Industrial Overcapacity Behind Stalled Wage Growth in China

SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore.

China’s legislature began its annual meeting on Sunday; in one of its first moves it approved a lower economic growth rate of 6.5%. This is the lowest growth rate that China has planned for in the last 20 years. The country is currently facing a number of economic problems, including excessive pollution, industrial over-capacity, and a very large private and public sector debt load.

However, other than the lower growth target, analysts do not expect China to change its economic course for now. The consequences of not changing course could lead the country into more serious problems, according to some analysts.

Joining us now to take a closer look at the Chinese economy is Richard Vague. Richard is a Managing Partner at Gabriel Investments, and a chair of The Governor’s Woods Foundation. And he’s the author of “The Next Economic Disaster: Why It’s Coming and How to Avoid It.”

Thank you so much for joining us here, Richard.

RICHARD VAGUE: Thanks for having me.

SHARMINI PERIES: So, Richard, why is the economic growth target slowing down in China?

RICHARD VAGUE: You know, we suspect that their actual growth rate’s quite a bit lower than the 6.5% that they mentioned. And it needs to be. They have massive over-capacity, and are continuing to create more and more over-capacity. So, we suspect the step-down from 7% to 6.7% now, to 6.5% is just them trying to let their forecast catch up with their reality.

SHARMINI PERIES: Now, isn’t China an economy that had tremendous more capacity to grow, relative to more developed countries, like the U.S.?

RICHARD VAGUE: They have grown very, very rapidly. A lot of that growth in the early 2000s was export dependent. And that of course, came to an end in ’08, and since then their high growth rate has been debt dependent, private debt dependent.

Their financing growth is really not needed. They’re building housing that’s not needed. They’re producing steel and coal that are not needed, in large part. So, you know, no we don’t think that there’s the capacity for them to go back to a 10 or 15% growth rate. We think their published growth rates are higher than their growth rate is, and frankly, higher than their growth rate needs to be.

SHARMINI PERIES: Now, Richard, last time we talked about the Chinese economy, my assumption was that the world economy was slowing down, and therefore, the demand for Chinese goods aren’t as high. And, of course, that meant that the Chinese authorities were turning the economic demand to a domestic demand. And you said that’s not the case. The domestic demand isn’t growing as fast as the Chinese had expected, is that still the case?

RICHARD VAGUE: You know, the consumer sector of the economy is the smaller part, and it is growing rapidly. But the concerning thing about that, is that that growth is debt financed. Consumer, or household debt, is now growing twice as fast as business debt. So, we see kind of a yellow to red flashing light there as well, as they go for this rebalancing.

SHARMINI PERIES: Now, part of the reason for the debt is, of course wages, and wages aren’t going up, at least not very dramatically. And from what I understand, there is a lot of labor unrest in the country. Give us some sense of where the workers are, in terms of demanding higher wages. And not having higher wages is obviously contributing to this debt burden you’re speaking about.

RICHARD VAGUE: Well, China’s big competitive advantage for at least a couple, or three decades, has been its low wages. But we’ve seen its wages now get to a level where they’re above, for example, wages in Mexico. So, that competitive advantage has largely dissipated and that makes it, frankly, much harder to increase wages from here.

You couple that with the fact that there is significant earnings pressure in those industries, like steel, and cement, and coal, where there is over-capacity. And in real estate, where there’s 50 million empty homes, and ghost cities in China, that you see that there’s not a good formula for continuing to have high wage growth. And I’m sure that has come as unpleasant news for a lot of workers.

SHARMINI PERIES: Okay. And, as you were saying, and I also mentioned in the introduction, that China’s currently facing a number of issues, like pollution, over-capacity in terms of production. Not so much demand for their goods as in previous years from abroad, in terms of exports.

Now are these the major issues, and is there other ways in which the legislature could redirect the economy? In other words, where are the capacity there, in terms of growth, and should they not be redirecting it?

RICHARD VAGUE: No. I think an imperative for China’s economy is to lower actual growth, to stop compounding the problem. They could be growing at three, or 4%, publishing that number, that’s a very respectable number. And, frankly, they have demographics working in some ways, in their favor. Since population growth is flat, it creates less of a platform for dissent and for pressure, as might exist in a country where population is growing fast. And we think stopping creating additional over-capacity is at the center of the way they need to be addressing the problem.

SHARMINI PERIES: Right. And, in your opinion, where are the areas in which the economy, be it 4% or otherwise, but where are the potential of the economy in terms of developing more positive growth?

In other words pollution is a problem, is there a way of doing a green economy in China excelling on the production of solar panels, and other such examples?

RICHARD VAGUE: Well, we think going up the value chain in manufacturing is where any country needs to have, and China’s in a superb position to do that. We know in engineering, in construction, they’re at the leading edge of what the world can do. I’m involved in medical research, I know that China has made a great effort in some very leading edge genetic research.

There’s numerous areas like that, robotics is another, where they could be moving up the value chain. To me, that’s where they’re emphasis should continue to be, to a larger extent, than merely taking the mass produced commodities, and continuing to pound out over-capacity there.

SHARMINI PERIES: And turning towards the United States, what do you make of the current Trump administration’s policy towards China, and in terms of trade and this kind of joint stimulation, in terms of the economies?

RICHARD VAGUE: Well, I think the United States has had a better hand to play on trade than it has played, frankly, for decades. You know, we have been conciliatory on trade matters in order to get, you know, political support or military support, or the like. We’ve been kind of frittering away our advantages at the edges. I think we hold far more cards than China does, if we play them correctly.

China needs us more than we need China, frankly, to put it bluntly. You know, I don’t like the way the Trump administration goes about handling this, but I do think there’s room to be more assertive in how we do business, with a lot of countries, not the least of which is China, frankly, China’s in a fairly fragile position. I think there’s actually kind of a remote danger that we could contribute trouble there, in a way that we might not intend.

SHARMINI PERIES: All right, Richard, I thank you so much for joining us, and as these legislative meetings unfold in China I would like to come back to you in the near future. Thank you.

RICHARD VAGUE: Thanks so much.

SHARMINI PERIES: And thank you for joining us here on The Real News Network.

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