China industrial profits fall for 6th straight month

In October, profits fell 4.6 percent from a year earlier.BEIJING: Profits earned by Chinese industrial companies in November fell 1.4 percent from a year earlier, marking a sixth consecutive month of decline, data from the statistics bureau showed on Sunday.

Industrial profits – which cover large enterprises with annual revenue of more than 20 million yuan from their main operations – fell 1.9 percent in the first 11 months of the year compared with the same period a year earlier, the National Bureau of Statistics said on its website.

The November profits of industrial firms have seen some improvement from the previous month. In October, profits fell 4.6 percent from a year earlier.

The NBS said investment returns for industrial companies in November increased from a year earlier by 9.25 billion yuan ($1.43 billion).

The jump in November profits from the auto manufacturing and electricity sectors, up 35 percent and 51 percent from a year earlier, respectively, helped narrow overall declines, the statistics bureau said.

Mining was still the laggard sector, with profits falling 56.5 percent in the first 11 months of the year from a year earlier, the NBS data showed.

Aluminium producer China Hongqiao Group said in early December it would cut annual capacity by 250,000 tonnes immediately to curb supplies.

Eight Chinese nickel producers including state-owned Jinchuan Group Co Ltd, said they would cut production by 15,000 tonnes of metal in December and reduce output next year by at least 20 percent from this year, in a bid to lift prices from their worst slump in over a decade.
The producer price index (PPI) contracted 5.9 percent in November from a year earlier, recent data showed. PPI has been in negative territory for nearly four years, pointing to weak domestic demand and overcapacity.

China’s top leader last week outlined main economic targets for next year after they held the annual Central Economic Work Conference, where it said the government will push forward “supply-side reform” to help generate new growth engines in the world’s second-largest economy while tackling factory overcapacity and property inventories.

Chinese firms are combating high debt levels, and a growing number of companies have struggled to make bond payments on time this year. The heavy industry, construction and mining sectors remain under severe pressure from slowing demand and falling prices.

Who Will Pay?

As might have been expected before the talks began, reports on the eve of the expected conclusion of the Paris climate change negotiations suggest that the talks have become bogged down over who will pay the costs of adaptation. (See The New York Times, here.) Advanced countries want the rising middle-income countries, China and India particularly, to share more of the burden. Poor and emerging nations, which will likely incur the greatest costs of climate change, should do more to address the problem they argue.

Needless to say, these countries are balking at the prospect. They justifiably argue that the advanced rich economies got that way (i.e., rich) because their economic development over the past century has been fueled on carbon. Asking middle-income countries to pay for adaptation on an equal basis with the advanced rich countries, they contend, fails a basic equity test. While the marginal social cost of the CO2 emissions they create in their quest for riches may be high, their ability to pay is less that of rich countries.

Many years ago, well before the global financial crisis, a former IMF colleague, Peter Heller, and I shared a table at a G20 dinner hosted by the IMF in the Fund’s headquarters in Washington. At the time, he was (presciently) writing a book on the fiscal implications of the aging baby boom generation and the looming costs of climate change. His book is entitled,Who Will Pay? and in it Heller pleads for forward-looking policies, as he puts it: “to prepare responsibly for an uncertain future.”

The point here is that, if the science is right, there will be substantial costs from climate change to be borne. But these potential costs will not be shared equally — some countries are more susceptible to, say, rising sea levels than others. And, because these costs reflect negative externalities, there is an incentive to free ride — think of climate change as a public “bad” for which the private negative harm done to one doesn’t reduce the private harm inflicted on another. Climate change is a threat.

The challenge for any society is to mobilize resources to combat external threats. History and experience teaches that successful societies are marked by the ability to respond effectively to such challenges. The thing is, achieving the needed degree of coordination requires institutions (which Brad DeLong of Berkley refers to as the “secret sauce” of growth) to assuage the free-rider problem. In third century BCE China, the Emperor and an efficient administration made possible the Great Wall. In 1940, it was the leadership of Winston Churchill and Westminster Parliamentary democracy, which facilitated the smooth transfer of power, that mobilized the British people to resist Nazi aggression. These threats were clearly identifiable, however.

The threat from climate change is less tangible. Moreover, if the past is any guide, future generations will be wealthier than the current generation, so inter-generational equity considerations might suggest that the unborn should pay the costs. But as Heller’s book strives to make clear, the future is uncertain, and the further out into the future we look, the greater the uncertainty. What if the costs are greater than currently anticipated? And what if the costs are incurred sooner so that unborn generations are bequeathed less capital?

It is possible that, in those circumstances, the implied tax increases are so great that individuals’ incentives to invest in human and physical capital are distorted. Apart from the hypothetical lump-sum taxes of Welfare Economics, all taxes entail distortions. Lacking the capital to generate the wealth needed for future adaptation, societies settle into a long process of slow, secular immiserization.

Those less affected by climate change and with the resources to do so may opt to build physical and virtual walls to prevent the Hobbesian world outside their borders from spilling over. While such a response to this dystopic vision seems far-fetched, previews of it are clearly visible in the U.S. Republican primaries. As the outside world becomes nastier, more brutish and shorter, the costs of maintaining these walls will increase. Even those countries who believe they are immune to such spillovers will face higher costs–think of the costs to public infrastructure (bridges, sewer systems, etc.) designed to once in century standards when the reality suddenly changes to once a decade.

The simple fact is that the bill for climate change adaptation will have to be paid. The question for the international community is how to mobilize the resources. The COP negotiations represent the international community’s attempt to build the institutions needed to respond effectively to the threat posed by climate change. As the debate over who will pay for adaptation reveals, it will be a messy, protracted process. Time will tell what the agreement looks like. But, whatever the outcome, Paris will not be the last such time the question “who will pay?” is raised.

The Return of Malthus?

Last month China announced that, after 35 years, it was ending its one-child policy which restricted couples to one child. While the prohibition was rigorously enforced on the masses, for those with party connections there was always a way around the policy. The fortunate few studying abroad, for example, could return with their foreign-born brood when their studies were completed.

The policy was driven by fears that China was stuck in a poverty trap: that unbridled population growth prevented the accumulation of savings needed to invest in the capital necessary to raise income. As Deng Xiaoping, the Chinese leader who imposed the policy in the late 1970s, put it the policy was needed to ensure that “the fruits of economic growth are not devoured by population growth.”

This is straight out of Robert Malthus–the 18th century English clergyman, turned economist, who pessimistically concluded that society faced a natural constraint: population increases geometrically, while food production increases arithmetically. As a result, man’s proclivity for reproduction would eventually exhaust any improvement in agricultural productivity, so that mankind’s fate (or, rather, the fate of the labouring classes) is one of disease, malnutrition and early death.

No wonder Carlyle dubbed economics “the dismal science.”

Looking at the long span of historical data he confronted, Malthus’ pessimistic perspective is understandable. There was, after all, very little improvement in caloric intake or other measures of well being from the Stone Age to the industrial revolution of the late 18th century apart for a fortunate few who ascended to the tip of society’s pyramid. Indeed, Gregory Clark argues in “A Farewell to Alms” that workers of the early industrial revolution actually had a worse standard of living than their pre-history hunter-gather counterparts foraging on the African Savannah.

Malthus was singularly unlucky, however, in that he was writing on the cusp of a truly revolutionary change in living standards. Economists might say he missed a “structural break.” What Malthus’ failed to anticipate was the remarkable increase In agricultural productivity unleashed by the nascent science of chemistry, which would lead to fertilizers, as well as botany and plant science, which together greatly expanded agricultural yields. At the same time, while it wasn’t apparent to him or, subsequently, Marx, the fruits of the incredible increase in productivity that the industrial revolution unleashed were eventually shared with workers–albeit not without a fight.

A funny thing happened on the way to a higher labour share of national income. As workers’ incomes increased and became more stable, behavior changed. Fecundity decreased. Individuals began having fewer children; a trend that accelerated in the advanced economies with the invention and introduction of the birth control pill in the 1960s. Fertility rates in some countries are now so low that population growth is stagnant. Instead of rearing children, workers accumulate possessions.

It’s a material world.

Today Malthus is dismissed as an economist. Yet, in some respects, a new threat puts Malthus on his head. The worry of some is that with labour force growth flat, output growth is dependent on technological change. Technology has, of course, been the driving force of productivity and income gains. But, if, as some prominent economists foresee, we are in a period of slow technological change we could see output stagnating and advanced economies becoming stationary states.

The stationary state scenario is not necessarily a problem. And, indeed, it might reflect a better balance between material accumulation and fundamental resource constraints, such as the earth’s capacity to absorb CO2 emissions. (Past measured growth, it might be argued, was overstated since the negative externalities associated with the carbon-based economy of the past 200 years were not factored in the national income accounting.)

But what does the scenario imply for global economic prospects?

In the first instance, there is the concern that higher savings of the aging population of advanced economies implies less consumption and the secular stagnation hypothesis advanced by Larry Summers: chronic demand deficiencies that are only relieved temporarily by asset price bubbles.

In the second instance, there would be a change in global demand patterns. Advanced economies with aging populations cannot be relied upon as the consumer of first and last resort, as arguably was the case prior to the global financial crisis. This implies that the emerging markets that had benefited from large current account imbalances, reflecting underlying savings-investment imbalances, will have to develop domestic sources of demand–the rebalancing of growth to which the Chinese authorities say they are aiming.

When viewed in these terms, Beijing’s policies over the past couple of decades seem prescient. Capital accumulation is needed to achieve a level of income consistent with strong domestic demand. But to get that capital required higher savings. The one-child policy, combined with an exchange rate policy that promotes current account surpluses, generated those savings.

As the well-worn saying goes: the challenge for the Chinese masses was to “get rich before they got old.” The recent relaxation of the one child policy may be an indication that, having achieved a level of GDP per capita sufficiently high to sustain convergence to high-income levels and people voluntarily choosing “quality” over quantity of children, the authorities are confident they have succeeded. Time will tell.

A subsequent post will consider the impact of an inverted Malthus on the global financial architecture and the institutions of international cooperation that have helped support global growth and development over the past 70 years.