Sunday, November 23, 2003
CHINA HOT OR NOT?
Time Asia has an article on the question of whether China’s economy is “superheating” titled Too Much Too Soon? It profiles a car manufacturer in Xian that was a state-owned artillery shell plant just a few years ago. The article goes on to discuss the general rapid growth in Chinese manufacturing, and then sounds the ominous chords of overproduction followed by recession:
The danger, however, is that the government will let the pressure build until the economy is so saturated with excess goods that banks must cut off credit abruptly, pushing the economy into recession. Economies always look and feel great when credit is easy and factories are coming on-line and new developments are in the works. But at some point, all those washing machines, apartments and automobiles have to be converted back into currency. The question hovering over China's economy now: Are there really enough buyers out there?
There’s no question that’s the right question. Over the last 25 years of reform, China has faced a series of qualitative thresholds: privatizing agriculture, separating large state-owned enterprises from the state structure organizationally, smothering the role of communist ideology in society, allowing the internet to blossom with only minimal party controls … the list goes on and on. Up to now, meeting pent-up demand and investing generations of stored capital has been the easy route: once the market switch was turned on, the process ran swiftly, and with it came a cascade of progress on many levels throughout the country.
As the Time Asia article points out, though, the question of what happens when China’s manufacturing economy meets its first equilibrium point with domestic demand isn’t just a Chinese issue, it’s an issue for the whole world, because China has become the whole world’s factory. When a major sector of Chinese manufacturing comes close to meeting China’s domestic demand, the excess will either go abroad, or there will be a recession in China.
The pressures, both domestic and international, will be intense. Domestically, the crony-ish format of “Confucian Capitalism” will result in a strong push to subsidize industrial overcapacity. Internationally, the even greater flood of inexpensive Chinese manufactured goods will challenge every developed country’s commitment to free trade. Policy failure on either front could truly spell a disaster for China and the world.
There’s really only one path out of this that will make sense: China and the world have to “stay loose” to allow continued growth throughout the Chinese economy. Domestically, China’s top rulers will have to allow more and more people to xia hai – “jump into the sea” as it is said, i.e. cut loose from the state-controlled economy and make their livings creating sufficiently broad wealth to absorb the growing supply. Tightening down will only flush the problem upstream into the already-rotten banking system, leading to a real depression, not just recession. With the genie of personal expectations for a better and better life let out of the bottle, that would be the death-knell for the Party. Internationally, throttling Chinese exports will inflame the sullen Chinese nationalism that always lies just below the surface, and would set off a round of trade battles that would kill the global economy.
The only way forward is freedom.
GB, THHotA
posted by Greg 8:43 AM
