|
As China’s economy has continued to put up stellar economic growth in the midst of one of the worst global economic crises on record, it’s widely believed that China will lead the world out of its downturn and soon rise to global economic dominance.
So it’s no surprise that there was a lot of attention given to Chinese President Hu Jintao’s visit to Washington this week.
But those who have been swept up by this tide of popular sentiment might be surprised to hear that there’s an alternate scenario that’s equally plausible: China’s economy could represent a major and imminent threat.
Indeed, throughout the crisis, I’ve been making the case that China could be a big problem for the global economy for at least a couple of reasons …
Reason #1
China’s Currency Manipulation
China has gained economic prowess through maintaining an artificially weak currency — to corner the world’s export markets. When times were good, the rest of the world was happy to ignore the ultimate costs of China’s currency policy to the global economy.
But now that the world remains in flux, the Chinese currency manipulation has become a front-burner issue for its trading partners — most notably the U.S. And this is particularly an issue as long as global trade remains out of balance.
Moreover, its currency policy has given rise to currency wars, political divisions and protectionism as I laid out in my column last October.
We may find, though, that China’s currency policy will be moved to the backburner this year. The main reason: No one wants to see China slump. They realize that a significant slowdown in China’s economy would pose a more imminent threat to global stability.
Reason #2
China Boom Could Be Turning into a Bubble
We’ve seen a dramatic slowdown in Thailand and Malaysia, and now the easy-money-based spending in China is coming to a head, threatening its much-beloved growth story.
The speculative boom that drove a mass overbuild in Chinese infrastructure — and that spilled over into real estate and financial markets around the world — has done very little to build domestic demand for the country.
In short, we have to ask: Is China’s rapid growth sustainable? How much of it was driven by China’s easy-money policy responses to the global slowdown?
Remember: When the global economic crisis was at its peak, governments around the world responded by rolling out massive fiscal stimulus packages in hopes of kick-starting recovery. China, still growing around 6 percent, rolled out a package of its own — to the tune of 16 percent of GDP, by far the biggest in the world.
On top of that, the state-owned Chinese banks showered the land with new loans — and continue to do so today.
Take a look at the chart below. It shows the growth in money supply (indexed at 100) in China since late 2007, relative to the U.S.
You can see the explosive growth in China’s money supply, climbing 79 percent since the onset of the global economic crisis. That’s five times the rate of U.S. money supply expansion!
Now, the Chinese government is beginning to rein in that growth — in an attempt to curtail runaway real estate and food prices. Again, we must ask: Is that a recipe for a major slowdown in China?
Consider this: It was China that supplied cheap credit to the world, financing the unsustainable consumption boom in the U.S.
Therefore, it’s only fair to ask: As the other party to that boom, will China experience a bust of its own?
In this alternate scenario, instead of being the springboard of economic recovery for the world, which much of the world has embraced, it’s reasonable to expect that the Chinese story could end badly.
For a world that has been hitched to the idea that China can grow at a double-digit rate year in and year out, you now have to ask the ultimate question: What would the global economy look like if China slowed down to 5 percent?
Growth at 5 percent would be recession-like territory for China. It would threaten the employment of its billion-plus people, and could even pose the risk of a public uprising against the government.
What This Could Mean for Commodities
And the Sovereign Debt Crisis
Fitch Ratings reckons that a Chinese slowdown to 5 percent growth would result in a 20 percent plunge in global commodity prices.
Meanwhile, the most extensive study on global sovereign debt crises — by the academic team of Harvard Professor Kenneth Rogoff and Maryland Professor Carmen Reinhart — finds that, historically, falling commodities are a common trigger that can set off a contagion of sovereign debt defaults.
They also find that the decade-long credit boom is likely to be followed by a decade of deleveraging. Given that analysis, it’s equally possible that the decade-long boom in China could be in for a decade-long retrenchment.
Factor that scenario into a global economy that remains vulnerable to the growing sovereign debt crisis and you can conclude that a flight to safety is in the making.
Regards,
Bryan
{ 10 comments }
Aren’t graphs like the money supply comparison misleading when looked at in a vacuum? Shouldn’t money supply growth parallel growth of GDP? It could be quite appropriate for China’s money supply to have grown 79% while ours has stayed almost level if the rates of economic growth of both countries has shown a similar divergence.
No sense talk. Fed printed trillions of, trillions of money. What is the poblem with China? Commody Inflation though the whole world, Brazil, Korea, etc. Why do you blame China? Looks you hate China and always talking bad things about China.
One of the factors worrying China is the fact that our own Fed is keeping interest rates at near-zero and that this cheap money is flowing into China by the boatload causing inflationary pressures in their own backyard. They’re worried about the spike in Chinese real estate prices as speculators try to get in on the growth China is experiencing. The effect of a Chinese real estate market collapse would pull the rest of the world down with it especially since much of the world is turning to China as a source of growth and profits as their own markets continue to lag.
I spend my winters here in Bangkok. So too are many articles picked up
here is made in China….so too in Malaysia and Indonesia. So too around
the other parts of the world. So………????
Hi Bryan,
Have been following your articles for sometimes now. Your research are mostly well articulated and somewhat non conventional .But your view on China is very biased. I can’t help writing this email.You seem to belong to the self-centered China bashing camp. What amazes me is the US being the most advance nation on the planet earth can fall into such simple Chinese trick as currency manipulation Cheap Chinese goods or cheap credit? Can you not avoid buying those cheap goods which has kept inflation at bay and had enhanced productivity? Or is this plain old capitalism which you should be familiar?. Do you not think attempt to help finance the deficit by buying treasuries is also a sinister attempt from China too? Many years ago when Soviet Russia had a taste of free market, the price of bread skyrocketed and some Russian blamed capitalism, instead of increasing competition, the mod burned down the factory. Are we like those group? What need to change is US politician and citizen need to make positive changes and redress the structural problem. Do you think the Japanese or German or Jews are better business people?Don’t just blamed others for your woes. The issue is not just as simple as Washington want you to think! If you have not visited China, go there and check it out.
There seems everyone makes things complicated, perhaps to show how bright they are.
Straight forward. If one country has labour producing goods at say 50 cents an hour in a common currency and it costs say $8.00/ worker hour to live in country two, it doesn’t matter how smart or clever the businessmen are in country 2, they cannot compete in common markets.
If country 2 throws open its markets, the result is obvious.
Historically America has restricted access to its markets, now it doesn’t..
A rebalancing is obvious – tax, limiting market access or printing money are all methods. Which is the least painful? America is responsible for voting in gutless and incompetent politicians and as voters for accepting unsustainable bribes.
The Chinese take no prisoners in life or business.
Should Weiss want me to write for a small fee, you have my address
Good luck
Tim Hall
China’s Innovative Way of Skinning the United States!
Mark Twain’s, on point, used “more than one way to skin a cat”, in A Connecticut Yankee in King Arthur’s Court, follows: “she was wise, subtle, and knew more than one way to skin a cat”, that is, more than one way to get what she wanted. Thefreedictionary.com provides a conventional definition of beggar-thy’s-neighbor as: an international trade policy of competitive devaluations and increased protective barriers that one country institutes to gain at the expense of its trading partners. Under the guise of fostering ‘indigenous innovation’ in its economy, the Chinese government creatively applies its own, non-conventional, subtle version of beggar-thy-neighbor. Its version doesn’t entail the competitive devaluation of its own currency, which would enhance China’s exports and inhibits its trading partners’ exports. China’s ‘indigenous innovation’ version perpetrates an over-valuation of the currencies of one or more of its trading partners. This adversely affecting all that (those) trading partners’ trade, with all its (their) trading partners, not just trade with China. During the periods China pegged its currency to the U.S. Dollar, China’s version of beggar-thy-neighbor was 8 times as damaging to the U.S. economy as what the media refers to as “China keeping it currency undervalued”.
In November 2003, Warren Buffett in his Fortune, Squanderville versus Thriftville article recommended that America adopt a balanced trade model. The fact that advice advocating balance and sustainability, from a sage the caliber of Warren Buffett, could be virtually ignored for over seven years is unfathomable. Until action is taken on Buffett’s or a similar balanced trade model, by the powers that be, America will continue to squander time, treasure and talent in pursuit of an illusionary recovery.
Take a look at this article. What do you think? China has the worst human rights violations in the world for a country that is not at war.
http://fullcomment.nationalpost.com/2011/01/22/lawrence-solomon-china’s-fall/
First here is talking about economics. Second, how does trillions of dollar printing violate human right? Who gives them the right to take hard people’s saving? Does not this violate human right?
I have to agree with the comments above that see an unfair bias against China in this column. The truth is that the US Fed is printing money like it’s going out of style and lending it out at near-zero interest. This has created a huge opportunity for arbitrage, as the American institutional investors who get their hands on it carry it to other countries where they can take advantage of higher interest rates.
This is a continuation of the parasitical attempt by US finance capital to “make” profits out of thin air. Actually, China is in the difficult position of having to try to keep the entire global economy from falling apart even though it has limited political clout.