The Downturn in China
Things are looking down in the far east, just like everywhere else:
China’s growth rate has been forecast to be about 9 percent in 2008, down from 11.9 percent the year before and close to the 8 percent that economists say China must maintain in order to keep the labor market stable.
“China is under growing tension from its large population, limited resources and environment problems, and needs faster reform of its economic growth pattern to achieve sustainable development,” Hu said, according to the People’s Daily newspaper, the official Communist Party newspaper. He did not provide specifics.
This hardly counts as an economic model, but for my part I just don’t see how China could possibly maintain 8 percent growth if we have simultaneous recessions in Japan, the US, and the Eurozone. And all indications are that we’ll have simultaneous recessions in those countries. Keep in mind that six percent growth would be, for a country that’s not China, an impressive figure — especially under bad conditions. But if China is unable “to keep the labor market stable” then I think you have to wonder about what the consequences of that would be for their political stability.
34 Responses to “The Downturn in China”
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November 30th, 2008 at 4:04 pm
Just wanted to comment how awesome it is that the “Switching is Easy” Credo Mobile ad on the right has a picture of Joe Lieberman.
November 30th, 2008 at 4:07 pm
Well, you’ll see the consequences before too long. You have 300 million or so migrant workers who leave the countryside and smaller cities in search of work in factories, construction sites, etc. As thousands of factories are starting to close in Guangdong and elsewhere, workers will either return to the countryside – which can’t support them economically – or stay unemployed in the city. Either way, its a recipe for trouble.
November 30th, 2008 at 4:10 pm
Bear in mind that a big share of China’s growth in the lasy decade has been from domestic investment and infrastructure spending … and of course, the US housing bubble burst a year ago, so they have had quite a bit of advance warning to develop a government spending program to help ride out an international recession.
9% is not an implausible growth rate.
November 30th, 2008 at 4:45 pm
“As thousands of factories are starting to close in Guangdong and elsewhere, workers will either return to the countryside – which can’t support them economically – or stay unemployed in the city.”
Nothing a great leap forward can’t solve.
All we need is countryside villages to set up toy and steel small factories.
November 30th, 2008 at 5:35 pm
“Bear in mind that a big share of China’s growth in the lasy decade has been from domestic investment and infrastructure spending ”
Roughly 40% of their economy is industrial production for exports. So, its hard to see how their economy can continue its rapid growth while one of its largest sectors is rapidly deflating.
November 30th, 2008 at 7:04 pm
Don’t put too much stock in any Chinese economic numbers. No one knows what China’s real growth rate was last year. Whether it is local governments messing with their reports to Beijing, Beijing cooking the books, or some combination of the two, is a matter for debate. But the end result is the same–unreliable statistics.
November 30th, 2008 at 7:39 pm
3% would be impressive. 6-9 is phenomenal.
November 30th, 2008 at 7:59 pm
For one thing, China has a more realistic chance of keeping their GDP at higher levels simply because their economy has been operating from a surplus, not decades-long deficits. Thus they can put people to work (at dirt cheap wages) through domestic stimulus spending, w/o borrowing, by cashing in their foreign reserves. Of course, if China chooses to go this route, that would totally suck for the US & EU economies as we would be forced to pay back our debt. If things ever get to that point, I suggest we need to worry more about our own political stability.
November 30th, 2008 at 8:21 pm
“I suggest we need to worry more about our own political stability”
I don’t see even a severe depression having a significant impact on the US’s political stability. I mean, perhaps it would lead to bread riots and the like, but I think that it would take an extraordinary turn of events to have a financial crisis lead to a political crisis. In China, I’m not so sure. Even with their rapid economic growth you see tens of thousands of mass protests in the countryside ever year – and thats going from the Chinese Government’s figures.
That isn’t to say that an economic downturn will necessarily lead to political instability, but the potential is there.
November 30th, 2008 at 8:23 pm
bob in fla: That’s not how government (or corporate) bonds work. If China wants to cash in their debt, they have to sell the bonds to someone else. It would be a good time for China to pursue that policy, in fact, since Treasuries are currently unusually expensive.
November 30th, 2008 at 9:34 pm
The flip side is that dumping their dollar holdings would cause their currency to appreciate, which would inflict even more pain on their export industries.
November 30th, 2008 at 9:52 pm
Walt & Dave:
And here folks is the conundrum for our world economy. The producer cannot consume, but the consumers can no longer product (and now can no longer consume). All because China, rather than let its currency or its wages rise to keep up with the growing trade imbalances, decided it was best to continue to keep wages low in order to attract investment and jobs, but failed to see that it was literally biting the hand that fed it (the United States).
At least we are the debtor nation. It is easy for us to decide to revamp production. We have the knowledge, capacity and people, as well as still a decent enough consumer base. In addition, our debt is in US currency, meaning we could inflate our way out of this. As the Trump-man sayeth: “When you owe someone $1,000 dollars, that is your problem. When you owe someone a million dollars, that is their problem”
Seems to me China is the country which is in trouble once the US population finally says enough to free-trade and demands a re-industrialization of this country. China does not have the ability to create its own aggregate demand, which means that they are beholden to the buyers.
November 30th, 2008 at 11:13 pm
Many of the goods that China produces for export are inferior (both qualitatively… crappier electronics, toys, clothes… and in the technical economic sense that you buy more of them as a percentage of your income when your income falls) – so a lot of China’s industries will be weakened by a Japan/US/Europe recession, but others will be strengthened. The question is, which effect is stronger…
December 1st, 2008 at 5:25 am
The current lack of democratic institutions may actually hurt the Chinese during this current economic downturn. The Chinese president wants to spend over 500 billion dollars domestically in order to stimulate the economy. But on the local level the Chinese officials are so corrupt that they might take the money themselves, and since they don’t face any elections or political opponents, will probably get away with it. So it is very likey the 500 billion dollar stimulus package will go to waste due to the political immaturity of the Chinese government.
December 1st, 2008 at 11:59 am
“But on the local level the Chinese officials are so corrupt that they might take the money themselves, and since they don’t face any elections or political opponents, will probably get away with it. So it is very likey the 500 billion dollar stimulus package will go to waste due to the political immaturity of the Chinese government.”
I don’t see this as an issue of democracy per se – more one of a political culture in which it is taken for granted that bureaucrats should use their positions to benefit themselves. This has had disasterous consequences in infrastructure building – the collapse of several schools in the Sichuan earthquake has been blamed on officials embezzling funds for school construction.
That said, I wonder what the practical effect of that embezzlement would be on the economic stimulus program. That is, if 100 Billion of that gets spent by officials on banquets, cars, prostitutes etc. would it still be contributing to the economy?
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