Friday, August 21, 2015

China's economic slowdown: does it matter?

There's been a lot of hand-wringing about the Chinese economy's slowdown recently. In the space of a month, Shanghai's stock index suddenly dropped by 30%, and the Yuan was suddenly devalued by 4.4% against the US dollar. It has been speculated that the official figure of 7% annual GDP growth may well be exaggerated, and we may be talking about "only" 4 or 5%.

Quite frankly, all the concern sounds a bit over the top to me. The stock market's drop of 30% followed a rise of 150% over the previous year. The Yuan's devaluation wasn't really that huge, and it is a far cry from the years in which it was much more severely undervalued. What is true is that the Chinese authorities will always take draconian policy measures to try and fix any economic problem which presents itself, as can be seen from how they attempted to stop the stock market from dropping further. They are just congenitally incapable of not interfering heavily and unpredictably in the economy. Then again, leaving financial markets to fix themselves through market forces also produces dangerous imbalances, as the 2008 financial crisis in the US has shown.

The bottom line is that China's economy cannot continue growing by 10% a year for ever (and if it did, the world's natural environment would suffer all the more as a result). Even 4 or 5% growth is above the global average after all, and there's no reason why it shouldn't be satisfactory. China is already a moderately well-off country, and most of its problems are caused by social and political factors. Further GDP growth won't make them go away. Only political reform will. Even the dire poverty which still exists in the countryside and among the migrant workers could be ameliorated simply by distributing the wealth more evenly. After all, China has one of the most unequal distributions of wealth in the world (going from one of the most equal in the early eighties).


justrecently said...

Clearly, you haven't listened to Gordon Chang yet. ;-)

lingvo-shatanto said...

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Gilman Grundy said...

The thing is, slow-downs don't always work this way - they can't simply be dialled down. This is especially the case where government actions create uncertainty, bubbles, and extreme over-capacity. Rather than simply slowing down, it can be (as we saw in 2008) like the entire country running into a wall.

Looking at China, it seems unlikely that the government is just going to declare a lower growth target and the economy is going to oblige by slowing down to that figure, with everything else unchanged. There is extreme over-capacity in many sectors (car production, cement, steel, mining etc.) that is basically never going to be used - this "zombie production" is being kept alive by government support with the idea that it will eventually be used, but if it is not then that support will be removed, with economic shrinkage being the result. In the long term this may be a good thing, but in the short-term it will be painful.

Several important factors basically depend on growth staying at a high level and are going to kick up a lot of fuss if they are insulated from the effects of the slow-down.

The extreme loyalty of the military, for example, is basically contingent on a military budget that will increase at ~10% indefinitely (or at least until the spending and capabilities of the US are matched). The security apparatus (which may actually cost more than the military) is another example. The PRC leadership may well be aware that, allowed to expand out of control, military spending can throttle the rest of the economy, but they may be powerless to stop its growth.

Of course, none of this is a certainty, and we should not go into Gordon C. Chang territory and predict an imminent collapse: communist regimes such as that currently reigning in China have weathered much nastier storms.

Ji Xiang said...

I'm no expert on dynamics within the Chinese military, but I can hardly imagine the army staging a coup and taking over in a country as mature as China. This isn't Pakistan or Egypt. As for the security apparatus, it is even more unthinkable that they might become "disloyal" and rebel against the government which they are meant to defend.

Economic shrinkage will obviously be painful for a lot of people in China, but as long as the general narrative on which the government's legitimacy rests maintains its grip, I can't imagine that it will be overthrow. Remember that even in Western countries, many people only found out there was a recession in 2008 through the media, but felt no ill effects in person. In China the media won't talk about it, and so a lot of people won't even find out it's happening unless its really bad.