Yet more on the broken model

The SCMP reports experts’ suggestions for fixing the government’s budget deficit…

The Hong Kong government could reduce land sale prices, improve the efficiency of 167,000 civil servants and temporarily freeze their pay as possible solutions to ease the HK$100 billion (US$12.85 billion) deficit, experts have said, while admitting there are no simple fixes.

…city leader John Lee Ka-chiu said on Tuesday that “the government will start by cutting expenditure and increasing revenues”.

…[Economist] Simon Lee said Hong Kong has been too reliant on land sales and stamp duty for its income and needed to diversify its income sources in the long run by including levies such as sales tax.

Officials would be horrified at the idea of lowering land prices to stimulate sales and thus at least some revenues. Their assumption is: cling on to the land for long enough, and apartments must eventually come back to HK$20,000-plus per square foot, as God Himself ordained and carved in stone –  and the premiums will come flooding in.

Even more unacceptable would be the idea of cutting expenditure via a ‘temporary’ pay freeze for civil servants (assuming that ‘improved efficiency’ in practice means layoffs, which is a non-starter). If public-sector remuneration is 50% above that of the real world (and that’s a modest guess), it would take at least a decade for private-sector pay to catch up. Just admitting that such a gap exists would be unthinkable. Plus there’s the morale/loyalty angle.

Other potential spending cuts (assuming wasteful infrastructure projects are shelved, and big items like health, welfare and education remain intact) would only nibble at the deficit. 

That leaves a consumption tax – say 5% on all sales at shops, restaurants, utilities, etc. On the one hand, only the low-paid and poor, who have to spend most of their income on essentials, would really feel any pain. People on civil service salaries will barely notice a difference. The bad news is that sales taxes might in theory put off tourists, who as we all know are the most important and precious beings in existence.

Higher profits and salaries taxes would be more equitable, but now we’re getting blasphemous.

Ultimately, some sort of smaller government/higher taxes combination seems unavoidable – unless a miracle brings back the 1990s-2010s boom era.

In the background: gloomy prospects for the workshop of the world…

In a censored speech, economist Gao Shanwen says Beijing’s GDP and unemployment figures are (basically) false…

He said that if models from other country’s with burst property bubbles were applied to China, the country’s economy should have contracted by at least 2%, more likely by 3-4% in each of the last three years, though official figures have only reported a slowdown of 0.2 percentage points.

“The GDP growth rate has been overestimated by 3 percentage points each year, and by 10 percentage points cumulatively, which corresponds to the loss of 47 million employed people in urban areas,” Gao told the conference in the speech, a copy of which was posted by the U.S.-based China Digital Times website.

The WSJ looks at how developing countries – many supposedly friends of Beijing – are putting up barriers against Chinese manufactured goods…

A deluge of cheap Chinese goods washing over the developing world is jacking up tensions between China and the Global South, complicating Beijing’s plans to build alliances as it confronts escalating trade tensions with the U.S.  

With President-elect Donald Trump saying he plans to significantly increase tariffs on China, Beijing is hoping to unload more of its excess factory production to developing-world countries, from Indonesia to Pakistan to Brazil. 

But many of those countries are pushing back, as cut-price Chinese imports put pressure on their factories, killing jobs and blocking efforts to grow manufacturing at home. Many poorer countries have been counting on expanding manufacturing as the best way to propel their rise up the development ladder.

The article lists measures taken by Brazil, Indonesia, Bangladesh, South Africa and others to prevent Chinese imports from hollowing out their manufacturing sectors.

Michael Pettis comments….

This WSJ article lays out what is in effect an intractable problem of simple arithmetic. China represents 17% of global GDP and 30% of global manufacturing. Its current growth model requires that it increases its share further.

The US represents 23% of global GDP and only 17% of global manufacturing. 

if the two economies, who collectively comprise nearly half of global manufacturing, both try to increase their manufacturing shares, this requires that all other countries reduce their own manufacturing shares to accommodate them.

Not surprisingly, neither the EU nor most developing economies are interested in playing that role. So something must break – we cannot all raise or maintain our shares of global manufacturing. This is just arithmetic.