Joe Stiglitz: Why the world economy's malaise continues

[ish mailian]

WORLD  ASIA  CHINA NEWS

Glut of Chinese Goods Pinches Global Economy

Plants in China keep producing as growth falls, fueling deflationary
pressure world-wide

A worker loads a truck with tires from Del-Nat Tire, a distributor in
Memphis, Tenn., that found itself stuck with high-priced inventory after
tire prices declined because of overproduction in China. ENLARGE

A worker loads a truck with tires from Del-Nat Tire, a distributor in
Memphis, Tenn., that found itself stuck with high-priced inventory after
tire prices declined because of overproduction in China. PHOTO: STEVE JONES
FOR THE WALL STREET JOURNAL

By LINGLING WEI,  BOB DAVIS and  JON HILSENRATH

June 1, 2015 10:38 p.m. ET

164 COMMENTS

DONGYING, China— Liu Zijun built a thriving tire-manufacturing business
when China’s economy was roaring ahead. But when China’s growth weakened,
he had to cut prices to keep his business afloat.



Now the pain felt by industrialists such as Mr. Liu is reverberating across
the globe, showing how China, once the world’s most reliable source of
growth, is adding to deflationary pressures world-wide.



In the rubber-tree fields of Southeast Asia, planters are scrambling to cut
prices for their latex fast enough to keep customers in China happy. In the
U.S., tire distributors are marking down prices and some are cutting staff
as China floods the U.S. with discounted goods from unneeded factories.



“The growing production capacity in China changed the U.S. industry,” said
Brian Grant, chief executive of Del-Nat Tire Corp., a Tennessee tire
distributor that exited the business early this year after chalking up
losses on overpriced inventory it had bought before prices fell.



A dozen years ago, low-cost workers from the countryside poured in to
China’s factories, helping bring down the cost of everything from T-shirts
to tricycles.



Then the country’s booming demand for commodities such as oil and cotton
helped to reverse that downward inflation trend, as natural-resource prices
surged. Now, China’s excess manufacturing capacity and slowing growth rate
are changing the equation again, putting renewed downward pressure on
prices.



Milk producers in New Zealand, coal miners in Australia and sugar growers
in Brazil have been forced to cut their prices after finding they had
overestimated commodity demand from China. At the same time, Chinese
manufacturers, stung by their country’s economic slowdown and excess
capacity, are flooding export markets with finished goods such as tires,
steel and solar panels.



RELATED READING



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How China’s Taste for Milk Actually Hurt the Value of New Zealand’s Cows

Global deflationary pressures emanating from China are symptomatic of wider
demand issues gripping economies from South America and Europe to much of
Asia. China is far from the sole cause of price weakness; others include
new crude-oil supplies in North America and sluggish growth in Europe. But
China’s sheer size, reach and central role in global manufacturing make it
a potent force.



Consumer prices for tires in the U.S. have fallen in 23 of the past 32
months, by a total of 6.5% since July 2012, after rising steadily a few
years earlier, Labor Department statistics show. Prices of all goods
imported to the U.S. directly from China have fallen in 20 of the past 38
months, by 2.2% in all.



For U.S. consumers, that is good news. But for policy makers and corporate
executives, declining prices present a real challenge. The declines can sap
profitability, deter investment and block wage growth, all of which are
needed to help the world break out of its years of underwhelming growth.



U.S. prices for services, which are affected by domestic factors such as
the cost of labor, are running close to the Federal Reserve’s target of 2%
annual inflation. They could move higher still as the job market tightens.



But U.S. goods prices, which are more susceptible to global trade winds
influenced by China, have been running well below the Fed’s inflation
target since 2012, and entered outright deflation in 2013.



Inflation below target

Overall, the Federal Reserve’s preferred measure of annual U.S. consumer
price inflation was 0.1% in April. Soft prices of commodities, particularly
oil, and declining import prices have been contributors. This U.S.
inflation measure hasn’t been above 2% since early 2012.



In Europe, falling consumer prices earlier this year prompted the European
Central Bank to embrace aggressive monetary-easing measures as a way to
drive growth. In April, European consumer prices were flat.



China’s role in weak price growth world-wide is becoming increasingly
apparent as the country struggles to absorb all of the plant capacity it
has added. Prices at the factory in China have fallen for more than three
years, pressuring the People’s Bank of China to ease credit conditions and
bring down borrowing costs in hopes of spurring consumption and broader
economic growth.



Still, PBOC officials worry that such moves could make matters worse, by
channeling money to industries that already have excess capacity and are
looking to export away their problems. The risk is that cheap money spurs
even more expansion of Chinese manufacturing capacity.



With China’s slumping construction industry requiring less steel than had
been expected, the country has become a massive global exporter of the
metal, weighing on global prices.



Last year, China exported 94 million metric tons of steel, more than the
total output of the U.S., India and South Korea, the world’s third, fourth
and fifth largest producers.



Too much capacity

UBS analysts estimate the world has excess steel-production capacity of 553
million metric tons a year, much of it in China. That is enough to build
more than 10,000 modern aircraft carriers a year, or the Eiffel Tower
75,000 times annually.



The price of a common steel product called hot-rolled coil has dropped by
44% since March 2012, according to McGraw Hill’s Platts unit. Other prices
are falling with it, including those for iron ore, coking coal and scrap
metal.



A fundamental mismatch of supply and demand haunts other industries. In
2013, Chinese authorities named 19 sectors plagued by overcapacity in the
country, including cement, aluminum, copper, chemical fiber and paper.



“This has happened again and again in markets, but this was on a super
scale,” said Daniel Yergin, vice chairman of the Colorado market-research
firm IHS Inc. “People invest, but they don’t see what everybody else is
doing at the same time.”



The troubles in China’s tire industry provide a glimpse of how pernicious
deflationary pressures can be.



Between 2000 and 2013, China’s tire production soared threefold to about
800 million tires a year as the country grew into the world’s biggest auto
market, according to Freedonia Group, a market-research firm in Cleveland.
Producers exported many of those tires, occasionally drawing complaints
from tire industries in the U.S., Brazil, Turkey, India, Colombia and Egypt
that China was dumping its excess supplies on their markets. All six
nations imposed tariffs on Chinese tires.



The problem has worsened dramatically since 2009. Chinese tire producers
expanded rapidly by taking advantage of the easy credit that was part of
the government’s post-financial-crisis economic stimulus. By the time
China’s economic growth rate slowed to about 7% this year, output was far
outpacing demand.



According to the China Petroleum and Chemical Industry Federation, the more
than 300 tire makers in China operate at 70% of capacity, far below the 85%
that economists say is needed to generate profits. Chinese tire exports
increased tenfold between 2000 and 2013.



Guangrao, a county in eastern China, is home to about 200 tire factories in
an area dubbed Rubber Valley. For years, the valley’s skyline was dominated
by construction cranes hoisting up new factories.



The Guangrao county government, which needs tire companies’ tax revenue, is
trying to keep them in business. Doing so saves jobs in the short run. But
it also puts off a consolidation that might make the survivors profitable.



One manufacturer, Deruibao Tire Co., turned to the Guangrao government for
help in arranging a sale that would prevent it from filing for bankruptcy,
the Guangrao government said. Helping the company stay in business means
little or no capacity will be reduced. Privately owned Deruibao declined to
comment.



Family-owned Shandong Yongsheng Rubber Group, where Mr. Liu is chief
executive, is another local company that has struggled. It began making
rubber tubes in 1986 and grew into one of China’s largest tire exporters.



Figuring that demand would continue soaring, Yongsheng kept investing. The
company spent roughly 1.5 billion yuan ($242 million) to finish two new
plants last year, raising its capacity to 18 million tires a year from 15
million.



It became clear executives had overestimated demand.



Del-Nat Tire CEO Brian Grant, seen here in a warehouse, sold the inventory
at a loss. ENLARGE

Del-Nat Tire CEO Brian Grant, seen here in a warehouse, sold the inventory
at a loss. PHOTO: STEVE JONES FOR THE WALL STREET JOURNAL

“I’ve been with the company for six months, and the prices of our products
have already dropped four times,” Huang Jianning, a Yongsheng salesman,
said in February. They now average about 200 yuan, or $32, per tire.



Mr. Liu has mothballed two factories to try to keep his business on track.



Rubber Valley’s problems have rippled out to other countries, including
ones where planters produce the raw material for tires.



Rubber trees take about seven years to mature. Planters had to decide in
2007—when China’s gross domestic product expanded by 14.2%—how many trees
to plant to meet demand in 2014.



When it was time to harvest, the Chinese economic growth rate had fallen by
about half.



Kampanart Pornpromvinij, a Thai planter, bought 395 acres over the past
decade for rubber-tree cultivation. He thought demand and prices would keep
rising.



Now, more than 316 acres of his trees are maturing. But the price of the
milky white sap, called latex, that is processed into rubber is down 60%
from its high four years ago. Mr. Kampanart has continued shipping latex at
a loss to Mr. Liu’s Yongsheng and other factories, so he can maintain
relationships and gain at least some revenue.



In the U.S., the sliding prices are a boon to tire shoppers. Gene Endicott,
a Memphis gas-station mechanic, said he used his tax refund in February to
buy tires priced at $139 apiece for his Dodge Caravan.



“When I saw what tires were selling for, I jumped on it,” he said.



For some retailers and distributors, though, the deflation has meant
losses, layoffs and trade fights.



At Del-Nat, prices fell so quickly they began to undermine the Memphis,
Tenn., distributor’s business model.



Del-Nat had been buying a large share of its tires from Yongsheng,
reselling them at a markup. When Yongsheng and other Chinese companies
started cutting prices, Del-Nat was stuck with older, higher-priced
inventory it couldn’t sell at a profit.



“Management had a hard time getting over the fact that prices were going
down and to turn the product, they had to reprice it, even at a loss,” said
Mr. Grant, a 33-year-old turnaround specialist recruited last year as
Del-Nat chief executive. “Instead of minimizing losses, they sat and hoped
for a rebound.”



Tariff issue

Matters grew worse after low-price exports by Yongsheng and other Chinese
tire makers caught the attention of the U.S. government last year,
triggering a tariff action that led to even more setbacks for Del-Nat.



The Commerce Department was getting complaints from workers in U.S. tire
factories, who argued that Chinese tire producers benefited from improper
subsidies such as tax credits.



Commerce zeroed in on Yongsheng, peppering the company with questions.
Relations between the Chinese company, which declined to answer Commerce’s
queries, and U.S. investigators became so poisonous that Commerce labeled
Yongsheng a “non-cooperating party.” The Chinese company “significantly
impeded” its investigation, Commerce said in a document explaining a
preliminary ruling in November.



In that preliminary action, the U.S. tagged Yongsheng with an 81.29%
tariff. A final decision is expected this summer.



Mr. Liu said his company withdrew from the Commerce investigation because
it couldn’t provide “in a very short period” all of the detailed
information requested. He said it would ask the department to review its
decision next year if it puts in place a stiff tariff, as expected by many
in the U.S. tire industry.



ENLARGE

Recognizing that its tires would probably become uncompetitive in the U.S.
because of the tariff on them, Yongsheng stopped shipping orders to
America. That left Del-Nat in Memphis without the main supplier for some of
its best-selling brands. Losing money already, Del-Nat felt it didn’t have
time to find alternative suppliers.



“We were done; we couldn’t rebound,” said Mr. Grant, its CEO.



He quickly sold the distributor’s inventory in January 2015 at what he
calls a “distressed” price of $23 million, or about 85% of what Del-Nat had
paid for it. Half of the company’s 52 employees have left or been laid off;
the others are looking for jobs from the purchaser of the Del-Nat warehouse.



“A tremendous amount of capacity came on line [in China] before people
realized it wasn’t sustainable,” Mr. Grant said. “By then, it was too late.”



— Wilawan Watcharasakwet contributed to this article.



Write to Lingling Wei at lingling.wei at wsj.com, Bob Davis at
bob.davis at wsj.com and Jon Hilsenrath at jon.hilsenrath at wsj.com



Corrections & Amplifications:

Freedonia Group is a market-research firm in Cleveland. An earlier version
of this article misspelled Freedonia as “Fredonia.” (June 2, 2015)

On Fri, Jan 15, 2016 at 1:50 PM, ish mailian <ishmailian at gmail.com> wrote:

> I respectfully withdraw from the discussion; I can't go round on this one
> more time, sorry.
>
> On Fri, Jan 15, 2016 at 9:54 AM, Robert Mahnke <rpmahnke at gmail.com> wrote:
>
>> If what you're talking about is what's in that Japan Times piece, it's
>> nonsense. If not, you haven't tried to explain.
>>
>> It's easy to explain where the shortfall in demand came from: the shock
>> in 2007. Demand has never recovered. If you want to say we have too much
>> supply, you need to explain how that could be. One can do this in a
>> particular sector (say, cars or housing). But what's your story about the
>> global economy?
>>
>> Sent from an iPhone; pls xcse typos.
>>
>> On Jan 14, 2016, at 23:28, ish mailian <ishmailian at gmail.com> wrote:
>>
>> Krugman is shooting away at his favorite target, the idiots on the Right
>> who argue, mostly from some puritan ideology and not from any economic
>> theory, that belt tightening is the best way to feed the poor. Though he
>> sets his favorite theory against their favorite theory, the piece is not
>> economics but politics.
>>
>> And, while he is absolutely correct, his piece has nothing to do with
>> what I am talking about.
>>
>> On Fri, Jan 15, 2016 at 2:06 AM, ish mailian <ishmailian at gmail.com>
>> wrote:
>>
>>> Yeah, he's right about the war on demand, but I'm not talking about
>>> that.
>>>
>>>
>>>
>>> On Thu, Jan 14, 2016 at 8:02 PM, Robert Mahnke <rpmahnke at gmail.com>
>>> wrote:
>>>
>>>> It's a little dated, but this post is still quite relevant, apparently:
>>>>
>>>> http://krugman.blogs.nytimes.com/2011/01/24/the-war-on-demand/
>>>>
>>>> On Thu, Jan 14, 2016 at 4:19 PM, David Morris <fqmorris at gmail.com>
>>>> wrote:
>>>>
>>>>> That's what I thought.  A very biased author without a story,
>>>>> confusing everything in order to attack excess debt.
>>>>>
>>>>> Thanks,
>>>>> David Morris
>>>>>
>>>>>
>>>>> On Thursday, January 14, 2016, Robert Mahnke <rpmahnke at gmail.com>
>>>>> wrote:
>>>>>
>>>>>> That piece (the Japan Times op-ed from 2012) is gobbledegook.  In the
>>>>>> right circumstances, it makes a lot of sense to talk about a bubble
>>>>>> creating over investment in certain areas, leading to an excess of supply
>>>>>> over what a market in equilibrium (not a bubble) will demand.  Arguably,
>>>>>> you have had this situation in the auto industry, where national
>>>>>> governments subsidize their own makers. But to say that this is happening
>>>>>> across the global economy is nonsense, a slick label without a story behind
>>>>>> it.
>>>>>>
>>>>>> The author says there is "excess labor"?  What does that mean?  Too
>>>>>> many people have been born?  Persuaded to enter the economy instead of
>>>>>> loafing in unemployment.  You have high unemployment because there aren't
>>>>>> enough jobs, which is to say there is insufficient demand for the labor we
>>>>>> have.
>>>>>>
>>>>>> The author also talks about excess capacity.  How does he know the
>>>>>> problem is excess capacity instead of absent demand?  "Prices of digital
>>>>>> home appliances are going down at an accelerating speed, and a new model is
>>>>>> sold at a 50 percent discount within six months of its launch. This is
>>>>>> proof that the global economy is in excess supply."  If you think that's
>>>>>> proof of anything other than sloppy thinking, I have a bridge to sell you.
>>>>>>
>>>>>> His third problem is excess debt, and there the reason for this piece
>>>>>> is clear.  The author is hostile to fiscal stimulus, and clearly has
>>>>>> reasoned backwards to attack the case for it.  The case for stimulus, and
>>>>>> what we could do about the secular stagnation, can be another conversation,
>>>>>> but the only way to read this piece and to think that it rebuts what
>>>>>> Stieglitz wrote is to have started with that as a belief and to have
>>>>>> searched for confirmation.
>>>>>>
>>>>>> On Thu, Jan 14, 2016 at 3:19 PM, ish mailian <ishmailian at gmail.com>
>>>>>> wrote:
>>>>>>
>>>>>>> Maybe this will help?
>>>>>>>
>>>>>>>
>>>>>>> http://www.japantimes.co.jp/news/2012/11/05/business/excess-supply-not-lack-of-demand-weighing-on-the-global-economy/#.VpganfkrIb1
>>>>>>>
>>>>>>> On Thu, Jan 14, 2016 at 5:41 PM, Mike Weaver <mike.weaver at zen.co.uk>
>>>>>>> wrote:
>>>>>>>
>>>>>>>> It's not really about production, it's about distribution.
>>>>>>>>
>>>>>>>> On 14/01/2016 22:12, David Morris wrote:
>>>>>>>>
>>>>>>>> Does the article say deceased demand isn't the cause of over
>>>>>>>> supply?  Since I can't read it...
>>>>>>>>
>>>>>>>> David Morris
>>>>>>>>
>>>>>>>> On Thu, Jan 14, 2016 at 4:08 PM, ish mailian <ishmailian at gmail.com>
>>>>>>>> wrote:
>>>>>>>>
>>>>>>>>> OK, but if demand is not declining, the price level is not
>>>>>>>>> increasing, the story is supply. That's the story, Gerry.
>>>>>>>>>
>>>>>>>>> On Thu, Jan 14, 2016 at 4:59 PM, David Morris <fqmorris at gmail.com>
>>>>>>>>> wrote:
>>>>>>>>>
>>>>>>>>>> Lack of demand is one of the basic causes of over-supply (glut),
>>>>>>>>>> and that lack of demand might be caused by any number of things, like lack
>>>>>>>>>> of money (liquidity). Overproduction (exceeding demand) might be another
>>>>>>>>>> cause.  Cheap money would not be one of its causes.
>>>>>>>>>>
>>>>>>>>>> David Morris
>>>>>>>>>>
>>>>>>>>>> On Thu, Jan 14, 2016 at 3:42 PM, Robert Mahnke <
>>>>>>>>>> rpmahnke at gmail.com> wrote:
>>>>>>>>>>
>>>>>>>>>>> When demand exceed supply, how do you distinguish between "a
>>>>>>>>>>> supply story" and a demand story?
>>>>>>>>>>>
>>>>>>>>>>> On Thu, Jan 14, 2016 at 1:31 PM, ish mailian <
>>>>>>>>>>> ishmailian at gmail.com> wrote:
>>>>>>>>>>>
>>>>>>>>>>>> Sorry about that; I thought it was a free article. It's an
>>>>>>>>>>>> excellent article. And yes, it is focused on China, but the overproduction
>>>>>>>>>>>> is not just a China story.
>>>>>>>>>>>>
>>>>>>>>>>>> The super capacity that was built to meet the expected super
>>>>>>>>>>>> demand of the developing and emerging growth economies, in China and
>>>>>>>>>>>> elsewhere, is the story, a supply story.
>>>>>>>>>>>>
>>>>>>>>>>>> On Thu, Jan 14, 2016 at 4:07 PM, David Morris <
>>>>>>>>>>>> fqmorris at gmail.com> wrote:
>>>>>>>>>>>>
>>>>>>>>>>>>> This article is behind a paywall, but if the first two
>>>>>>>>>>>>> sentences portend its content, then it seems to be saying that a glut of
>>>>>>>>>>>>> Chinese goods is slowing growth.  More demand would be the solution to this
>>>>>>>>>>>>> problem.  Lack of demand is its cause.
>>>>>>>>>>>>>
>>>>>>>>>>>>> David Morris
>>>>>>>>>>>>>
>>>>>>>>>>>>> On Thu, Jan 14, 2016 at 2:56 PM, ish mailian <
>>>>>>>>>>>>> ishmailian at gmail.com> wrote:
>>>>>>>>>>>>>
>>>>>>>>>>>>>> Because it's true.
>>>>>>>>>>>>>>
>>>>>>>>>>>>>>
>>>>>>>>>>>>>> <http://www.wsj.com/articles/glut-of-chinese-goods-pinches-global-economy-1433212681>
>>>>>>>>>>>>>> http://www.wsj.com/articles/glut-of-chinese-goods-pinches-global-economy-1433212681
>>>>>>>>>>>>>>
>>>>>>>>>>>>>> On Thu, Jan 14, 2016 at 3:49 PM, Robert Mahnke <
>>>>>>>>>>>>>> rpmahnke at gmail.com> wrote:
>>>>>>>>>>>>>>
>>>>>>>>>>>>>>> Why do you say that?
>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>> On Thu, Jan 14, 2016 at 12:37 PM, ish mailian <
>>>>>>>>>>>>>>> ishmailian at gmail.com> wrote:
>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>> The world is not not suffering from too little demand but
>>>>>>>>>>>>>>>> with too much supply and with too much capacity.
>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>> On Thu, Jan 14, 2016 at 3:00 PM, David Morris <
>>>>>>>>>>>>>>>> fqmorris at gmail.com> wrote:
>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>> The economics of this inertia is easy to understand, and
>>>>>>>>>>>>>>>>> there are readily available remedies. The world faces a deficiency of
>>>>>>>>>>>>>>>>> aggregate demand, brought on by a combination of growing inequality and a
>>>>>>>>>>>>>>>>> mindless wave of fiscal austerity. Those at the top spend far less than
>>>>>>>>>>>>>>>>> those at the bottom, so that as money moves up, demand goes down. And
>>>>>>>>>>>>>>>>> countries like Germany that consistently maintain external surpluses are
>>>>>>>>>>>>>>>>> contributing significantly to the key problem of insufficient global demand.
>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>> At the same time, the U.S. suffers from a milder form of
>>>>>>>>>>>>>>>>> the fiscal austerity prevailing in Europe. Indeed, some
>>>>>>>>>>>>>>>>> 500,000
>>>>>>>>>>>>>>>>> <http://thinkprogress.org/yglesias/2011/07/08/263588/the-conservative-recovery-continues-2/> fewer
>>>>>>>>>>>>>>>>> people are employed by the public sector in the U.S. than before the
>>>>>>>>>>>>>>>>> crisis. With normal expansion in government employment since 2008, there
>>>>>>>>>>>>>>>>> would have been two million more.
>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>> On Thu, Jan 14, 2016 at 1:39 PM, Robert Mahnke <
>>>>>>>>>>>>>>>>> rpmahnke at gmail.com> wrote:
>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>>> <http://www.huffingtonpost.com/joseph-e-stiglitz/world-economy-2016_b_8908560.html?utm_hp_ref=world>
>>>>>>>>>>>>>>>>>> http://www.huffingtonpost.com/joseph-e-stiglitz/world-economy-2016_b_8908560.html?utm_hp_ref=world
>>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>>
>>>>>>>>>>>>>>
>>>>>>>>>>>>>
>>>>>>>>>>>>
>>>>>>>>>>>
>>>>>>>>>>
>>>>>>>>>
>>>>>>>>
>>>>>>>>
>>>>>>>
>>>>>>
>>>>
>>>
>>
>
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