Jeremy Wallace

While Egypt’s regime is upended today, unlike some, this blog remains pivoted towards China.

Over the weekend, a very nerdy but important twitter back and forth occurred between Noah Smith (@noahpinion) and Damien Ma (@damienics) on the subject of a “hard landing” for China’s economy. Just what would entail such a hard landing was the real subject matter. Was it a sharp drop in growth rates year-on-year or a gradual decrease to a very low level of growth? Some of the language was inflected by the metaphor of an uncomfortable end to a plane flight, referring to landing gear, although for the most part the discussion focused on numbers that summarize economic activity–GDP growth rate changes.

Martin Wolf, on the other hand, goes with the same metaphor and takes off with it in a column for the Financial Times. There is a neat cartoon even.

The core of the piece is excellent. He presents reasons why a slowdown from 10% growth to 6% growth (or something even lower) can be difficult rather than desirable, which 6% growth still looks like from the doldrums of the United States or Europe.

First, investment in inventories must fall sharply, since its level depends on the growth of an economy, not on the level of activity. Think about it: in a stagnant economy, inventory accumulation would normally be zero. Again, other things equal, an economy growing at 6 per cent would need 60 per cent of the investment in inventories of one growing at 10 per cent. The immediate impact of this adjustment would be a sharp decline in investment in inventories, before their growth resumed at 6 per cent a year, from the now lower level. Moreover, businesses might well fail to anticipate the economy’s slowdown altogether, particularly after years of far higher economic growth. They would find themselves burdened with rapidly rising inventories and would then be obliged to slash inventories, and so levels of output, even further.

Second, investment in fixed capital must also fall sharply. Investment might have to fall by 40 per cent: all other things equal, in China that would imply a 20 per cent decline in GDP, which would evidently entail a deep (and unexpected) recession. …

Third, an investment-induced reduction in demand and activity is also likely to have a large downward impact on profits. That would impair corporate solvency and lower investment still further. Finally, a decline in the rate of economic growth, particularly one preceded by a very large credit boom, might have unexpectedly grim effects on the state of balance sheets. … But, in a more slowly growing economy, the jump in bad debts might prove huge.

My complaint is not so much about these claims as the framing device of the “hard landing.” He quotes David Levy of the Jerome Levy Forecasting Center on the subject:

[Levy] has asked the crucial question: what is China’s stall speed? The general view is that it is straightforward for China to move from 10 per cent to, say, 6 per cent growth over the coming decade. The implicit assumption is that “a rapidly expanding economy is like a speeding train; let up on the throttle and it slows down. It continues to roll along the track as before, just not as rapidly.” He argues, instead, that China is more like a jumbo jet: “In recent years, a couple of engines have not been working well, and the pilot is now loath to keep straining the remaining good engines. He is allowing the plane to slow down, but if it slows too much, it will fall below stall speed and drop out of the sky.”

I think that this gets it precisely wrong. First, the common use of the phrase “hard landing”  clearly points to the use of the plane as the dominant metaphor rather than the train.

More importantly, the Chinese economy is neither a train nor a plane. It is not a balloon nor a video game. It is an economy, which is a short way of referring to the billions of transactions and interactions that take place between individuals, companies, states, NGOs, and other entities in a territory that involve money. We cannot conceive of its full complexity, so we estimate summary statistics to try to wrangle the chaotic activity into something understandable and comparable. These statistics, particularly in an authoritarian country, can be questioned, but even if one can believe in them, the import of the cold numbers is difficult to intuit. And so we turn to metaphors, because people are animals, and we have spent millions of years interacting with real things that roll and fly, whereas our ability to reckon with 12 digit numbers has only been built up over the past century.

The Chinese economy is not going to bounce upon landing like a Dash-8 flown by a 31-year old thinking of his days in the Air Force. It is not going to roll into the station. Billions of money-inflected transactions will continue to take place inside of China. Some people will lose money that they had invested. Others will end up having to close their shops or sell property at less of a profit than they had hoped would materialize. Investors will be reluctant to put their money at risk in schemes to make more money in this place as opposed to other ones. This negative sense will likely exacerbate the situation.

It is possible that enough negative sentiment will emerge that whole classes of people will be upset about the situation and turn their anger towards others. Those others could be the Chinese Communist Party or the rich elites that have prospered during the previous decades of fast growth (and those groups surely overlap in large measure). Perhaps some will decide that the empty apartment on the 13th floor of the building that they live underneath should be theirs in a more fair world and simply decide to squat in it. Perhaps some will wonder why they should pay back their loans that they took to fund a college education that ended with a fancy robe but without that decent job staring at a computer screen all day in an air-conditioned office like they always dreamed of. Perhaps some will wonder why those in charge are still in charge when so much promise has evaporated.

No one will wonder about the quality of the metaphor. There won’t be time.