If Gordon Chang’s analysis at The National Interest holds true, China is in for some rough sledding:
As an initial matter, China’s current situation is far worse than the official National Bureau of Statistics reports. The NBS maintains that the country’s gross domestic product rose 6.9 percent during the third calendar quarter of this year after increases of 7.0 percent during each of the first two quarters.
Willem Buiter, Citigroup’s chief economist, a few months ago suggested the rate was closer to 4 percent, and growth could be as low as the 2.2 percent that people in Beijing were privately talking about mid-year. The most reliable indicator of Chinese economic activity remains the consumption of electricity, and for the first eleven months of the year electricity consumption increased by only 0.7 percent according to China’s National Energy Administration.
Other statistics confirm extremely slow growth. For instance, imports, a sign of both manufacturing and consumption trends, fell 8.7 percent in November in dollar terms, marking a record thirteen straight months of decline. Exports were down 6.8 percent, the fifth straight month in the red.
Especially disturbing is price data. In Q3, nominal GDP growth of 6.2 percent was less than the officially reported real growth of 6.9 percent. China, therefore, looks like it is now caught in the deflationary trap of falling prices. Deflation, in turn, suggests a 1930s-style crash is increasingly possible. China has too much debt—perhaps as much as 350 percent of GDP at the moment—which becomes impossible to service in an era of rapidly declining prices. The country over the last year has seen a number of “first†defaults. So far, the central and provincial authorities have managed rescues for many of the obligors, but at some point they will have no choice but to let failing borrowers go under in far greater numbers.
You might think that the Chinese authorities might try a different tack to address their country’s economic slowdown but so far that doesn’t seem to be the case. They’re continuing to wield the hammer they’ve been using so far: stimulus. If they pound long enough it might work eventually.
If the Chinese authorities’ ability to change the course of China’s economic ship is limited, ours is nonexistent. Although it might be difficult to credit, I doubt even a major downturn in the Chinese economy would have much direct bearing on the U. S. At $130 billion our exports to China account for less than 1% of U. S. GDP.
Not so for countries from which China imports a lot more, notably Taiwan, South Korea, and Japan but also Germany, Australia, and Brazil. Germany exports $87 billion a year to China, accounting for 2% of the German economy—they’re one of the few countries that maintains a small trade surplus with China. Australia’s exports to China account for a whopping 6% of their economy. Both Germany’s and Australia’s economic growth have been pretty flat this year and China’s slowing economy is a big part of that.
I’ve long been a China skeptic. I opposed China’s admission to the WTO. It’s too big, it’s too authoritarian and mercantilist, it lacks an exchangeable currency or a robust system of civil law. The world is simply incapable of integrating that China into the world system. And that was when China was expecting double digit growth as far as the eye could see. What will things be like when China has slow or no growth?
The Chinese authorities have long maintained that 7% annual GDP growth was necessary to avoid civil unrest. Maybe they were wrong or maybe things have changed.
Interesting times.
