At PBS News Hour economist Eswar Pasad muses over the future of the Chinese economy, wondering if it will collapse like a house of cards?
There are legitimate reasons to be concerned about the brittleness of China’s economy. Moreover, its political structure appears to have become even more rigid under President Xi Jinping, raising the risk that political and social stability might unravel suddenly and dramatically if adverse shocks to the economy or other events were to break the Communist Party’s tight control of society and the state. Indeed, one could make a plausible argument that a relatively modest trigger could set off a destabilizing chain of events. President-elect Donald Trump’s threats of setting off a trade war could be one such trigger that hurts exports, creates more bad loans and causes economic disruption. On the other hand, Western prognostications of the likelihood of such disastrous outcomes are probably overstated. It is quite likely that the government will, in fact, be able to manage the economic, social and political tensions it faces — although the lack of flexibility in China’s economic and institutional frameworks means that there are likely to be many missteps and stumbles along the way. No matter what happens with China’s growth, one thing that is certain is that the economy is in for a wild and interesting ride in the years to come.
I think a more apt analogy than a house of cards is toppling domino tiles. Dominos is, after all, a Chinese game. The Chinese economy has many, many tiles: state-owned enterprises, the large number of poor subsistence farmers, the government-owned banks, local governments, the Chinese Communist Party, and so on and so on. China’s economic growth has depended on the interdependencies of these “tiles”. When one tile is removed from the chain or the process has reached its fruition, the dominos, in this case economic growth, stop toppling.
The CCP wants to maintain its own power. It does so by promoting growth in a stable context. Local governments are given certain growth goals. They satisfy these by channeling low-cost, subsidized loans from the government-owned banks to state-owned enterprises. The state-owned enterprises have expanded production and need workers. They offer jobs to subsistence farmers.
The chain has many dependencies. You’ve got to be able to offer subsidized loans. There will be many non-productive loans. That requires a certain opacity (in contradiction of its WTO obligations) in Chinese banking.
Another dependency is agricultural productivity. That has been increased by, among other strategies, dumping enormous amounts of fertilizer into the soil. That has declining benefits over time.
The question is less whether the process will end rather than which factors will cause it to arrive at its end.
What happens to the rest of the world? Tried to make it a project one afternoon, but didn’t get very far, to see what happens if the Chinese imports go away. How much would it really affect us?
Steve
There is the possibility of an internal China and external China, economically. Internally, the structure could work in various permutations as long as it was isolated. It would need to be consistent, but that would not necessarily need to be based upon real premises.
What would be voluntary trust in other systems could be enforced trust, but as long as everybody (or almost everybody) was included, it would almost be the same.
China might be able to pull it off, or at least extend the collapse longer than anybody can imagine.
There’s a limit to how much deadweight loss any society can bear. The poorer the society the lower that limit is. China is bearing a lot of deadweight loss.
On the Chinese economy, things are complex.
On the one hand, real economic growth and dynamism continues in the “first tier” regions around Guangdong, Yangtze Delta and Beijing. The rest of the country is struggling. China has invested in human capital in a way say the Soviet Union did not, that’s why it has world class tech companies like Alibaba, Tencent, and DJI. But it’s also wasting capital on an insane scale.
A relevant observation is that every country that’s followed the investment/export development model (Japan, Taiwan, Korea) has suffered an economic shock around 40-50 years after it started, and China is now approaching 40 years. But also every country has continued development afterwards. On the other hand, none of those nations are burdened with the CCP and right now the current leader is okay with having another cultural revolution.
To conclude, I say with low confidence, but theres good chance of an economic crisis to occur in the next 10 years, but in the long term – 25+ years, it will be viewed as a blip.
Well, I hope that isn’t the case because China is probably in the “too big to fail” category and their political system is one that would probably start a war rather than give up power.
I think that CuriousOnlooker’s assessment:
is about right although the horizon for crisis may be a bit shorter. What happens in the medium term, 25 or more years, depends on what happens during the crisis. If a civil war or major war starts, all bets are off.