Tuesday, May 05, 2015

Ahead of My Time?

I've been waiting for China's stunning economic growth rates to grind to a (relative) halt since I've been blogging. But China has defied my assumption of pending failures. Perhaps I haven't been so much wrong about the event as wrong about how long it would take such a large place as China to change direction.

I admit it, I'm a sucker for for news like this:

Many people in the financial community, both in and outside China, fear that Chinese economic growth is not just slowing down but about to stall and quite possibly go into decline. Some call it the Japan Syndrome because the current Chinese situation is similar to Japan’s in the 1990s. Both China and Japan experienced explosive GDP growth for decades mainly because of highly efficient export industries. But there was something else going on in both countries that got less attention internationally; a lot of that GDP growth was sustained by massive internal spending on construction (of infrastructure, housing and all sorts of stuff both countries lacked before their spectacular economic boom). Eventually there was no more need for massive construction efforts but in both cases the government realized that it would have a lot of unemployed people if the construction effort was cut back as much as reality required. So a lot of money was borrowed until the banks got into trouble and threatened to trigger an economic depression. This forced the Japanese to make a lot of adjustments and while Japan escaped economic disaster, for over two decades Japanese economic growth has been stalled.

Now China is headed in the same direction. While Japan was able to avert economic and political disaster when faced with this problem, there is some doubt about China. That’s because Japan was a democracy while going through all this and angry Japanese could, and did, vote out of office politicians seen as responsible for the mess. China is not a democracy and Chinese leaders understand that because of that they could get a rebellion rather than unfavorable election results if there were too many people unemployed.

The danger, of course, is that Chinese leaders will seek a foreign threat to rally their people and maintain power in the face of economic crisis that angers their people.

Japan did not do that, but they have democracy and a view of the world that separates domestic and foreign policy.

China's communist rulers unfortunately see threats to their rule as a continuum of problems from local riots to a superpower hegemon standing in their way.

I may have been right all along but just failed to appreciate how long forces leading to an economic correction would take in a country as immense as China.