The Chinese economic miracle could still come crashing down

4:05 pm - February 15th 2011

by Guest    

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contribution by Ranjit Sidhu

With China overtaking Japan as the second biggest economy, economists are falling over themselves to tell us that in 10 years China will be bigger than the USA.

These were the same economists who were so confidently claiming in the 1980s that Japan was going to take over the USA in, yep, ten years. Lets take a step back. The state of the Chinese economy right now is flux.

There is a real fear the Chinese economy is overheating; inflation is high with food inflation rising 7.2% last year, a real fear of social unrest and a labour shortage.

This has lead to wage inflation that seems close to being out of control – in December Beijing city raised its minimum wage by 21% in January,Guangdong province rose by 26% .

Coupled with this is also a widespread fear of the Chinese housing bubble bursting-it seems all the factors are there; house prices having doubled in four years with an average apartment in Wuhan costing 29 times the average salary. The government having to tax people 40% on second homes to dampen the housing speculation.

The nature of the Chinese economic reporting does not help make it clear for us whether the growth in imports into the Chinese economy is due to a rise in domestic consumption or due to the effects of the Chinese Stimulus package.

Yu Yongding, the former member of the People’s Bank of China monetary policy committee and respected Chinese academic was scathing in an article in the China Daily, tellingly a government run paper:

The country’s investment rate now stands at more than 50 percent -….. Some local governments are literally digging holes and then filling them in to ratchet up the GDP

His judgement was frank:

So China has reached a crucial juncture: without painful structural adjustments, the momentum of its economic growth could suddenly be lost

The growing social tension was also laid bare, for once.

With the contrast between the opulent lifestyles of the rich and the slow improvement of basic living conditions for the poor fomenting social tension, a serious backlash is brewing.

A lack of clarity also prevents us from being sure of the consequences of China’s command economy- an example of this is the one child policy, which it sees as a success in limiting the population growth since 1979 , but will have the knock on effect of increasing the percentage of population over retirement age from 10% in 2000 to 25% in 2040 .

What history can tell us is that it is inevitable that every emerging economy will at some point need to change from a pure growth economy and refocus on innovation and creation it will be interesting to see how understanding the over-confident markets who have already factored in growth will be when this occurs in China.

Don’t take it from me, Premier Wen Jiabao stated China’s growth was: “unstable, unbalanced, uncoordinated and ultimately unstable” – something you don’t see reflected in The Economist’s graph.

The major concern with China is that social and economic cohesion are all built on a presumption of growth. If and when the bubble bursts, what happens after? That is the billion dollar question.

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Reader comments

And the Chinese army is deployed many times every year to quell unrest all over China. It wasn’t something I gave any thought to till I read Henning Mankell’s thriller The Man From Beijing but I checked and his research was impeccable, China is exporting its unemployed to Africa as part of its trade deals which are securing as many mineral resources as possible. Many of these deals are with regimes the west refuses to trade with because of human rights.

Broadly agree. A great blog on China for those interested:

Imo, China’s biggest problem is it’s absense of a functioning rule of law. This of course isn’t helped by the lack of democracy and representation and that too is going to be seen as more of an inhibitor when it comes to future growth.

Interestingly, the biggest (or maybe 2nd biggest – my memory is vauge) protest in China since the Tiananmen Sqare protests was in Shanghai by mainly middle class (although technicaly wealthy), home owning citizens who were protesting at the placement of a magnetic levitation train line that was too close to their house. They had health concerns. This group of people is only going to get bigger and at th emoment there isn’t an outlet for their concerns.

how understanding the over-confident markets who have already factored in growth will be

what markets are you talking about and what does “understanding” mean? It’s not as if our banks and pension funds all holding Chinese government bonds. Of course large unexpected changes in the Chinese economy would have ramifications all over the shop, prices changing, people canceling planned investments etc. but when all this happens, how will we know whether market have been “understanding” or not? Ah, you could be talking about China no longer wanting to buy our bonds. another reason to worry about our government debt!

I’m not sure I’d know a “pure growth economy” or one refocussed “on innovation and creation” if it dropped on my head either. History tells us it is inevitable, though.

[although the futurology power of anyone who predicted Sunderland Chelsea result should be respected]

Imo, China’s biggest problem is it’s absense of a functioning rule of law.

I’m not entirely convinced. India has a bigger problem with corruption (IMHO) and yet they don’t have similar problems. In fact their problem is that they can’t get runaway growth going!

Hmm, could if be that the lack of rule of law (and the wider undemocratic system) is what has/is enabling China’s runaway growth? I don’t really know enough about India to compare the two – but I did live in China for a couple of years, and invariably most of the problems I came across were in some way rule of law related. In fact, that Peking Duck blogger who’s analysis I generally rate had this reponse to an interview about China’s situation:

“Your blog has long been an unabashed critic of some of China’s harsher policies. If you were given the power to make just one monumental change in China tomorrow – what would it be?

Richard: First, I hope you’ve noticed after I came back in 2006 I tried to give a more nuanced picture of China. I understand its challenges better, and i know it’s not a matter of black and white, good and evil. The monumental change I’d implement, should Hu Jintao ever ask me, would be rule of law with an untouchable supreme court at the top. This would provide checks and balances, deter corruption and help ensure that no one was above the law. The laws are all there, but China has no system for enforcing them. This can lead to outrageous crimes by local authorities and literally no hope for justice from the disenfranchised. ”


And now they are running out of water, resulting in crop failure then…watch out.
The biggest bubble since that last big bubble.

“how understanding the over-confident markets who have already factored in growth will be”

Markets aren’t stupid – there are plenty of market commentators out there already warning of the dangers of a China bubble…and quite a few funds out there betting on it too. Doesn’t mean a collapse will happen though. Predicting the future isn’t easy.

I would say that China becoming a larger economy than the US is a dead certainty.

As one wag has pointed out, For 19 of the past 20 centuries China has been the largest economy on the planet.

The reason isn’t that I am convinced that Chinese living standards are going to surpass US anytime soon: or even ever.

It’s that there are 300 million Americans and something like 1.3 billion Chinese. The Chinese only need to get to be 1/4 as rich, each of them, as Americans and the Chinese economy will be larger than the US.

Using PPP figures this means that China only has to move from it’s current level, around El Salvador or Bosnia, to around Brazil or Romania.

I’d say that’s a dead certainty, whatever happens to the current bubble.

Thank you all for your comments:

1. Geoff&Sunny Rule of Law and democracy, or lack it, I consider very important, but didn’t have room to touch on here. There is the old argument that political freedom and economic freedom go hand in hand. Personally, my view is that when people become more affluent and confident it seeks a greater say in things, for me it is more a human instinct rather then political philosophy- A burgeoning middle-class could be encompassed by the present government, but if all those millions of workers in those workshop felt they were missing out…..

2. To Luis Enque and Tyler. I would never call market stupid, well almost never, my point is that they will not be in anyway factoring the social cost of their actions if they decide to start removing or cutting back the current $100 billion being invested in China,

Luis- we must understand that China is a command economy- the strategy is set centrally- it was a strategy to become a export driven growth economy. With labour prices rising, the economy needs to develop elsewhere, hopefully with a large internal market and I am not sure this is happening Yu Yongding again put it better then I can:

“After decades of rapid expansion, China has become the workshop of the global economy. The problem is that it is no more than a workshop. A lack of innovation and creation are the economy’s Achilles’ heel.

For example, in terms of volume, China has become the world’s largest car producer, churning out 17 million vehicles this year. But the proportion of models developed by domestic carmakers is negligible.

In an era of rapid technological progress, creativity and innovation, the global economic landscape can change rapidly. Without a strong capacity for innovation and creativity, even a giant has feet of clay. And when a giant falls, many get hurt.”

All I wanted to do is add balance to the “china is amazing” view that seems so prevalent.

(Finally Luis, forget SUnderland v Chelsea- predicting Liverpool to win and Morieles to score against them was sweeter !)

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