Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

China’s Economic Miracle Is Over

Economics / China Economy Mar 16, 2017 - 10:16 AM GMT

By: John_Mauldin

Economics

BY GEORGE FRIEDMAN : Chinese Premier Li Keqiang told the National People’s Congress that China’s GDP growth rate would drop from 7% in 2016 to 6.5% this year. In 2016, the country’s growth rate was the lowest it has been since 1990.

The precision with which any country’s economic growth is measured is dubious, since it’s hard to measure the economic activity of hundreds of millions of people and businesses. But the reliability of China’s economic numbers has always been taken with a larger grain of salt than in most countries. We suspect that China’s economy is growing less than 6.5%, if at all.


The key part of Li’s statement is that the Chinese government is signaling that it has not stopped the decline in the Chinese economy. That means more economic pain is on the way. According to the BBC, Li said the Chinese economy’s ongoing shift is promising, but it is also painful. He likened the Chinese economy to a butterfly trying to emerge from its cocoon. Put another way, there are hard times in China that will likely become worse.

The Miracle Is Over

China’s economic miracle, like that of Japan before it, is over. Its resurrection simply isn’t working, which shouldn’t surprise anyone. Sustained double-digit economic growth is only possible when you begin with a wrecked economy.

In Japan’s case, the country was recovering from World War II. In China’s case, it was recovering from Mao Zedong’s policies. Simply by getting back to work, an economy will surge. If the damage from which the economy is recovering is great enough, that surge can last a generation.

But extrapolating growth rates of a society that is merely fixing the obvious results of a national catastrophe is irrational. The idea that China was going to economically dominate the world was as dubious as the idea held by some in the 1980s that Japan would.

China’s dilemma, like Japan’s, is that it built much of its growth on exports. Both China and Japan were poor countries and demand for goods was low. They jump-started their economies by taking advantage of low wages and sold products to advanced economies. The result was that those engaged in exporting enjoyed increasing wealth. But those who were farther from East China ports, where export industries clustered, did not.

China and Japan had two problems. The first was that wages rose. Skilled workers needed to produce more complex products were in short supply. Government policy, which focused on exports, redirected capital to businesses that were marginal at best, which increased inefficiency and costs.

But most important—and a fact often forgotten by observers—is that miracles depend on customers who are willing and able to buy. In that sense, China’s export miracle depended on demand from its customers… not on Chinese policy.

Effects of 2008

In 2008, China was hit by a double tsunami. First, the financial crisis plunged its customers into a recession that was followed by extended stagnation. Thus, demand for Chinese goods contracted. Second, China’s competitive advantage was cost, and it now had lower-cost competitors.

China’s deepest fear was unemployment, and the country’s interior remained impoverished. If exports plunged and unemployment rose, the Chinese would face both a social and political threat, emanating from immense inequality. It would face an army of the unemployed on the coast.

This combination is what gave rise to the Communist Party in the 1920s (which the party fully understood). So, a solution was proposed that entailed massive lending to keep non-competitive businesses operating and wages paid. That resulted in even greater inefficiency and made Chinese exports even less competitive.

The Chinese surge had another result. China’s success with boosting low-cost goods in advanced economies resulted in an investment boom by Westerners in China. Investors prospered during the surge, but it came at a cost. It damaged the economies of China’s customers in two ways. First, low-cost goods undermined businesses in the consuming countries. Second, investment capital flowed out of the consuming countries and into China.

That inevitably had political impacts. The combination of post-2008 stagnation and China’s urgent attempts to maintain exports by keeping its currency low and utilizing irrational banking created a political backlash when China could least endure it—which is now.

There is talk of increasing China’s domestic demand, but China is a vast and poor country and iPads are expensive. It will be a long time before the Chinese economy generates enough demand to consume what its industrial system can produce.

The Cost of Unemployment

In the meantime, the struggle against unemployment continues to generate irrational investment, and that continues to weigh down the economy. Economically, China needs a powerful recession to get rid of those businesses being kept alive by loans. But politically, China can’t afford the cost of unemployment.

The re-emergence of a dictatorship in China under President Xi Jinping should be understood in this context. China is trapped between an economic and political imperative. One solution is to switch to a policy that keeps the contradiction under control through the use of repression.

The United States is China’s greatest threat. President Donald Trump is threatening the one thing that China cannot withstand… limits on China’s economic links to the US. In addition, China must have access to the Pacific and Indian oceans for its exports. That means controlling the South and East China seas. The US is aggressively resisting that control.

Faced with this same problem in the past, Japan turned into a low-growth, but stable, country. But Japan did not have a billion impoverished people to deal with, nor did it have a history of social unrest and revolution.

China’s problem is no longer economic—its economic reality has been set. It now has a political problem: how to manage massive disappointment in an economy that is now simply ordinary.

China must also determine how to manage international forces (particularly the United States), which are challenging China and its core interests. China is trying to convince the world that it remains what it was a decade ago. That strategy could work for a while, but many still view China through a lens that broke long ago.

But reality is reality. China is no longer the top owner of US government debt; that honor goes to Japan. China’s rainy day fund is being used up, and that reveals its deepest truth… when countries have money they must keep safe, they bank in the US.

China carried out a great—and impressive—surge. But now, it is just another country struggling to figure out what its economy needs and what its politics permit.

Watch George Friedman's Ground-breaking Documentary, Crisis & Chaos: Are We Moving Toward World War III?

Russian adventurism. An ailing EU. Devastation in the Middle East. These are just three symptoms of a systemic instability engulfing a region that’s home to 5 billion of the planet’s 7 billion people.

In this provocative documentary from Mauldin Economics and Geopolitical Futures, George Friedman uncovers the crises convulsing Europe, the Middle East, and Asia… and reveals the geopolitical chess moves that could trigger global conflict. Register to watch the documentary now.

John Mauldin Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules