What if We Were Talking About China Instead of Greece Today?

Ah, America. We have such a penchant for grandeur. As we spend our limited attention spans watching our political parties play “No, You’re a Poot-head”, or for the past few weeks, our Republican presidential candidates forgetting that we now have the capability to actually play back statements they made 20 minutes ago, there are circumstances around the globe to which we should be paying much, much more attention.

 

Well, at least someone should.

 

As the kabuki theater over Greece and the Euro zone plays out, I am reminded of just how out of touch Americans tend to be. If Greece’s relatively small economy can truly bring about another “Financial Armageddon”, as we are frequently reminded by the shrill musings of the obsequious Erin Burnett, a former CNBC corporate shill, shouldn’t we, (as Joe Scarborough, MSNBC’s narcissistic, pudgy-faced, bi-polar, Mika-abusing, Rush Limbaugh-lite, morning host would say) be the adults in the room and be more focused on China?

 

The Chinese economy, now the second largest in the world, after the U.S.’s., is expected to increase to 24% of the total global growth this year. China’s strength is essential to the recoveries of both the U.S. and Europe; for if Beijing crashes, the reverberations will be felt from Brussels to Boise.

 

It may seem strange to Americans who complain about the emigration of jobs to Asia and the pressure of Chinese competitiveness, but there are growing concerns regarding China’s future. The Chinese miracle has been built on cheaper labor, cheaper land and very cheap capital. But the model is starting to break down.

 

China’s banks, which have spent too much money on bad loans(sound familiar?), are perhaps as troubled as those in the West. The effervescence of the real estate market in major Chinese cities makes the U.S. housing peaks of 2007 look almost restrained. Inflation is growing, there aren’t enough high-level jobs, and social unrest is on the uptick. China’s own Premier, Wen Jiabao, calls his nation’s economy “unbalanced, uncoordinated and unsustainable.”

 

Similar to Republicans in the U.S. who try to “starve the beast” by cutting government spending, the Chinese have been attempting to put a damper on the nation’s debt-fueled real estate boom as part of a determined effort to redefine the economy into one that relies more on domestic consumer spending and less on manufacturing and exports(Familiarity?Anything? Anybody?).

 

Desiring to establish a firm foundation for its future growth, China must move from being the world’s factory to being one of its largest consumers. If, however, the party’s attempts to make that sea change result in a sharp drop in real estate values, well, I think we all know where that would lead, yes? Multinational corporations whose revenue and earnings growth are tied to China would be decimated. At the very least, the U.S. could be thrown back into full-blown recession if not an outright Great Depression 2.0.

 

The question then, is whether this bubble is about to pop as ours did. In China, we hear of new airports and high-speed-train lines under construction; glass-fronted apartment buildings whose empty units remain eerily unlit in the night; there are underutilized roads, bridges and tunnels; and entire towns waiting for occupants.

 

So, why does China keep building? Because building creates jobs and wealth for those who are associated with all that development. The problem is that this model, which has worked so well for over three decades, is showing signs of fatigue. Chinese factories are aging, their counterparts across Asia are now poised to compete. Returns on investment are in decline. Concurrently, wages rate of growth are declining, (which is one reason manufacturing jobs are trickling back to the U.S., as the labor costs between the two countries narrow).

 

The growth-at-all-costs model followed for the past three decades has exacted enormous costs on Chinese society. Yet despite undrinkable water and unbreathable air in many parts of the country, the Chinese Communist party continues to enjoy widespread support; its public relations machine successfully stresses its efforts to redress China’s humiliation at the hands of the West for the past two hundred years.

 

But the strains caused by China’s growth strategy are showing. Mass protests of party abuses–often the taking of land without just compensation–have been multiplying so steadily that the government, departing from past protocol, did not publish the number of them last year. At government facilities in many regions of the country, there have been explosions set off by citizens so disaffected that they didn’t care about the consequences.

 

If the party’s attempt to rein in the easy money flowing to state-owned enterprises results in a dramatic decline in property values, the outcome could be an earthquake in the Chinese financial system that would violently shake the U.S. But because the state, which owns the biggest banks–and thus the people’s savings–ultimately pays the price of any write-off, households bear the cost of the cleanup. Chinese banks are the original too-big-to-fail financial institutions.
I suppose nothing is ever really a true bubble until it bursts. But if the bubble pops, it will have serious consequences in America. The U.S. sold $92 billion in goods and services to China last year. If China succeeds in moving away from its model of cheap land and cheap capital and makes a smooth transition to an economy based more on domestic demand…..Great! Hallelujah! Hip Hip Hooray!!!

 

But if Chinese land prices plummet, there will be less demand for raw materials and a steep decline in world commodity markets and global trade in general.
The U.S. economy is already in the peculiar position of having cash-rich companies that are not spending or hiring. Imagine how that propensity to remain inactive will increase if they are frightened by a Chinese economic slowdown.

 

As the Chinese try to engineer this complex shift in their economic model, the U.S. could do a lot to help. It could, for example, avoid starting contentious squabbles over things like trade and currency at a time when populist political sentiments in both countries are high. Rather than bash China, it could focus on encouraging the export of services and goods to them. China is attempting to scale Mr. Everest by feeling its way in the dark….a process in which some scrapes are inevitable. The concern for us all could very well be their avoiding a fall.

 

Irony. Aint it a hoot?

 

hg

  3 comments for “What if We Were Talking About China Instead of Greece Today?

  1. Newscat1955
    November 6, 2011 at 9:15 pm

    True. Never gave that angle a thought.

  2. November 5, 2011 at 11:55 am

    I’ve read that on demographic grounds alone, China will be passed by India as our biggest competitor. Because of it’s one child policy China will soon have a shrinking workforce and a ballooning retirement age population.

  3. November 4, 2011 at 12:21 pm

    Well written and well thought out piece. I couldn’t agree more with the sentiment and the conclusions. China is definitely not the enemy and starting ridiculous trade battles with them is completely counterprodutive to say the least.

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