Topic: Economic Policy
Do Not Believe The Pundits On China’s Century China has created a massive middle class in a single generation, but it has yet to empower it. American consumers are unconsciously pushing back the clock on that empowerment of the Chinese middle class through their dramatic behavior modification of the past year.by James Raider
(liberal libertarian)
Tuesday, July 7, 2009
While countries struggle, muddling their way through stimulus packages and bailouts, China is being touted as everything from, "the best current place to invest," to being, "the engine that will pull the globe out of its recession." These entreaties and prognostications are sprinkled with reminders of the power it wields over America, given the huge dollar reserves that it holds. If I may quote Tony Soprano, "forget about it."
China has asked rather politely, that the U.S. maintain its creditworthiness. No kidding? That plea was less a wish that the U.S. not skip town on its debt (devalue the dollar dramatically), than it was a declaration of a deep desire for a return to excessive U.S. borrowing. When the U.S. borrowed, it bought. When it bought, China prospered. This is rather basic, however, what is not so evident, or obvious to many pundits and experts, it seems, is the fact that China became inebriated through the glory days of consumerism. China now suffers the consequences of its acquiescence to a surety that the intoxicating euphoria enjoyed around the globe for a generation, would never end.
China understood that to become America's principal provider of goods, it had to manufacture less expensively than anyone else. China excelled at squeezing productivity out of its labor force. It rapidly implemented a sweeping expansion of the necessary infrastructure to manufacture products faster, better (sometimes), and cheaper (always). New plants sprouted at an unprecedented rate. China's expansion of its machine was based on an enormous assumption - the rate of growth it was enjoying through exports would continue unabated. It is now shutting down plants faster than it opened them. The capacity that was preparing for demand twenty years out, is now shutting down, and the Chinese are not about to ramp up their own consumption to energize reopening of the plants. While China has become a major manufacturer, the majority of its manufacturing is for, and on behalf of foreigners, selling established brands. China's authoritarian "system" has made the creation and recognition of its own brands, all but impossible.
American consumers are not returning to the binge behavior of the past twenty years, although their ambivalence on trade with Asia persists. As for China, it focused on creating trade surpluses, and it adroitly squeezed its workers, but it did not prepare them, or its industries for broad based consumption. It has not created a self-sustaining, stable economic environment. China will dip into its coffers to stimulate internal employment, spending on infrastructure, or investing in what it knows best - export industries. Endeavoring to attract foreign investments, China will claim improvements in efficiencies, forensics, accountability and accounting practices of its indigenous infrastructure. The claims are beyond its ability to deliver. Until such critical elements as property rights, or a welfare breadbasket are implemented through appropriate taxation, Chinese consumers will be more prone to save, as they must individually concern themselves with how to pay for tomorrow's meals.
Any cash China spends outside will go to acquiring natural resource producers for pennies on the dollar in the present climate, and countries, including Canada will be happy to sell out. This will do absolutely nothing for the long-term health of the North American economy.
There are currently foreign reserves of around $7.5 trillion held around the world with particular concentration of dollars held in East Asia, where since the late 1990s there was perceived need to protect against currency speculations, and a tendency, no, make that urgency, to feed (finance) the American engine driving China's growth. We should note that the size of China's reserve accumulations have, in the past couple of years, attracted the very speculation they sought to themselves protect from, which has further accelerated the bloating imbalance. The size of China's dollar reserves forces a tentative, even precarious, equanimity between the U.S. and China, but it is a potent equilibrium nonetheless. It will be a long road traveled before China finds sustainable balance in savings, consumption, exports, and internally stimulated (broad based) investment. It will also be a long wait before we witness demonstrations of international responsibility emerging out of China. Until then, China will continue to flex its new-found influence to push for such things as an independent currency a few degrees removed from the dollar.
The world's economic history has been fueled by leaps from one bubble to the next, but the current recession may have a long wait for the next bubble of consequence that will yank the world out of the doldrums. Whatever its form, it is not likely to come out of the less than transparent, state owned, and controlled economy of communist China. China has created a massive middle class in a single generation, but it has yet to empower it. China will not soon be supplanting Americans, or Europeans, in the mall line-ups yearning for China-made-American-invented-branded-and-engineered products. American consumers are unconsciously pushing back the clock on that empowerment of the Chinese middle class through their dramatic behavior modification of the past year. Like it or not, global economic stability will for the foreseeable future depend on the West, and very particularly on America.
The views expressed in this
article are those of James Raider only and do not represent
the views of Nolan Chart, LLC or its affiliates. James Raider is
solely responsible for the contents of this article and is not an
employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
Posted By: Jahfre Fire Eater
Date: 2009-07-08 09:26:21
Hi James,
I agree with much of your analysis but question the last sentence. I read that sentence as a sideways conclusion that no global economic stability is possible. I assume you mean that the west WILL provide that stability. On that we disagree.
I believe we are entering a period of creative distruction that will eventually eliminate most excess capacity. Only when that process is complete will any broad-based recover or global economoic stability be possible.
Unfortunately, one of China's most under utilized resources and costliest liability is human labor. China has a huge problem that cannot continue. Population. Soon their polite request for us not to devalue our currency will register as having been denied, with a vengence. Will Chinese leaders just sit by and quietly starve? Nope. I believe they will send the masses to war as part of the process of creative destruction.
WIth whom? When? Why? (the media accepted reason, I mean, I already know why.)
I have my guesses but not good rational for them so I'll just keep them to myself for a bit yet. At the pace this is unfolding I expect the event will preceed my prognostication anyway.
My thinking is that the world will continue to depend on America's return to past out-of-control spending habits, before countries breathe a sigh of relief and "return to a sense of economic stability." America just got kicked in the shins and chipped some bone. Americans are busy Saving for the first time in a generation. Out of control spending will not return for years. The current recession is likely with us for a decade.
Long term, humans will be human, so we will continue to go through roller-coaster cycles, with bubbles providing the biggest amplitudes on the ramps.
China is much more stable today than it was twenty years ago, and while the sporadic regional unrest we observe with some regularity, revolution is highly unlikely, IMHO. It will not enjoy growth of the past, but stability is not dependent on growth.
Posted By: Jahfre Fire Eater
Date: 2009-07-08 19:10:24
Hi James,
I agree there isn't much threat of a revolution. The "guess" I mentioned in my earlier comment is that China will come to the aid of Iran after an attack by Israel in the near future.
During this global economic collapse China has to reduce its excess capacity in human labor so they will send hoards of foot soldiers to die in droves. I think we'll hear about their draft technique as "No fightee, no foodee." The fighting age man will have two options go eat, then die, in the desert or stay home and starve to death with their grandparents.
China's population is economically unsustainable. To say that they and the rest of the world will continue to depend on the US ability to resume an unsustainable economy is, to me, the same as saying they are doomed. No empire in history has ever recovered its former glory after the crash. We are in a full unstoppable crash.
The place we diverge is summed up in your roller coaster analogy. You believe we are still on the track and enjoying the ups and downs as designed. I beleive we left the tracks last fall when the Senate initiated a spending bill for the bailouts. I also don't think it's a roller coaster but an enormous freight train loaded with maunure that has left the track and is plunging into the abyss as dozens of empires in history have done before us. The crash is unstoppable but think of the flowers that will grow there in the future! :-)
I believe the future will be China's economically but not for the reasons you mentioned. My reasons are few:
1. The drastic population reduction will ease the economic burden on the remainder.
2. US assets, factories, real estate and infrastructure will be sold to the Chinese at fire-sale prices as our empire collapses.
The Chinese economic advantage will not be in the continuation of their and our unsustainable bubble behavior. That era is over...for now. Instead, they will be our employers, our land lords and our lenders. China will be the "company store" for the entire western world. The dollars they hold must come back to the US in some way...and it will not be the way the FED hopes to force them into. It will be in exchange for assets and productivity and cheap labor. Yep, I believe former tax parasites and paper pushers will have to take jobs producing goods and the Chinese owners will reinstate a work ethic and increase US productivity.
How's that for some wild predictions? I don't consider these opinions wild nor predictions. I consider them history lessons that we're probably going to learn the hard way, again.
Want to comment on this
article? Leave your comment here. Your email address is
required to track your comment. However, we will neither
publish your email address nor distribute it to other
organizations or persons. The only reason we might use
it would be if we needed to contact you regarding your
comment. All comments are subject to our
terms of use policy.
