Two bits of news developed yesterday relating to China. Well, one bit of news was more an interesting article that made a rather good point about the yuan. The other news was based on the views of one of the world’s leading economists who has predicted a nasty economic crisis in the making in China.
Let’s start with the China crisis and then finish with what really is an absolutely fascinating point about why the appreciation of the Chinese currency will not solve all the world’s problems as some politicians think. Rather, it will create a new set of problems.
Kenneth Rogoff belongs to that elite group of economists who called the economic crisis. He is a former chief economist at the IMF, a professor at Harvard, and co-wrote one of the better economic books that have been published recently – This time it is different. And right now, our Ken is in Japan hobnobbing it at an IMF conference.
He said people say that China “won’t have a financial crisis because there’s central planning, because there’s a high savings rate, because there’s a large pool of labor, blah blah.” But this time, he suggested, it won’t be any different.
The real crisis in the making in China is the asset and investment bubble.
As you know, China reacted to the economic slowdown by massive increases in government spending. But, said the famous economist: “Their response to the latest financial crisis clearly raised the risk that they have a debt-fueled bubble in the economy.” He went on to talk about a bubble in real estate in Shanghai and Beijing which has “taken a departure from reality”, and warned that such a crisis in China will be horrible for Latin America, where many countries export their commodities to the other side of the Great Wall.
There is one drawback to the good professor’s prediction. Let’s tell you about one particular sentence he uttered: “You’re not going to go a decade without having a bump in the business cycle.”
Umm, so he is actually saying China will see growth fall drastically at some point this decade. But it won’t be like Japan’s lost decade, he said, rather the China slowdown will be a bump in the economic cycle.
So it’s a bit like going to a séance, and the mystic saying: “Do we have anyone in this room called John?” So yes, China will see growth stumble at some point in the next ten years.
Investment and Business News is good at making predictions, too. We can now exclusively reveal that it will snow in the UK, at least once more, at some point during this decade.
It seems that a good economic forecaster gets his predictions right, just like a good astrologer, by making them as imprecise as possible.
What Kenneth was really saying is that China is no different from the rest of us, and that maybe the world has become over reliant on China.
Maybe more telling was his comment that when China stumbles it will not be like the Japanese lost decade. In this sense he is dead right.
Did you know that according to the Chinese Academy of Social Sciences, the average Chinese will produce $4,000 worth of goods and services during 2010, compared to just $3,500 odd in 2009.
Aspects of China’s growth story may have a hint of a bubble about it.
But the real story of China is that productivity is surging. There is nothing illusionary about this. It is not a case of the emperor has no clothes. The Chinese emperor is well and truly clothed.
And if you want to know what has really caused today’s economic crisis, a factor is surely that a fifth of the world’s population is industrialising so fast that this is creating imbalances.
Whenever a new superpower emerges, the result is upheaval. This does not have to be a bad thing, but that there will be negative consequences at some stages during the process is inevitable.
And that brings us on to the good article. Writing in the FT, Geoff Dyer points something out that few people in America seem willing to contemplate.
As you know, US politicians, and some European ones, blame the cheap yuan, or renminbi, as the cause of all the world’s ills. There seems to be this view that the Chinese currency needs to appreciate by about 40 per cent against the dollar.
But consider what this would entail. China’s GDP measured in dollars would rise by 40 per cent, meaning all of a sudden the Chinese economy will be around half the size of the US economy.
Now call the author of this article disingenuous if you like, but US politicians won’t like that.
As Mr Dyer points out, they won’t like it either when the capitalisation of Chinese companies such as ICBC, which is already the world’s largest bank, sees its value shoot up. They won’t like it when firms such as PetroChina become one-a-half-times bigger than ExxonMobil.
But what they really won’t like is when these giant Chinese firms look for American firms to buy out, or when the Chinese defence budget rockets with the appreciating yuan.
The argument that a higher yuan will solve the world’s problems is simplistic nonsense.
The truth is that in developing economies the currency is always cheap. It was thus when the US was a developing economy. The big difference this time is that there are two developing economies, India and China, which between them make up between a third to half of the world’s population and which greatly outnumber, in terms of population, the developed world.
And of course this creates problems, just as it creates opportunity.
And that, more than bankers’ greed and debt bubbles, is surely the real explanation of what’s going on in the world today.
For more on China, the yuan versus dollar, and sino versus western culture see
The Great Bubble of China
China and the West: the lesson of history
Truth or myth, free trading yuan is answer to our ills
Will the emergence of China mean more unemployment in the West?
Why China’s real opportunity gets overlooked: the parallel with Japan
What went wrong with China and what went right?
China and the West – The difference is cultural
China in our hands and the currency row
China solves economic crisis, with cunning plan
China heading for recession, and the yuan myth
The great imponderable
China: the government is not omnipotent – it is impotent; and that’s where the West has got it wrong
© Investment & Business News 2013