Macroeconomists have been increasingly concerned by China over the last 30 years, sometimes for good reasons, and sometimes for bad ones.
The good ones are fairly obvious: big economy, growing fast, huge player in world trade.
The bad ones are also fairly obvious too: most populous (or second most), militant, irredentist (if you do not know that one there's this amazing thing called Bing that you can google on), communist (but maybe not with a capital "C" anymore) ... big economy, growing fast, and huge player in world trade ... and so on.
But I'd like to add another one that's more macroeconomically specific, and about with which you're probably less familiar.
China is also home to a huge asset price bubble, and is already working through a major bankruptcy associated with it (and really doesn't have a roadmap about how to do that).
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I'll repeat what my former principles students have heard many times: recessions and financial crises are not the same thing, and do not have to occur together ... but it's a much bigger problem when they do.
Also, asset price bubbles can be a cause of financial crises. But not always. Asset price bubbles are very common, probably much more common than non-economists think, and therefore maybe not as serious as they're set out to be (a similar argument is made by some about COVID-19: stealthily common, and therefore less serious).
Assets first: these are longer-lasting things (the depreciate slowly), that are productive and therefore valuable.
Assets can be real or financial. Real means they are a tangible, and usually physical thing ("real" has a second economic meaning in this case, and not that their value is adjusted for inflation). Financial assets are ownership claims on the value produced by assets.
Financial assets are often created in a pair with a financial liability, and the pair has zero net value. So a car is a real asset, it's title is a financial asset, and a loan to purchase the car (with the real asset used as collateral that can be repossessed) as the financial liability.
When you purchase a car with cash, you're exchanging a real asset for another one of about the same value. When you purchase a care with a loan, there are now two assets and two liabilities exchanged: the car, the cash (the bank puts in your hands), the title (the bank holds until you pay off the loan), and the loan (with its threat of repossession if you don't make payments). This is actually pretty cool, because now the financial asset and financial liability can move through time and space until they are no longer near the car, or each other. But also, their values can deviate from one another too.
Bubbles are more common in financial than in real assets. This seems to be an effect of ... well ... people thinking they know everything they need to know about them already. And sometimes they don't. For example, you rarely meet someone at a party that tells you all about the real asset — say a copier — that they bought or own. But you often hear people talk about stocks, bonds, loans, and titles with a great deal of supposed expertise.
Price bubbles are the tendency of the price of financial assets to get serially skewed upward, and to separate from the value of the underlying real asset. Here, "serially" means in a connected sort of way through time, and skewed means the distribution has a long tail one side.
They're called bubbles because, while they go up, they come down even faster: like a bubble popping.
Bubbles are fairly common. I hesitate to call them normal, but they're definitely typical.
I think part of that is that many people like bubbles because the run up in prices makes them feel smart about their wealth. It's like an automatic ego-stroker.
And, of course, people like bubbles because they make them richer. But it's also like the childhood games of hot potato or musical chairs. You may be winning now, but that doesn't mean you won't lose later. People don't talk about that part as much. Go figure.
What's worse is that governments often create asset price bubbles on purpose. And people who get richer that way tend to support the government.
Most governments do this with real estate. An implicit promise of all governments is: you buy here, and let us rule, and we'll make sure that value of your purchase improves. That sounds a lot like good government, and it often is, but people and governments can get carried away with that.
BTW: let me clue you in to something almost no one will ever tell you. Real estate is generally a very crappy investment; and the corollary is that when it's a good investment you should be aware of the bubble you're already in.
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Here's how this has worked in China.
The Chinese Communist Party (CCP) and the government — pretty much the same thing for the last 75 years — set it up so they own all the real estate. Then about 45 years ago, they started liberalizing.
One of the schemes they cooked up was for local governments to sell land to developers, with the proceeds supplementing taxes to provide government services. The developers got the money by borrowing from "banks". Except these banks are sort'of like the banks you're used to at the micro level but not at the macro level. At the macro level they mostly got deposits because the typical Chinese person had to put their savings into them. Because they didn't have other options, the rates they got paid were low, and the rates on the loans the banks made to developers were low too. The developers built cities filled with apartment complexes, then made their money by selling that finished real estate to interested buyers, and paid off their loans. The bubble part comes in because the buyer has the choice of getting rich by either putting money into banks that don't pay much interest, or by buying real estate. When their purchases get too exuberant, we get price bubbles.†
Economists have thought that the market for residential real estate in China is the biggest asset price bubble the world has ever seen ... for about a generation now. And we worry about when it's going to pop, and what the effects will be.
Enter a company called Evergrande. Evergrande is a real estate developer, one of the largest companies in China, and one of the larger ones in the world. And it went bankrupt this past year.
Well, sort of. Bankruptcy is the name we give to what's actually an orderly legal process that does a good job of preserving value when a firm's business goes bad. In many ways, the American bankruptcy system is an unsung hero in our macroeconomic success, and the envy of most of the rest of the world. The thing that attracts foreign investors to America is not the high rates of return we offer, but our ability to avoid low rates of return (including losing all your money).
The things is, China does not have a transparent and working bankruptcy process. And no experience with the failure of a business as large as Evergrande that's part of a price bubble.
Hey! Remember 2008! Remember the bankruptcy of Lehman Brothers, Bear Stearns, and the insolvency of Fannie Mae? Wasn't that fun! And we're the country that knows what it's doing with bankruptcy.
This is why macroeconomists are paying even more attention to China these days.
† Grousing here. Most of the people you hear talking about fascism over the last few years ... don't know wtf they're talking about.Fascism, as an economic system, means the government goes out of its way to help politically-favored business owners make supernormal profits, in exchange for political loyalty and funneling some of that money back into government (recall that Oskar Schindler was a loyal Nazi, who made a lot of money before he had misgivings).. That sounds a little like what happens in the U.S., but it really sounds like what happens in China.
Update: I forgot to link to this Twitter thread noting that Local Government Financing Vehicles (LGFV's) in China are buying more land in China. In China LGFV's are the way that a government would borrow money: analogous to issuing municipal bonds in the U.S. The gist of the thread is then that local governments are using their borrowing capacity to get cash, to buy land sold by some other local government office that's just down the hall ... reading between the lines this means they are short on liquidity, a hallmark of financial players caught in a collapsing bubble.
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