Is China Slipping into the 'Middle Income Trap'?

[rosin]

Is it even possible for a nation which truncates the free flow of information because of its authoritarian/totalitarian tendencies to achieve a first world economic status and income? Has that ever happened before in the post war period as economies became more information based and agile and supple?

South Korea was a military dictatorship and Taiwan an authoritarian one-party state with permanent martial law when they made the transition to a first world economy.

How rigorously did they restrict information flows, and is doing so now with the evolving economic structure more of a hindrance to growth now than in the past?

Comparing to today would be pretty meaningless, since all a totalitarian government had to do to control information flow in the pre-Internet era was striking down a few 'obnoxious' media outlets and self-censorship would make the others fall in line. It is much harder today.

[MasterJedi]

They’re slipping because it’s a one party state dictatorship that’s closing itself off more and is incredibly corrupt. Most money doesn’t make it to what it’s earmarked for and almost nothing gets to the people. The only option for them to invest is real estate which is basically all falling down from the second it’s “completed”.

[Vosem]

No, China still has fewer taxes, regulations, and a smaller welfare state than the US. This is indicative for a faster growth environment. Contrary to conventional wisdom, deflation is a good thing - it means a lower cost of living for everyone. We had a lot of deflation in the late 1800s, when our innovation and growth were the fastest.

It is possible that Xi Jinping could screw things up - he implemented extremely authoritarian COVID lockdowns for example which have slowed the economy for the last 2 years.

It's hard to have a lot of growth if your population is falling, and I think in practice China is much more regulated -- in the sense that local governments are empowered to take very authoritarian actions against enterprises they dislike -- than the United States.

[The Economy is Getting Worse]

No, China still has fewer taxes, regulations, and a smaller welfare state than the US. This is indicative for a faster growth environment. Contrary to conventional wisdom, deflation is a good thing - it means a lower cost of living for everyone. We had a lot of deflation in the late 1800s, when our innovation and growth were the fastest.

It is possible that Xi Jinping could screw things up - he implemented extremely authoritarian COVID lockdowns for example which have slowed the economy for the last 2 years.

It's hard to have a lot of growth if your population is falling, and I think in practice China is much more regulated -- in the sense that local governments are empowered to take very authoritarian actions against enterprises they dislike -- than the United States.

Have you seen DeSantis? It isn't just China being regulated at the local level. In any case, local regulation is much better than federal, in that there is competition where businesses can move if they don't like the current locality.

Also, what matters more is living standards, which doesn't matter much on population (although a higher population could mean more innovation). Monaco has a small population but high living standards.

[Benjamin Frank]

No, China still has fewer taxes, regulations, and a smaller welfare state than the US. This is indicative for a faster growth environment. Contrary to conventional wisdom, deflation is a good thing - it means a lower cost of living for everyone. We had a lot of deflation in the late 1800s, when our innovation and growth were the fastest.

It is possible that Xi Jinping could screw things up - he implemented extremely authoritarian COVID lockdowns for example which have slowed the economy for the last 2 years.

I think you need to get over the tired drumbeat that less regulations are inherently pro growth. I certainly don't disagree that the regulatory framework needs to be looked at in totality and not just separately, because the overall burden can be expensive and time consuming which provides a strong disincentive for investment.

However, there are also many examples of under-regulation resulting in such things as invasive species, (slightly) brain damaged children (lead in gasoline), banks gambling with other people's money (or simply stealing it) such as the Savings and Loans of the late 1980s and the sub prime mortgages of 2008 and general externalities that pass off expenses to the public at large and to other businesses, all of which are damaging for an economy (among other damage.)

[It’s so Joever]

No, China still has fewer taxes, regulations, and a smaller welfare state than the US. This is indicative for a faster growth environment. Contrary to conventional wisdom, deflation is a good thing - it means a lower cost of living for everyone. We had a lot of deflation in the late 1800s, when our innovation and growth were the fastest.

It is possible that Xi Jinping could screw things up - he implemented extremely authoritarian COVID lockdowns for example which have slowed the economy for the last 2 years.

I think you need to get over the tired drumbeat that less regulations are inherently pro growth. I certainly don't disagree that the regulatory framework needs to be looked at in totality and not just separately, because the overall burden can be expensive and time consuming which provides a strong disincentive for investment.

However, there are also many examples of under-regulation resulting in such things as invasive species, (slightly) brain damaged children (lead in gasoline), banks gambling with other people's money (or simply stealing it) such as the Savings and Loans of the late 1980s and the sub prime mortgages of 2008 and general externalities that pass off expenses to the public at large and to other businesses, all of which are damaging for an economy (among other damage.)

Also just the idea having a growing economy is as easy as a low tax rate sounds like something a five year old would say.

[2952-0-0]

No, China still has fewer taxes, regulations, and a smaller welfare state than the US. This is indicative for a faster growth environment. Contrary to conventional wisdom, deflation is a good thing - it means a lower cost of living for everyone. We had a lot of deflation in the late 1800s, when our innovation and growth were the fastest.

It is possible that Xi Jinping could screw things up - he implemented extremely authoritarian COVID lockdowns for example which have slowed the economy for the last 2 years.

This is someone who's never been there, doesn't speak the language, has never done any business with anyone from there, and hasn't met anyone from there at any substantial level.

There are state-owned monopolies in oil/gas, telecoms, banking, airlines, tobacco, and many other sectors. Where there aren't monopolies, state-owned enterprises are able to use their connections to selectively enforce regulations against their private sector competitors. Is your private company stealing orders from a state-owned competitor? Watch out: you could be fined for breaking this or that regulation, or worse get jailed for breaking a tax law from 20 years ago. Then there are regulations such as needing approval (not just notification) to move more than $50000 out of the country per year, needing to register a website with the police, needing to allow a Communist Party cell in your company if there are three or more Party members, and so forth.

Hence, one of the dark jokes that circulate is that "we pay taxes like in Scandinavia, we are regulated like in the Soviet Union, we see social inequality like in Latin America, and we enjoy social services like in Antarctica." In short, the worst of everywhere in the world.

Have you seen DeSantis? It isn't just China being regulated at the local level. In any case, local regulation is much better than federal, in that there is competition where businesses can move if they don't like the current locality.

Local governments love to impose or enforce arbitrary regulations without oversight, as a pretext to either extract money or to protect their cronies. Example: regulations - set at the national level - are intentionally vaguely worded to allow for flexibility in enforcement. Local governments then use these as a tool to either selectively levy fines or to push out businesses that are treading on the turf that "belongs" to their cronies. They also control local banks, further tilting the playing field. Also, getting a business license in China isn't as simple as paying a fee and filling out a form - you actually need to schmooze the bureaucrat in charge, who can deny it merely because the business threatens to steal customers and talent from his crony. China is less a single economy than a thousand little economic fiefdoms. Some of them have a genuine understanding of what attracts business, but the emphasis is on some. That's why China's economic geography is increasingly concentrated in a handful of megacities.

And even then, there's only so much the most pro-business local administration can do, if the big boss in Beijing is issuing increasingly erratic decrees.

[The Economy is Getting Worse]

No, China still has fewer taxes, regulations, and a smaller welfare state than the US. This is indicative for a faster growth environment. Contrary to conventional wisdom, deflation is a good thing - it means a lower cost of living for everyone. We had a lot of deflation in the late 1800s, when our innovation and growth were the fastest.

It is possible that Xi Jinping could screw things up - he implemented extremely authoritarian COVID lockdowns for example which have slowed the economy for the last 2 years.

This is someone who's never been there, doesn't speak the language, has never done any business with anyone from there, and hasn't met anyone from there at any substantial level.

There are state-owned monopolies in oil/gas, telecoms, banking, airlines, tobacco, and many other sectors. Where there aren't monopolies, state-owned enterprises are able to use their connections to selectively enforce regulations against their private sector competitors. Is your private company stealing orders from a state-owned competitor? Watch out: you could be fined for breaking this or that regulation, or worse get jailed for breaking a tax law from 20 years ago. Then there are regulations such as needing approval (not just notification) to move more than $50000 out of the country per year, needing to register a website with the police, needing to allow a Communist Party cell in your company if there are three or more Party members, and so forth.

Hence, one of the dark jokes that circulate is that "we pay taxes like in Scandinavia, we are regulated like in the Soviet Union, we see social inequality like in Latin America, and we enjoy social services like in Antarctica." In short, the worst of everywhere in the world.

Have you seen DeSantis? It isn't just China being regulated at the local level. In any case, local regulation is much better than federal, in that there is competition where businesses can move if they don't like the current locality.

Local governments love to impose or enforce arbitrary regulations without oversight, as a pretext to either extract money or to protect their cronies. Example: regulations - set at the national level - are intentionally vaguely worded to allow for flexibility in enforcement. Local governments then use these as a tool to either selectively levy fines or to push out businesses that are treading on the turf that "belongs" to their cronies. They also control local banks, further tilting the playing field. Also, getting a business license in China isn't as simple as paying a fee and filling out a form - you actually need to schmooze the bureaucrat in charge, who can deny it merely because the business threatens to steal customers and talent from his crony. China is less a single economy than a thousand little economic fiefdoms. Some of them have a genuine understanding of what attracts business, but the emphasis is on some. That's why China's economic geography is increasingly concentrated in a handful of megacities.

And even then, there's only so much the most pro-business local administration can do, if the big boss in Beijing is issuing increasingly erratic decrees.

1.I've been to China before. The costs of things are usually less, and I usually have to fill out way less forms there than here. Maybe you need to visit China yourself to see how much it has changed in the last 40 years, and you will realize that they're doing something right.
2.China's tax rates are lower than the US
3.China has lower regulations than the US. For example,  consider the process of building a high-speed rail. In America, environmental review alone takes 10+ years. In China, it's less than 5 years from planning to finishing construction.
4.Having "thousands of fiefdoms" allows for more competition. Competition picks the more efficient systems over the less efficient systems by allowing businesses/people to vote with their feet, leading to more overall efficiency. Also, having a megacities should be the natural outcome of free market development, as higher population density is more efficient.
5.The US has very high level of state control in the sectors. Yes, the industries aren't nationalized, but it's very far from a free market as well. Consider banking, where the Federal Reserve controls interest rates, and there are regulations such as "Too Big to Fail" (which encourages big banks to take excessive risks knowing that they will be bailed out) and Dodd-Frank. It's also nearly impossible to get in the financial field now; regulations are so strict. For example, you have to basically spy on your brokers.

The US airline system is highly inefficient as well. Usually, qualityof products improve over time, but airlines have been getting squishier and squishier. It's basically an oligopoly - with more competition we wouldn't see last minute tickets be much more expensive. It ties to the banking system, where airlines aren't really making money and basically selling their miles to the bank.

[It’s so Joever]

No, China still has fewer taxes, regulations, and a smaller welfare state than the US. This is indicative for a faster growth environment. Contrary to conventional wisdom, deflation is a good thing - it means a lower cost of living for everyone. We had a lot of deflation in the late 1800s, when our innovation and growth were the fastest.

It is possible that Xi Jinping could screw things up - he implemented extremely authoritarian COVID lockdowns for example which have slowed the economy for the last 2 years.

This is someone who's never been there, doesn't speak the language, has never done any business with anyone from there, and hasn't met anyone from there at any substantial level.

There are state-owned monopolies in oil/gas, telecoms, banking, airlines, tobacco, and many other sectors. Where there aren't monopolies, state-owned enterprises are able to use their connections to selectively enforce regulations against their private sector competitors. Is your private company stealing orders from a state-owned competitor? Watch out: you could be fined for breaking this or that regulation, or worse get jailed for breaking a tax law from 20 years ago. Then there are regulations such as needing approval (not just notification) to move more than $50000 out of the country per year, needing to register a website with the police, needing to allow a Communist Party cell in your company if there are three or more Party members, and so forth.

Hence, one of the dark jokes that circulate is that "we pay taxes like in Scandinavia, we are regulated like in the Soviet Union, we see social inequality like in Latin America, and we enjoy social services like in Antarctica." In short, the worst of everywhere in the world.

Have you seen DeSantis? It isn't just China being regulated at the local level. In any case, local regulation is much better than federal, in that there is competition where businesses can move if they don't like the current locality.

Local governments love to impose or enforce arbitrary regulations without oversight, as a pretext to either extract money or to protect their cronies. Example: regulations - set at the national level - are intentionally vaguely worded to allow for flexibility in enforcement. Local governments then use these as a tool to either selectively levy fines or to push out businesses that are treading on the turf that "belongs" to their cronies. They also control local banks, further tilting the playing field. Also, getting a business license in China isn't as simple as paying a fee and filling out a form - you actually need to schmooze the bureaucrat in charge, who can deny it merely because the business threatens to steal customers and talent from his crony. China is less a single economy than a thousand little economic fiefdoms. Some of them have a genuine understanding of what attracts business, but the emphasis is on some. That's why China's economic geography is increasingly concentrated in a handful of megacities.

And even then, there's only so much the most pro-business local administration can do, if the big boss in Beijing is issuing increasingly erratic decrees.

1.I've been to China before. The costs of things are usually less, and I usually have to fill out way less forms there than here. Maybe you need to visit China yourself to see how much it has changed in the last 40 years, and you will realize that they're doing something right.
2.China's tax rates are lower than the US
3.China has lower regulations than the US. For example,  consider the process of building a high-speed rail. In America, environmental review alone takes 10+ years. In China, it's less than 5 years from planning to finishing construction.
4.Having "thousands of fiefdoms" allows for more competition. Competition picks the more efficient systems over the less efficient systems by allowing businesses/people to vote with their feet, leading to more overall efficiency. Also, having a megacities should be the natural outcome of free market development, as higher population density is more efficient.
5.The US has very high level of state control in the sectors. Yes, the industries aren't nationalized, but it's very far from a free market as well. Consider banking, where the Federal Reserve controls interest rates, and there are regulations such as "Too Big to Fail" (which encourages big banks to take excessive risks knowing that they will be bailed out) and Dodd-Frank. It's also nearly impossible to get in the financial field now; regulations are so strict. For example, you have to basically spy on your brokers.

The US airline system is highly inefficient as well. Usually, qualityof products improve over time, but airlines have been getting squishier and squishier. It's basically an oligopoly - with more competition we wouldn't see last minute tickets be much more expensive. It ties to the banking system, where airlines aren't really making money and basically selling their miles to the bank.

I’m not going to respond to the rest of your incredibly dull take tonight but people “voting with their feet” is literally discouraged by the Chinese system you praise via hukou. Yeah people obviously still do move (rural depopulation is a problem) but it’s certainly not “encouraged”.
Now do me a favor and reply to this so I remember to tell you how wrong you are tomorrow.

[Benjamin Frank]

No, China still has fewer taxes, regulations, and a smaller welfare state than the US. This is indicative for a faster growth environment. Contrary to conventional wisdom, deflation is a good thing - it means a lower cost of living for everyone. We had a lot of deflation in the late 1800s, when our innovation and growth were the fastest.

It is possible that Xi Jinping could screw things up - he implemented extremely authoritarian COVID lockdowns for example which have slowed the economy for the last 2 years.

It's hard to have a lot of growth if your population is falling, and I think in practice China is much more regulated -- in the sense that local governments are empowered to take very authoritarian actions against enterprises they dislike -- than the United States.

Have you seen DeSantis? It isn't just China being regulated at the local level. In any case, local regulation is much better than federal, in that there is competition where businesses can move if they don't like the current locality.

Also, what matters more is living standards, which doesn't matter much on population (although a higher population could mean more innovation). Monaco has a small population but high living standards.

I was going to leave this for Vosem to respond to, but Vosem doesn't seem to be interested.

Just a couple general points, not specifically about China.

1.Regarding businesses moving: it depends on the type of business. It does happen occasionally, but moving a manufacturing plant is not easy. What usually happens is a firm expands elsewhere while letting the present facility run down. Retail outlets are often location specific. The easiest businesses to relocate are in the service sector.

2.The problem of lower population isn't necessarily having a lower population, it's in the transition of the decline. It can result in labor shortages if there is a problem of fewer young people replacing retiring workers. The teaching of economics in college tend to overlook transitory stages. Of course, there is also the cliche of businesses needing growing markets, which there probably is some truth to.

3.Real economic growth per capita was higher in the 1900s than in the 1800s. According to measuringworth.com real GDP per capita in 1801 was $1,611.8 using constant 2012 U.S $, and ended the century at $6,303.9. A 3.91 times increase.

While real GDP per capita went from 1901 of $6,511.0 to $46,523.0 at the end of the 20th Century, a 7.15 times increase. So, the 20th century having greater real economic growth than the 19th century is not even close.

I don't know what role inflation or deflation of the 19th century played in the slower real economic growth, but I'm sure one problem was that the U.S was on the gold standard then, so inflation was sparked by discoveries of large gold deposits (which have little to nothing to do with how the 'real economy' was doing) while deflation was caused by real economic growth not supported by any gold finds. (The gold standard is truly idiotic.)

While it is true that the overall century was deflationary, with the annual deflation rate of -0.42% for the century, not surprisingly there were wild swings. In 1802 for instance, the deflation rate was -15.73%, while in 1803 the inflation rate was 5.49%. I'm sure there is some error rate in these numbers since they had to be calculated from data sets compiled years later. Of course, the present inflation rates (CPI or GDP price deflator) also have error rates, but at least they use data sets compiled currently.

Edit: I see you mentioned 'late 1800s' not '1800s' for economic growth. Real GDP per capita was $4,329.3 in 1880 and, again, $6,303.9 in 1900.

Using a financial calculator with N=21, PV=4,329.3 FV=6,303.9 shows real GDP per capita of 1.9% per annum. Real GDP per capita from 1901 to 2000 was 2.01% per annum. The annualized deflation rate from 1880 to 1900 was -1.03%.

[2952-0-0]

I’m not going to respond to the rest of your incredibly dull take tonight but people “voting with their feet” is literally discouraged by the Chinese system you praise via hukou. Yeah people obviously still do move (rural depopulation is a problem) but it’s certainly not “encouraged”.
Now do me a favor and reply to this so I remember to tell you how wrong you are tomorrow.

To be fair, they encourage urban migration because they need cheap labour to fuel the urban economy. The police have long since lost the legal power to "deport" "illegal migrants" back to their rural communities. But, the hukou system ensures that these migrants will not enjoy the social benefits of the city, thus lowering the cost of paying social benefits. Thus, the cities get their labour force, without paying the cost of their social benefits.

Note as well that he didn't even bother to argue with the specific examples with my reply.

[wnwnwn]

That theory is mostly for countries with a small or foreing owned manufacturing sector. China seem to be on another situation. Also, the average middle income country doesn't have mines owned by their companies around the world.

Everything depends on the decisions of the polítical elite.

[RilakkuMAGA]

The idea that slowing population growth is indicative of a middle income trap is absolutely absurd - if anything we see the opposite, as GDP growth remains high despite the workforce shrinking.

On GDP per capita growth, China remains the fastest growing major economy in the world (India has higher GDP growth overall, but that's due to an expanding work force).

News stories about China being worse than expected or better than expected fool people who analyze on vibes more than numbers (ie, most political types), because worse than expected still ends up being a lot of growth.

[Frodo]

It is clearly much worse than the CCP regime (and their online puppets) is letting on.  With the domestic economic situation getting worse, their propaganda apparatus is in overdrive trying to contain the damage:

Negative Takes on China’s Economy Are Disappearing From the Internet

[2952-0-0]

It gets worse. Monday morning and the bottom is falling out of the Shanghai stock market.

https://twitter.com/Sino_Market/status/1754338155413815497

https://twitter.com/CathyYuanZhang/status/1754321195854663958

https://www.google.com/finance/quote/000001:SHA?

It's now becoming a cycle where Beijing announces measures to try to stop the bleeding, even including using foreign assets held by state-owned banks to pump up stocks, and then the bleeding continues at a faster pace. Up until recently, people had the belief that the CCP could leverage its vast resources to merely use words to influence the markets, almost like the Fed. But if the bottom falls out of the market despite its words, deeds, and actual pumping, then that aura falls apart.

The average Chinese retail investor is also fully aware that, while their own stock market is crumbling; those of the US, Japan, and even *gasp* Taiwan are surging from strength to strength. Official propaganda has noticeably toned down on the "we're about to surpass the US any time now" rhetoric, but people have memories. This has become a political problem that can't be censored or manipulated, because people can see the truth with their own eyes.

In an amusing turn of events, the comment section of the Weibo account of the US Embassy has become a virtual protesting ground.

https://weibo.com/usembassy

https://www.reuters.com/markets/chinese-turn-us-embassy-post-into-wailing-wall-stock-plunge-2024-02-04/

A post on February 2, which highlighted the work of the Smithsonian Institute in protecting giraffes, currently has 157,000 comments 693,000 likes, and 18,000 reposts. The comments are a riot. None of them had anything to do with giraffes. Most were grumbling about the poor state of the Chinese economy. Some were pledging allegiance to an imagined shining city on the hill. Others were asking how many comments were being censored. Some even said that if the US did a regime change in China, all 200 million Chinese retail investors would line the streets pointing towards Tiananmen Square. Someone even pleaded with the US to do an air strike on the Shanghai Stock Exchange. It appears that people are virtually protesting at the US Embassy faster than the CCP's censors can delete the comments. Chinese social media is now flooded with giraffe memes.

I won't predict what will happen next, but a situation where the aura of omnipotence is brutally ripped to shreds by cold-hearted reality could provoke irrational responses.

[Frodo]

Here is an excellent video explaining what happened.  It is quite comprehensive, being thirty minutes long:

[TechbroMBA]

The old saying is “the proof of the pudding is in the eating”.

If China is performing so robustly, and 5% growth is still very robust, why is the stock market so weak? Why can I buy into Chinese technology companies at a fraction of even Asian peers? Why can I book into the Shanghai Waldorf Astoria or EDITION for the same price as a Marriott in Chicago? Why is every person I know who’s Chinese and visits China saying the economy is doing badly?