manufacturing value add as % of GDP has been stable around 13%. This just means that productivity has increased. Nonetheless, this has been used as a reason for trade protectionism.

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The impact of Chinese manufacturing to US jobs isn't actually very large, but comparatively speaking, the challenge to US technology is real and a reason why the US-China trade war might be long-term. Even though manufacturing employment is single digits in the US, 60-70% of R&D and patents come from this sector.
- In 1997, China's manufacturing value-add is just 0.14 of the US, by 2018, it is 1.76. In 2019, China exceeded the US in global patents. By the Nature Index which measures contributions to fundamental science, China was 0.66 of US by 2019, 3x Germany and 4.4x Japan, up significantly from 0.24 in 2012.
Dotted: US base. Black: China manufacturing value-add. Dash: China global patents. Gray dash: China scientific research. China is still far away from the US, but has made significant progress.
No country has been strong without being (at least once upon a time) strong in manufacturing. China has been improving in this area. In 2005, for telecommunications and electronics, for Chinese exports, overseas components accounted for 43% of the value, but by 2015, it is down to 30%. Even for Apple, who publishes its top 200 suppliers, 30 mainland Chinese (and 10 Hong Kong) companies are on the list. It is estimated that they contribute about 20% of the (hardware) value of the iPhone.
If US & China continue to battle, this is bad for both US (who needs Chinese market) and China (who needs more time to get better at tech). Nonetheless, in the long term Chinese companies who are behind in tech could have a chance to catch up. The caveat is that there needs to be a large enough domestic market.