A Crash Coming In China?

Is the Chinese economy headed for a correction?

Via Kevin Drum comes this news about Chinese efforts to bring growing inflation under control:

China staged its third interest rate increase since October on Tuesday, the latest sign of the authorities’ intensifying efforts to temper the blistering pace of economic growth and prevent already worrisome inflation levels from escalating further.

The central bank in Beijing raised its benchmark one-year deposit rate by a quarter of a percentage point, to 3 percent, and its one-year lending rate by a similar amount, to 6.06 percent.

The timing of the announcement, at the very end of the Lunar New Year holiday, which has kept mainland Chinese markets shut for the past week, was in line with what many analysts had expected.

In fact, many economists forecast still more increases and other growth-dampening measures during 2011 as the battle to combat price rises intensifies.

“There are plenty of reasons to expect inflation to pick up further in the next few months,” Brian Jackson, an analyst at the Royal Bank of Canada in Hong Kong, wrote in a note following the rate rise announcement Tuesday.

The reason for the action? China’s absolutely explosive rate of economic growth:

Data released by the National Bureau of Statistics on Jan. 20 put the pace of growth at 10.3 percent for 2010 — up from 9.2 percent in 2009 — significantly above what analysts had expected. Inflation came in at 4.6 percent for December — well above what the authorities are comfortable with — and could rise further, economists believe.

As in many other emerging economies, rapid growth has combined with easy credit and inflows of cash from overseas to push up asset and consumer prices this year.

There is, of course, a lot of room for growth in China, and 4.6 percent inflation, assuming that’s an accurate number, isn’t exactly Weimar Germany territory. Nonetheless, there’s plenty of historical evidence to support the idea that China’s economy, which has been booming for the better part of a decade, is going to face a pull back at some point. In early American history, for example, there were financial panics in 1819, 1837, 1873, 1901, and 1907.

The circumstances that caused those panics are unlikely to be repeated, of course, and the economic of 19th Century American was much different from the more centrally controlled economy of 21st Century China, but that doesn’t mean that the laws of economics are suspended. In fact, it’s likely that the degree of government control that remains in China is likely to make any financial downturn worse than it would be in a market-based economy. A lot of money has poured into China in the last twenty years or so, and a lot of wealth has been created, but one sometimes get the feeling that we’ve been looking all along at a good old-fashioned speculative bubble, albeit with a Chinese twist.

Drum points to a drought in China’s agricultural reasons and rising world food prices (a huge issue in country with China’s population) and speculates:

I’m also working on the assumption that China’s measures to control its economy are too little too late, which means that a shock to China might also be the catalyst that bursts China’s bubble, and does it abruptly rather than gradually. Unfortunately, I continue to consider it likely that China in 2011 is similar to the United States in 2007, with disaster looming around the corner. We did too little to head it off then (though by 2007 it would have been too late even for more extreme measures to be effective), and I suspect China is doing too little to head it off now.

Drum admits he may be being overly pessimistic here, and there really isn’t much the United States can do about this anyway. However, this would seem to be a situation worth watching.

FILED UNDER: Asia, Economics and Business, World Politics,
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. ponce says:

    “A Crash Coming In China?”

    Magic 8 ball says: Very doubtful

  2. Steven Plunk says:

    I’ve noticed when people talk of a crash or speculative bubble bursting it is usually based upon sound facts. The question then becomes can it be avoided. Our own housing bubble was talked about for years but people all wanted to ride it until the very end and made it worse by doing so. Some crash will likely come but how big and how much it will damage the Chinese economy is unknown.

  3. john personna says:

    Hidden in Doug’s article is the surprising subtext, that planned state capitalism was able to exceed all expectations.

    Anyone remember “Free to Choose” and the idea that markets and democracy were bound?

    Singapore demonstrated that wasn’t true, and mainland China took that lesson to the bank.

    Now, sure, they may face “pullbacks” but those aren’t really the 21st century story. The world is not quite what we thought it was.

  4. ponce says:

    It is fun to watch the free market fanatics try to explain why the Chinese economy has outperformed the U.S. economy every single year for the past 30 years.

    In fact, the only time the U.S. economy has grown as fast as the Chinese economy has been growing recently was when that Commie F.D.R. was using taxpayer money to build the infrastructure America continues to depend on today.

  5. Steve Plunk says:

    Ha! The capitalist haters love to bash us. Considering where the Chinese started their growth could outpace ours for years and they still wouldn’t catch up. I wonder how many would trade our political freedoms for their lovely way of life so envied.

    FDR could build infrastructure because by today’s standards we paid slave wages and had no worker protections. With Davis-Bacon ruling public projects we can’t get anything built for a reasonable price, on time, and with any useful life. Bringing up examples from more than 70 years ago is living in the past.

    Let it go fellas, the tripe your college professors taught about the evils of capitalism and the joy of communism just isn’t true.

  6. ponce says:

    Shorter Steve: What ya gonna believe, my tired dogma or your lyin’ eyes?

  7. anjin-san says:

    Other economic news:

    A new Gallup poll shows that many Americans are more optimistic about the economy than they have been in years. In January, 41% of Americans said the economy is getting better, the highest level since Gallup began asking the question in 2008.

    http://www.gallup.com/poll/145997/Economic-Optimism-Ties-Three-Year-High.aspx

    Stand by for screeching from tea party types…

  8. anjin-san says:

    > Considering where the Chinese started their growth could outpace ours for years and they still wouldn’t catch up.

    Define “catch up”. The Chinese have enough economic muscle to destroy our economy if they choose. The only good news is that it would be MAD.

  9. anjin-san says:

    > FDR could build infrastructure because by today’s standards we paid slave wages

    “By todays standards”, does that even mean anything? What do today’s standards have to do with how much folks were making in the 30s?

    One stat I saw said the average salary in the U.S. was $1,713.00. A WPA worker in Pennsylvania could earn as much as $1,274.00 a month. So by the standards of the time, which were all that mattered to the people who were alive then, it was possible for a WPA worker to have an income at least within reasonable shouting distance of the average. This is based on a very quick bit of research, but I have a feeling a study in depth would bear it out. Nobody was getting “slave wages”. More brain-dead right wing bullshit.

    Have you ever been right about anything?

  10. ponce says:

    “The Chinese have enough economic muscle to destroy our economy if they choose.”

    They also have enough cash left over after their enormous infrastructure investments each year to lend capitalist America enough welfare to stay afloat.

    America now borrows 90% of the world’s savings each year to keep going.

  11. john personna says:

    I wasn’t saying that the Chinese system is in any way preferable, jutst that it proved possible.

    That is a big challenge to our thinking. Maybe it hits hardest at those old criticisms of Nordic socialism … that they were doomed to fail because only the freest markets could prosper.

    And of course “freest markets” for us meant corporatism and massive looting. See also aftershocks of the Madoff affair, with JP Morgan in question.

  12. john personna says:

    Steve P, you can pretend that our ratings agencies never gave “AAA” to crap, but pretending is all it will be.

  13. anjin-san says:

    > With Davis-Bacon ruling public projects we can’t get anything built for a reasonable price, on time, and with any useful life.

    Well, the eastern span of the SF Bay Bridge is actually ahead of schedule, so I guess we can get things built on time after all. It is going to end up costing 6 billion, which ain’t cheap, but it is an utterly critical bit of infrastructure in a region with an economy bigger than of lot of states have. 250K + cars cross it every day. As for useful life, probably at least 100 years, so I guess that covers “useful life”.

    http://www.dot.ca.gov/hq/esc/tollbridge/SFOBB/Sfobbfacts.html

  14. G.A.Phillips says:

    China sucks!

  15. anjin-san says:

    Hmm. Since Davis Bacon “with any useful life”. Davis-Bacon passed in what? ’31?

    SF Bay Bridge – In service since 1936
    Golden Gate Bridge – In service since 1937
    Hoover Dam n service since 1935
    Interstate Highway System – late 50s
    NASA’s Kennedy Space Center – First launch 1950

    I could go on for quite a while. Tell us Steve, how exactly do you define “useful life”?

  16. Franklin says:

    Ha! The capitalist haters love to bash us.

    Maybe ponce is bashing capitalism, but john personna said it precisely correct: “planned state capitalism.” Capitalism obviously works, and China (and India et al) have finally figured that out in the preceding decades. Both China and India are booming, but China is so far outpacing India because of the state planning part. There are other differences, of course, but that seems to be the main cause of the discrepancy.

  17. george says:

    >It is fun to watch the free market fanatics try to explain why the Chinese economy has outperformed the U.S. economy every single year for the past 30 years.

    Its easier to get a large percentage growth in almost any system when the absolute value is small, than when its big. If one system state variable is at 10, and the other’s is at 100, an absolute growth of 1 is a relative growth of 10% in the weaker system, but only 1% in the stronger system, though the absolute growth is the same.

    This shows up all the time in sports as well – beginners make huge relative gains in performance, whereas experienced athletes make small relative gains.

  18. sam says:

    @Plunk

    ” I wonder how many would trade our political freedoms for their lovely way of life so envied.”

    I hate to break it to you, Steve, but there is a large swath of so-called free market capitalists who would have zero problem with government curtailment of somebody else’s political freedoms if said curtailment would enhance the bottom line.

  19. andrew says:

    “Its easier to get a large percentage growth in almost any system when the absolute value is small, than when its big. If one system state variable is at 10, and the other’s is at 100, an absolute growth of 1 is a relative growth of 10% in the weaker system, but only 1% in the stronger system, though the absolute growth is the same.”

    Sorry George, Leftists don’t have the mental capacity to understand obvious stuff like this. They’re anti-intellectual.

  20. anjin-san says:

    Has Plunk gone missing?

  21. matt says:

    Andrew : Wait I thought all leftist were elitist limousine liberal academics? Oh shit the other day Rush told me that all liberals are welfare stealing lazy bums who don’t work. Fack I’m unable to reconcile how all liberals can be anti-intellectual while being in charge of all the colleges. How liberals can be all poor bums who don’;t work and live off welfare while being driven around in their elitist limousines. Maybe just maybe your stereotyping is full of shit and you would be better served to get to know people instead of making half cocked assumptions…

    George : China is the second largest economy in the world in nominal and PPP GDP which completely decimates your claim.. Thanks for playing though.

  22. john personna says:

    Andrew and George, since you guys are so smart, explain why it is unimportant that GM now sells more cars in China than in the United States.

    link

    This has huge impacts, as US corporate profits in general increasingly come from overseas.

    link

    This is not your father’s world economy.

  23. john personna says:

    As I sip my coffee and think about those links, and previous comments, I think it comes down to national identity lagging national reality.

    This is a new economy, and the American worker has a new relationship to it.

    The really sad thing is that the two schools of political solution are rooted in a different past, when America was the world’s factory. I don’t care if you say government programs will fix things, or if you say tax cuts will fix things, your world-view is centered on everything happening HERE.

    We don’t have a post-global solution for jobs or the middle class.

    The one philosophy that “works” is the corporatist one. That is, cut taxes, enjoy corporate income, and cut the middle class further out of the equation.

  24. george says:

    >George : China is the second largest economy in the world in nominal and PPP GDP which completely decimates your claim.. Thanks for playing though.

    Okay, I’m lost. Explain how that decimates my claim that its easier to get large percentage gains in a system on a state variable at a low value, than on a state variable that has a high value?

    If your explanation is valid you’ll have made a major contribution to systems engineering, since my ‘claim’ was simply re-iterating a very basic outcome of systems theory (as found in almost any second year engineering text).

  25. george says:

    > Andrew and George, since you guys are so smart, explain why it is unimportant that GM now sells more cars in China than in the United States.

    China’s population is four times that of the US. If they are out-performing the US in absolute terms, their economy should be four times the size – I don’t think that’s happening, though I’m not an economist so I could be error.

    China’s relative economic growth is larger, but as far as I know, its absolute size of economy is smaller. In engineering, performance concerns the absolute value of output, not the relative growth of output. For instance, if engine A puts out 100 HP, and then is modified to put out 110 HP, then it has a greater growth, but less performance, than engine B which puts out 200 HP one year, and 190 HP the next year.

    I don’t think this has much to do with capitalism vs socialism, which you seem to be hung up on – every major economy in the world is, or so I’m told by my economist colleagues, a mixed economy. In fact, both pure market and pure gov’t economies seem to be disasters, which is why they’re mixed … much of the debate about political economy seems to be the equivalent of arguing about how many angels can dance on the head of a pin – so theoretical as to be meaningless.

  26. john personna says:

    You are right george, you went with the angels on a pin answer.

    You didn’t engage how this changes the structure and profits of “American” corporations.

  27. george says:

    I’ve never claimed to be an economist JP, so I don’t pretend to know how a Chinese re-adjustment (or crash or whatever) will affect the structure and profits of “American” corporations. My guess is that it won’t, seeing as how it didn’t look like our crash did anything.

    Do I think they should be changed? Of course, basically the gov’t bailed out finance, which says everything you need to know about how well Wall Street is able to regulate itself. Do I think a Chinese crash will trigger such (or any) change? Not likely, though again, I’m not an economist.

  28. anjin-san says:

    JP… George strikes me as a pretty even handed commentator, I don’t think he is arguing from any left/right bias…

  29. john personna says:

    Well, my real argument is with the broader “Chinese problem” dynamic. We take shortcuts. We don’t engage. For instance those Chinese 14 year olds change the global labor dynamic. The change your cost of living, and your jobs.

    Does calling the Chinese labor names (“slaves!”) Illuminate or shelter our conceptions?

    And any crash in china is very likely to hit our US stocks for all those linkages.

  30. matt says:

    “Okay, I’m lost. Explain how that decimates my claim that its easier to get large percentage gains in a system on a state variable at a low value, than on a state variable that has a high value?”

    Because China hasn’t been a low value for over 20 years? That even at second place China is still whooping our ass in expansion and is probably on route to surpassing us in 10 or so years.

    Sitting around pretending that the Chinese economy is tiny and that’s why it’s expanding so quickly is just stupid. The facts are out there for you to look at and as a country we the USA should be very worried about our position of power in the world.

  31. matt says:

    Personally I think that China’s ability to transform from a backwater agrarian economy to an industrial powerhouse in such a short time to be a very worrying thing. When the next paradigm shift happens (think industrial revolution) China has shown the potential to take better advantage of the shift then the US..

  32. george says:

    >Because China hasn’t been a low value for over 20 years? That even at second place China is still whooping our ass in expansion and is probably on route to surpassing us in 10 or so years.

    China’s per capita GDP is about $4,000, the US per capita GDP is about $47,000 (according to Wiki). That puts it at roughly 10%, or an order of magnitude smaller. Which arguably makes it a low value.

  33. anjin-san says:

    > China’s per capita GDP is about $4,000, the US per capita GDP is about $47,000 (according to Wiki). That puts it at roughly 10%, or an order of magnitude smaller. Which arguably makes it a low value.

    How does their vastly larger population figure in? Wealth may be much lower on a per capita basis, but they have a head count that exceeds ours by quite a bit…

  34. george says:

    > How does their vastly larger population figure in? Wealth may be much lower on a per capita basis, but they have a head count that exceeds ours by quite a bit…

    As a country, China’s GDP is about $6 trillion, the US GDP about $14 trillion, which is closer, though still less than half – ie the US economy as a whole still out performs it by a 2/1 ratio.

    But my guess (again, I’m no economist) is that performance is more meaningful measured on a per capita basis. Otherwise you get strange conclusions such as the economy of Africa performing better than the economy of say Holland, which might lead one to suggest that Africa should be sending foreign aid to Holland rather than the reverse.

  35. john personna says:

    From my second “link” above, we see that US corporate profits were about 6% from overseas sources in the 1950s, are now at 40%, and growing rapidly.

    Now, I am not an economist ;-), but I don’t know why we’d go on about Holland and Africa with that kind of change staring us in the face.

    I’d much rather understand the new dynamic. I know it involves a lot (a billion?) of bright people working very hard for very little. I know that our corps are increasingly reliant on that pool of good, cheap, labor. I know that as they bootstrap they are becoming the market promised by pundits decades ago (Russia, not so much).

    We may, individually, find a way to make a living in this, but in aggregate at the national level, the answer seems stubborn entitlement.

    Our jobs will come back because we’re Americans, darn it, and we’re the best country in the world!

    Well .. I’m not usually our seriously a decline and fall type, but that is the attitude we see on the back side of empires, at the end of a country’s time in the sun.

  36. george says:

    > Well .. I’m not usually our seriously a decline and fall type, but that is the attitude we see on the back side of empires, at the end of a country’s time in the sun.

    Not in disagreement there. I don’t see how the shift from a manufacturing base (actually making things) to a finance base (pushing around paper) is going to work out in the long run – especially when that finance base is running huge deficits and borrowing heavily internationally.

    I admit its a good thing that the developing nations are, well, developing, raising the standards of living of their people. Not only morally, but for practical reasons … it will almost certainly lower birth rates, eventually improve their environmental laws (if you’re starving you don’t care about such things), and in fact if their wages rise to our levels then the playing field will become ‘level’. Even extremism tends to disappear when people have something to lose (though there are always a certain percentage of nut cases, they usually don’t gather many followers among the well off).

    But it’d be nice if it wasn’t accompanied by a large fall in living standards for us – a disappearing middle class is a worrying sign.

    I don’t think it matters if the US is the dominant country in the world (it wasn’t for much of our history), so long as it has the power to defend itself against attackers. But without a manufacturing base it won’t be able to do even that – and that’s when civilisations collapse.

  37. anjin-san says:

    George,

    Not sure I am seeing any validity in Africa/Holland comparison. A continent and a tiny country.

    All of this takes me back to something my father said 40 years ago. Every day you have a slightly larger pool of people competing for a resource pool that was a little smaller than it was yesterday. Sooner or later, something has to give.

    In my mind, the only real long-term answer is viable space travel, at least within our own solar system, to gain access to a larger resource pool But people tend to be short sighted, and we are making very little progress there.

  38. george says:

    > Not sure I am seeing any validity in Africa/Holland comparison. A continent and a tiny country.

    Perhaps not the best thought out analogy, but the point was that Holland has a much higher per capita GDP than Africa, but Africa as a whole has a larger total GDP – so if we’re basing performance of an economy by the total output rather than the output per capita you can get strange results.

    I agree the analogy breaks down, in that Africa isn’t a single political entity, so it was probably a bad one. But the underlying idea I think is still correct: a large number of poor people will produce a larger economy than a small number of well off people, but for the citizens (as opposed to perhaps the rulers), the meaningful measure of how well the economy performs depends on the per capita GDP rather than the total GDP (assuming of course its reasonably evenly distributed, as per say Holland).

    I suppose what I’m saying that given a choice of being an average citizen in a state with an economy that performed like China’s, or that of the US (or Holland for that matter … great country BTW), I’d choose to live in an economy that performed like the US economy. I suspect most people would – and if that is true, I’d argue it means that the US economy at this point is out performing the Chinese economy. Might not be true in a couple of decades, but at this moment I don’t think its really all that close.

  39. george says:

    Your second point Anjin-San I agree with; the world and its resources (and perhaps more importantly, the biosphere’s ability to handle our output), is limited. If the world’s population was 50 million we could all live as we do without consequences; as the world’s population of nearly 7 billion begins to have an average standard of living like ours the system is likely to break down. I haven’t heard of any good solutions either; if one comes about, it’ll likely come from some as yet undiscovered or undeveloped technology.

    Given the growing distrust of Americans for science (as seen in everything from the backlash against climate science and evolution, to back to the land types, to gov’t unhappiness with any science that doesn’t back their political views), and the much larger incentives for bright young people to go into finance (easier courses, higher pay, more prestigious, what’s not to like?) I’m beginning to think the chances of it developing on our shores is decreasing. Maybe it won’t develop at all. Its not obvious that the exponential growth in technology we’ve seen the last century will continue indefinitely – there are many examples of biological systems that have periods of exponential growth for short periods, but then run into limitations. We might be close to such conceptual barriers …

  40. john personna says:

    On resources, I think it’s amazing the degree to which Mao’s bad old “every mouth has two hands to feed it” has held true. We’ve gotten to 6B people without going seriously Malthusian. In fact, China’s growth shows that it was an organizational problem!