Is China Doomed?
Has the mainstream media ever been right about China’s future?
For as long as China has piqued my interest, there have been articles prognosticating over China’s coming decline.
You’ve seen the claims that China will slip and fall into a Japanese style bog, perhaps even plunge into chaos and darkness by way of a new revolution.
So why hasn’t it happened yet?
Doomsday in China
Past results are no guarantee of future performance – so all of the things that are supposedly about to push China into the abyss may in fact do just that.
After all, the environment may damage the health of hundreds of millions of Chinese people, the wealth gap may continue to grow, corruption may continue its cancerous growth throughout the country, old people might crush the younger generation under the weight of their future demands, and all of the rotting loans made to state owned enterprises might finally collapse the Chinese banking system from within.
And that might lead to revolution, or at least a painful contraction in China’s economy.
But here’s the thing: Most articles that are negative about China’s future are confused about what pushed it from one of the most wretchedly poor nations to the number one manufacturing country in the world by sales volume next year.
They give lip service to China’s growing economic freedoms and capitalism with Chinese characteristics, but don’t realize that by the measures that matter most for continued growth, China already ranks well.
So what are those measures that make the most difference in growth? Savings and taxes.
Savings are the engine of growth for any economy, Keynesian theories be damned. Without foregoing significant levels of current consumption, it is impossible to develop capital. The resources, labor, and capital necessary to fuel further capital formation and hence greater future output can only be freed for future consumption by consuming less today.
And taxes destroy capital, period. Just listen to this guy:
The power to tax is the power to destroy (John Marshall, Chief Justice of the United States Supreme Court from 1801-1835)
Remember that inflation by privately owned central banks is every bit a tax as the money you send to the taxman every year.
America’s shrinking capital base
A prime example is the US, where the real capital base has been shrinking for almost a decade. This is especially apparent when you use accurate measures of inflation and GDP growth (see below), or try to figure out what growth would have been if Americans had not taken on ever higher levels of housing or credit card debt.
If you combine these real inflation with the false growth from ever escalating debt levels, growth would have been heavily negative for the past eight years. In other words, America’s capital base has been shrinking even faster than the above chart would indicate, official statistics be damned.
What has caused all of this carnage, though? Ever higher total tax rates (as a percentage of GDP – and remember to include monetary inflation as part of the tax) and lower savings rates have significantly damaged the US capital base and economy in recent years. That damage is only now starting coming to light with the blowups in the credit markets.
China’s growing capital base
China has relatively low tax rates as a measure of total GDP – only 15.8% in 2008 versus 26.8% for the US.
But more importantly, China saves:
(From Hu is Saving China? at the Economic Strategy Institute)
Despite assumptions that excess savings in China is a bad thing, the portion that stays within its borders is the primary driver of growth in China.
Sure, part of the reason for such excess savings is fear about a future where one grandchild may have to support four grandparents, and a reaction to a time when China was desperately poor.
But whatever the cause of China’s sky high savings rates, they don’t seem to be coming down anytime soon. And that will spur more capital accumulation and growth, pushing China past the US or any other country in value added manufacturing in the years to come, likely much faster than anyone could predict.
What if China somehow wises up and stops trading their real goods for slips of paper promises with ever declining value?
That would just mean Chinese consumption and real savings would go up.
But Chinese People Don’t Consume…
There is a common conception that low rates of consumption are somehow holding China back.
This is based on the false idea that it is consumption that drives production, and not the other way around.
Americans are supposedly helping China by sopping up their excess production (savings), and will supposedly hurt China as their ability to consume disappears.
Well… simply put this would only be true if Americans had been trading real goods of equal value for their excess consumption.
But they were trading slips of paper with ever declining value for real goods from China.
When China cuts off Americans from the goods they can’t afford, real consumption of goods and real savings in China will go up.
After all, paper losses at the companies most exposed to exports to America will not reduce the amount of real resources, labor, or capital in China’s economy. Such losses will just force these factors to flow to companies that can meet the real consumption needs (current and future) of China or trading partners who trade real goods.
That’s not to say that malinvestment has not occurred thanks to false demand from America (or more accurately, false supply from the very non-free market central banks of China and the US – there are very few individual Chinese investors stupid enough to throw a bunch of money into US treasuries). But this malinvestment only creates the illusion of wealth – an illusion that is now being pierced and would be shattered if China suddenly tried to exchange all of their US IOU’s for real goods.
The moment China gives up this illusion of wealth in the form of paper IOU’s, China will be better off, even if it means a painful restructuring of Chinese industry.
When China does this, they will have even more real savings to plunge back into the Chinese economy. And that means that China’s days of growth are far from over.
[...] The China Explat: That’s not to say that malinvestment has not occurred thanks to false demand from America (or more accurately, false supply from the very non-free market central banks of China and the US – there are very few individual Chinese investors stupid enough to throw a bunch of money into US treasuries). But this malinvestment only creates the illusion of wealth – an illusion that is now being pierced and would be shattered if China suddenly tried to exchange all of their US IOU’s for real goods. [...]
I agree with the above sentiment. US taxes, beurocracy, and costs is killing its economy. If that is so then the reverse of this is the growth of China. I’m no economist, but living here is very different from the US. Even though competition for schools & good jobs is really high, there is still a lot more optimism here among the people than in the US. Everywhere in the US its like doom & gloom. There doesn’t seem to be any strong growth anywhere. However, here in China everywhere seems to be an opportunity & people aren’t afraid or hesitant to grab it. So what if you loose? If trying & taking risks can gain so much, just go for it. The US has lost this pioneering spirit. I don’t think China is going to go down at all. The only thing that could stop their growth is if they get too comfortable. The younger generation seems less entrepreneurial than the older ones. I think that if they get too much more interested in US movies, media, shopping, games, etc. then they might not have the gumption of their fore-bears. That could slow growth. At the same time it might create some balance; each person ends up having higher standards.
I would have to disagree having lived in Mainland China for several years, most of China’s growth is not really internal. Investment from abroad is the engine by which China grows, their currency which is not traded internationally and is used to keep political stability.China only hhas two major markets, property and manufacturing.Shortly the property bubble will pop making the Yuan increase in value even more, causing heavy loses, and political instability. China does not have a diversified economy, labor force, or educational system. It represents a false capital market, it is a communist/facist market which will by its inflexibility implode further scaring investors away.
Wow! That sounds quite bitter;got a lot of baggage haven’t we? I think there has been a lot of internal growth in the last 6 years. Yes, there is still a heavy reliance on exports, but the government has been encouraging growth of the internal market. I also just read recently that they increased the required downpayment for buying a house to over 30%. 30%! The bubble tht burst in the US was mainly over 0%; most buyers (especially new) HOPE to put down 20%!Its hard to flip houses when you have to put that much down. As for the internal market, the company I’m working for just hired new sales people, technicians, etc just for the internal market – they are considering the increase in wages and difficulty in finding laborers so therefore higher-tech machinery is required to replace workers. If thats not a sign of increased internal market then I don’t know what is. Wait, I do. Just go down to the local shopping area & see the huge numbers of people buying shoes, clothes, toys, wedding clothes (lots & lots of wedding-related service oriented business in China), etc – all made in China, marketed in China & sold mainly in China. The machines used to make the items-made in China, shipped in China, etc. I think this means a much stronger market in the future – a much better outlook than the US. I was looking for companies that make similar machinery to mine in the US & I couldn’t find a single one. Germany, Japan, India, Australia, Italy, UK, heck, even Ireland! They all make it, but after over an hour of searching, I still couldn’t find a single one in the US. Still, if you compare China to other modern countries, its still behind in economic strenth & verstility, but if you compare it to where it was just a few years ago? If you compare it to countries that are still developing, that have been for awhile? China ranks number one. If stable growth continues – well we all know where its headed. Besides this quarter (Spring ’10) turned out a lot higher than officials expected, in fact they are worrying about too fast of growth, cautioning that there is still the rest of the year to come.
Don’t count the U.S. out yet. The U.S. has a long sad histiry of failure that seems to have been forgotten in the past decades of growth. However, it is during these times, Revolution, Civil War, Depression, WW2, Civil rights, George W. Bush ; p, that a few people stand up. Most people are always gloomy, fortunately, they aren’t important to the remarkable diversity and ambition that lives in America like no other place. Having traveled many places, I have never found a culture that is half as open to the idea of helping each other when times are tough instead of waiting for the government. We expect our government to suck, that’s why americans are so charitable and self reliant. Which in the end is what will give us the ability to innovate and bounce back. Don’t forget how currencies ARE allowed to exist in the U.S. that are not based on the FED. Banks used to carry their own currencies all the time during the gold standard. Something like that could come back soon against the wishes of the government. With banks and rich people buying gold like crazy, they could easily start lending money to the government and after all these bailouts sink or swim. The collapse of the dollar does not represent a collapse of the U.S. We will either hit a breaking point and revamp, or we won’t because we won’t need to. But the corporations that rule the world, depend on the U.S. FED’s ability to get them what they want and they will not let that fall down so easy.
And yes, many contractors in China depend on it too. It’s easier for them to do business with a U.S. standard than let it collapse and do battle with the E.U. for rights. And vice versa.