Wednesday, May 08, 2013

Will There Be a Han Spring?

Is China's economic rise as real as many think?

China's economy has greatly expanded over the last three decades. There can be little doubt of that:

If one looks only at the explosive growth of China’s Gross Domestic Product (GDP) since the country began to embrace capitalism and global integration more than thirty years ago, it is impossible to deny that China’s rise is both real and breathtaking. In 1978, China’s GDP was US$214 billion in purchasing power parity (PPP). By 2012, it was, unadjusted for inflation, roughly 40 times bigger (US$8.3 trillion in PPP).

But have our expectations of what China has achieved--and will achieve--expanded beyond even China's dramatic growth? Is the quality of what China has achieved masked weaknesses not measured by the GDP statistics of quantitative growth? Quantity may have a quality all its own, but it isn't quality. What happens when that lack of quality becomes apparent in what the author calls a "Potemkin" rise?

Of all the potential consequences of China’s Potemkin rise, one that has received the least amount of thought abroad is the durability of the political regime that is responsible for such low-quality growth. At the moment, despite mounting evidence of China’s low-quality growth and lack of sustainability, few are asking the inevitable question: what happens to the Communist Party’s rule when the ill-effects of low-quality growth accumulate and produce a systemic crisis?

I've had my doubts about the inevitability of China's growth that so many say will supplant us as the dominant power.

So what happens when there is a systemic crisis in China? How do we predict what happens to China, then? I say we may not have to predict which outcome takes place. In a continent-sized country, all of the above could be the result.

And don't worry about whether the Arab Spring will or should spread to China. China will progress on their own timetable. So far discontent is more focused on local rulers and the central government is seen as a source of redress for grievances. The mountains are high and the emperor is far. If the Chinese people start to wonder whether their rulers in Peking are part of the problem of lack of freedom and rampant corruption--and can't produce the economic growth in the quantity and quality expected--then perhaps spring will come to China.

UPDATE: Will China even pass us by this century let alone soon?

China's Development Research Council (DRC) expects growth to drop to 6pc by 2020. It could be much lower. The US Conference Board says it will average 3.7pc from 2019-2025 as the ageing crisis hits. Michael Pettis from Beijing University thinks it is likely to slow to 3pc to 4pc over the next decade, deeming this entirely desirable if it comes from taming the runaway state enterprises.

If so, China's growth may not be much higher than the new consensus estimate of 3pc for a reborn America, powered by its energy boom and the revival of the chemical, steel, glass, and paper industries.

All those charts showing China's economy surging past the US by 2030, or 2025, or even 2017, will look very credulous. China may not surpass the US this century.

And there is a bonus point!

The IMF says the reserve army of peasants looking for work peaked at around 150m in 2010. The surplus will evaporate soon after 2020, the so-called Lewis Point. A decade later China will face a shortage of almost 140m workers.

The Lewis turning point! For years I went on about the problem with China's growth that would eventually end their run--that China would run out of peasants. I based this on Russia's economic problems that developed when they ran out of peasants. My thinking was that putting even the most efficient peasant farmer into a factory where he became the most inefficient factory worker would still raise national GDP. But when you run out of peasants, you are stuck with a lot of inefficient workers who aren't improving GDP any more than they did on their first day on the assembly line.

China may be losing their window of opportunity. If China can't pass us by before 2050 rolls around, they may not be able to pass us by at all.

Mind you, if China becomes just as powerful as we are, that has serious implications for our ability to support allies close to China but far from us. So China's failure to pass us by economically in gross GDP isn't a Golden Ticket to the chocolate factory of foreign policy. Remember, Japan in 1941-1945 caused us enough problems when they had a tenth of our GDP. But China won't be able to supplant us as the global power able to project decisive power around the globe.

UPDATE: The Lewis turning point rears its inconvenient head:

The press reported that China had reached that point at which urban businesses have to raise wages faster than the inflation rate to attract workers from the countryside. The plentiful, at one point seemingly inexhaustible, supply of cheap labour has been at the heart of much of China's growth. But wages are now rising considerably.

Does this mean China is doomed? Well, no. But China is not immune to the pull of gravity that has slowed other industrializing and urbanizing economies. We shall see. China has managed so far despite problems:

In other words, those who say China will continue to address its most vexing problems and continue to succeed as well as anywhere, which means continue to grow in prosperity and power, have plenty to point to which bolsters their argument.

But equally those who believe the problems are so widespread, so systemic, that China faces a major course correction, economically and probably politically, and that this will have unpredictable consequences, can also make a respectable argument.

It was wisely said that the further away from China you are, the more confident you will be in your judgment about it. Being here convinces me that no one at all knows the future of China. But we do know this. It's going to matter to us a great deal.

I guess my main contribution to the debate is wondering whether there is a single answer to the question of how "China" responds to the end of this cheap economic input.