In multiple posts over the past year, I’ve taken a fairly contrarian view of China’s current position in the world. While certain media know-betters write purple prose about China’s supposed invincibility and its inevitable rise in the world, I’m less convinced. In my untutored view, China’s economy cannot be separated from its centralized political system and the endemic corruption that goes with it.
Ambrose Evans-Pritchard of the UK Telegraph also thinks that claims of Chinese ascendancy are overblown. In his view, China’s been playing a risky game of labor arbitrage, providing ever more manufacturing capacity at the expense of Western workforces while at the same time opening floodgates of ill-managed credit into its own economy. As a result, China’s economy is in a delicate state, thereby making it the world’s biggest risk.
Mr Hu sounded conciliatory last week. China is taking “vigorous” steps to cut reliance on exports, still 39pc of GDP. “We want to increase people’s ability to spend,” he said.
Beijing is indeed boosting pensions and extending health insurance to the countryside so that people feel less need to save, but cultural revolutions take time. All we have seen so far are “baby steps”, says Morgan Stanley’s Stephen Roach.
The reality is that much of Beijing’s $600bn stimulus has been spent building yet more plant and infrastructure so that China can ship yet more goods, or has leaked into property and stocks.
Credit has exploded. Allocated by Maoist bosses for political purposes, it has become absurd. China is rolling as much steel as the next eight producers combined. It is churning more cement than the rest of the world. Fixed investment is up 53pc this year. Once you know that Hunan authorities have torn down two miles of modern flyway so that they can soak up stimulus by building it again, or that the newly-built city of Ordos is sitting empty in Inner Mongolia, you know what must come next.
And speaking of fixed investment, let’s take a look at Ordos, the new – and empty – city in Inner Mongolia built for the specific purpose of boosting GDP. As a monument to the folly of central planning, this can’t be beat.
So, when the “investment” bubble bursts and Chinese bank credit tightens, what then? If China is not able to resume exports and with hundreds of millions idle, what happens to China – and to us?
MOODY ADDS: I disagree with [Evans-Pritchard's] assessment that the US can shelter itself from China.
The fact is that the US/China economic entanglement is so entrenched that it has dramatically limited each side’s options. The US is so dependent on outside money to fund the every-growing deficit that if China were to flood the world market with Treasuries then US interest rates would have to go up. I don’t see how unilateral capital controls in the US would prevent this scenario–unless he means that the US would force citizens to buy treasuries.
The scary part is that [Evans-Pritchard] is correct that China is the biggest threat. Through communist “planning” they have built an unsustainable economy driven by politics not economics. They try to keep the monster alive by feeding it liquidity . . . and more liquidity . . . and more liquidity. Then they hide it via a non-transparent banking system that would be insolvent several times over if subject to US standards. It’s not a matter of if, but only a matter of when this house of cards comes tumbling down sparking a global economic crisis.
UPDATE: Check out Tyler Cowen’s November 28 New York Times piece, “Dangers of an Overheated China”. H/T to the Economist’s View.
