Confusing China With the CCP

I think that Robert Samuelson is unduly worried about China:

On any list of calamities threatening the world economy, a China crash ranks at or near the top. Just what would constitute a “crash” is murky. Already, China’s sizzling rate of economic growth has declined from 10 percent annually — the average from the late 1970s until 2011 — to 7 percent, which is still high by historical standards. The question is whether the deceleration continues and growth goes much lower.

A faltering China could tip the world back into recession. Because China is a huge customer for raw materials (grains, metals, fuels), their prices would remain depressed. China’s surplus capacity of basic industrial goods, such as steel, would be increasingly exported, also depressing prices. This would dampen any recovery in global business investment. Confidence would suffer.

[…]

Housing looms as the largest drag on China’s growth because it amounts to about 25 percent of the country’s GDP, including major supply industries such as steel, cement and glass, Prasad says. With housing supply exceeding demand, building is already slowing. Housing prices are down roughly 6 percent from their recent peak. The decline will go to 10 percent, says economist Yukon Huang of the Carnegie Endowment for International Peace.

Compounding this weakness is a slackening of local government spending on infrastructure projects (roads, airports, hospitals). To finance these projects, local government debt surged from about 6 percent of GDP in 2008 to 33 percent of GDP in mid-2013, according to the global bank UBS. The central government is now trying to slow the growth of this debt.

for a simple reason. I think he’s confusing China with the Chinese Communist Party. I don’t think there’s any doubt that a hard landing for the Chinese economy would be a disaster for the CCP. Their strategy has been to encourage local governments to engage in frivolous and frequently corrupt infrastructure spending and then to hide the non-productive loans within China’s opaque banking system which has retained that quality despite the obligations the country assumed when it gained membership in the World Trade Organization. Meanwhile, well-heeled Chinese, frequently party members, have used their corrupt earnings to purchase real estate abroad, particularly in the U. S. and Canada. These purchases by non-resident Chinese nationals amounted to $22 billion in 2014 alone and they’ve been increasing every year. It’s pretty obvious these purchases are a “golden parachute”.

Meanwhile, half of China’s people are subsistence farmers and 13% of the population are still among the world’s poorest, living on a dollar a day. That’s 200 million people, a number the size of the entire U. S. population in 1970.

China needs a lot of things. It needs an economy less dependent on exports and ill-conceived infrastructure spending. It needs to import more, particularly more food. It needs a more transparent banking system. It needs an exchangeable currency. It needs a robust system of civil law, something without which enforcing China’s environmental laws (in theory more stringent than ours; in practice non-existent) will be impossible. It needs to stop polluting its earth, water, and air. It needs to spend less on prestige projects and its military. It needs a more equitable distribution of the national income (however bad our problem of income inequality is, China’s is that much worse). It needs political freedom. It needs liberal democracy. It will have none of those things as long as the CCP is in charge.

If a hard landing for the Chinese economy results in the ouster of the CCP, it would be a blessing for China.

Economic turmoil in China would be hard on some countries, particularly Australia, Brazil, and South Africa. It would be hard on some U. S. companies, e.g. Apple which has put a lot of its eggs in the Chinese basket. How exposed are we really to a severe Chinese downturn?

Not really, I think. Chinese real estate purchases account for less than 1% of total U. S. real estate sales. U. S. exports to China account for less than 1% of GDP. Imports from China would quickly be replaced by imports from elsewhere in the developing world or even from increased domestic production. It is possible that economic downturn in China could be a boon to the U. S. That’s the nature of a balance of payments as lopsided as ours is with China. China isn’t alone in that. It’s true of many other countries and in particular Japan. The Chinese and Japanese need us a lot more than we need them.