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ECONOMIC ALARM FOR CHINA? December 22, 2011

Posted by wmmbb in East Asia.
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Could it be that China too is heading into the economic doldrums. Where will that leave Australia’s bifurcated economic and security co-dependencies?

Paul Krugman in The New York Times on 18 December is calling a bust in the Chinese economy. The boom, like others that occurred in Japan and the US,
he suggests has been caused by a massive increase in construction induced by real estate prices and relying for credit on a shadow banking system, not subject to supervision. He admits it is difficult to know exactly what is happening in China, and while official figures may be unreliable, the recent news is alarming.

He writes:

The most striking thing about the Chinese economy over the past decade was the way household consumption, although rising, lagged behind overall growth. At this point consumer spending is only about 35 percent of G.D.P., about half the level in the United States.

So who’s buying the goods and services China produces? Part of the answer is, well, we are: as the consumer share of the economy declined, China increasingly relied on trade surpluses to keep manufacturing afloat. But the bigger story from China’s point of view is investment spending, which has soared to almost half of G.D.P.
[Investment spending has increased to almost half of GDP. This investment is going into real estate and construction.]
The obvious question is, with consumer demand relatively weak, what motivated all that investment? And the answer, to an important extent, is that it depended on an ever-inflating real estate bubble. Real estate investment has roughly doubled as a share of G.D.P. since 2000, accounting directly for more than half of the overall rise in investment. And surely much of the rest of the increase was from firms expanding to sell to the burgeoning construction industry.

Do we actually know that real estate was a bubble? It exhibited all the signs: not just rising prices, but also the kind of speculative fever all too familiar from our own experiences just a few years back — think coastal Florida.

And there was another parallel with U.S. experience: as credit boomed, much of it came not from banks but from an unsupervised, unprotected shadow banking system. There were huge differences in detail: shadow banking American style tended to involve prestigious Wall Street firms and complex financial instruments, while the Chinese version tends to run through underground banks and even pawnshops. Yet the consequences were similar: in China as in America a few years ago, the financial system may be much more vulnerable than data on conventional banking reveal.

Now the bubble is visibly bursting. How much damage will it do to the Chinese economy — and the world?

Some commentators say not to worry, that China has strong, smart leaders who will do whatever is necessary to cope with a downturn. Implied though not often stated is the thought that China can do what it takes because it doesn’t have to worry about democratic niceties.

To me, however, these sound like famous last words. After all, I remember very well getting similar assurances about Japan in the 1980s, where the brilliant bureaucrats at the Ministry of Finance supposedly had everything under control. And later, there were assurances that America would never, ever, repeat the mistakes that led to Japan’s lost decade — when we are, in reality, doing even worse than Japan did.

For what it’s worth, statements about economic policy from Chinese officials don’t strike me as being especially clear-headed. In particular, the way China has been lashing out at foreigners — among other things, imposing a punitive tariff on imports of U.S.-made autos that will do nothing to help its economy but will help poison trade relations — does not sound like a mature government that knows what it’s doing.

And anecdotal evidence suggests that while China’s government may not be constrained by rule of law, it is constrained by pervasive corruption, which means that what actually happens at the local level may bear little resemblance to what is ordered in Beijing.

I hope that I’m being needlessly alarmist here. But it’s impossible not to be worried: China’s story just sounds too much like the crack-ups we’ve already seen elsewhere. And a world economy already suffering from the mess in Europe really, really doesn’t need a new epicenter of crisis.

In February 2010, Mish Shedlock was prepared to forecast that the Chinese economy would blow up:

Once consequence of such an economic crisis, especially ironic in an economic led supposedly by a Communist government will be a heightened of economic inequality and other sources of social fracturing. The protest that would arise would be meet intense violence, as has happened in Egypt and the US. The democratic movement in China, as in other countries has gone underground, and economic dislocation, were it to happen, as elsewhere may lead to it emergence, and thus to the realization of one of the major fears of the Chinese leadership.

In the US, para-military repression seems to have worked for the moment on the Occupy movement, and in its own darkly ironic way, we are left with relying on a Russian news service to provide some form of update:

RT reports that OWS is not going away:

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