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November 8, 2011

The Most Important Story of the Day

Hold on to your seats; according to The Conference Board, perhaps the most important business oriented forecasting group in the world, revolution is coming to China.

That’s not what the group’s latest global forecast says literally, but this or something like it is the clear meaning of the forecast that China’s growth is likely to slow to 8.7 percent next year, 6.6 percent in each of the four years after that, and then average 3.5 percent per year between 2017 and 2025. It has long been an article of faith inside China and among most China watchers that the country needs 9 percent growth per year to avoid widespread instability.

If China’s growth decelerates that fast, that far, the biggest question in world politics won’t be how the rest of us will accommodate China’s rise.  The question will shift to whether China can last.

The report, well covered in the Wall Street Journal, is a sober read.  Overall, world growth is expected to decline, with both China and India leading the decline.  The advanced countries are expected to recover from the current slump, but growth will remain anemic for years to come.  In other parts of the developing world, growth could slow to a crawl, presumably reflecting poor demand for basic commodities in a slow growth world.

Forecasts almost never come true, and economic forecasts at this point are much less reliable than weather reports.  But the main story here is that some of the best trained, and best connected economic minds in the business are changing their tune about China and India.  The inexorable rise of the supergiants has been the dominant meme in the fashionable chit-chat about global economic and geopolitical trends for some time.  The Conference Board report gives respectability and visibility to a more textured and, in Via Meadia’s view, more realistic view of what lies ahead.

The Conference Board could still be understating the problem.  If growth deceleration results in serious instability, blows out the financial system (a distinct possibility), or simply ties the hands of China’s policy makers so that they can’t respond in a timely fashion to changing circumstances, deceleration could turn into something much more dramatic very fast.

The next ten years will be full of surprises; this report offers a welcome if occasionally grim peek under the curtain to see what some of those surprises might be.

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  • Kenny

    China’s prosperity always depended on an accommodating West, especially America.

    Up until now, China’s advancement has served the interest of our elites. If that interest falters, bye-bye China’s development.

  • Duncan Frissell

    Beyond current market conditions, there’s also the aging of the Chinese population that may restrain growth.

    Then there’s the Chinese surprise few are mentioning. China may follow South Korea by flipping into evangelical Christianity with who knows what effects.

  • Eurydice

    Before predicting the fall of China, my questions would be, “Are the China experts’ articles of faith valid?” and “Are there other stabilizing forces in China which would mitigate the effects of slower economic growth?” Also, it seems that China itself is putting on the brakes with its increasing concern about inflation. Would inflation be more destabilizing than slower growth?

  • Jeff77450

    It’s hard for me to feel sorry for China. They’ve bullied their neighbors repeatedly every since the communists came to power in 1949. They engaged in blatant, and I gather large-scale, intellectual property theft; blatant unfair trade-practices. Like Japan before them they make little or no attempt to practice the principles of reciprocity and fair trade (to include the aspects of the Law of Comparative Advantage that don’t favor them).

    Military strength is a byproduct of economic strength. How much is it the world’s interest, really, for a blatant, unapologetic, unrepentant bully, with a huge chip on it’s shoulder, to become “rich?”

  • tom beebe st louis

    Ok, interesting story but it fails to address possible causes. First, of course, would be the human reluctance to give their all for a totaliarian government of any sort. Second would be the diminishment of incentives when government “spreads the wealth around”. Who would deny that one? But one that should be regarded is the “one child” rule meant to slow population growth. Promoted there for economic reasons, it has been promoted on this side of the Pacific by such geniuses as Joe Biden, and the greenies. We’re seeing the economic consequences of lower birthrates when the newer generations shoulder the burdens of caring for the elder.

  • Patrick Carroll

    So, we’ve sent them a bunch of paper, and they’ve sent us a load of stuff, and now they’re about to collapse?

    Seems to me we may have made out like bandits.

  • Patrick Carroll

    Has Tom Friedman commented on this?

  • ken

    I know of Chinese businessmen who are outsourcing textile manufacturing to Africa because their workers are on strike, demanding pay raises after years of getting nothing while living in an inflationary environment. When textiles are too expensive to make in China, and thousands are being quietly laid off as a result, there’s big problems.

  • epobirs

    If the predictions are off I’d bet it is that they’re overly optimistic. There is a big difference in how rough government can play with skilled workers vs. unskilled workers. It used to be China could kill off a few million farmhands and replace them practically overnight by emptying out the urban ghettos. But today you cannot restock a high tech factory so readily.

    China is a powder keg. When it starts to blow, it will blow fast. Amidst the chaos, economic growth will be nil. Possibly even negative before the dust settles.

    How many more ghost cities can they build before reality sets in?

  • tg

    Well, to assess the question of instability, one must first know whether China’s population is increasing or decreasing.

    According to must sources

    http://en.wikipedia.org/wiki/List_of_sovereign_states_and_dependent_territories_by_fertility_rate

    it should be declining. Thus, a country experiencing a shrinkage of population while still maintaining GDP growth translates to an improvement on a per capita basis in terms of material wealth.

    This contrasts with many developing nations where GDP growth is partly or mostly influenced by rising population.

  • NukemHill

    Then there are the reports that the real estate market there is cratering. A significant portion of the middle-class growth is due to the booming real estate market. And much of it is structured on crappy loans, just like ours was through the late ’90s and the aughts. If their crash is even a whisper of ours, then a huge amount of their middle-class wealth is going to simply evaporate. With the concomitant increase in instability.

    I think China’s “growth” has been mostly smoke-and-mirrors. We’re not going to see a slowdown there. We’re going to see a flat-out recession. It’s gonna be ugly, and fears of social unrest and possible revolution are not in any way unfounded.

  • M. Rad.

    Hmm, I thought I was the only one noticing the subterranean conversion of China to Christianity. I don’t know what it means either; the Communist gov’t certainly seems baffled by it. Of course, in China it is hard enough just to figure out what the facts on the ground are. Trying to figure out the implications will make your head explode.

  • Scott

    It’s been a phenomenal, historic run. China’s GDP has grown from $300 billion in 1980 to about $6 trillion now.

    No other country in history has been able to grow at such a phenomenal pace in such a short amount of time without generating a huge amount of mal-investment which results in an epic bust. (Just about every railroad in the U.S. filed for bankruptcy in the 19th century as we built out our infrastructure way too fast).

    I will be shocked if China doesn’t eventually experience some kind of financial bust – even if its caused by the hundreds of millions of people who have moved from farms to cities the past 30 years who go hungry from crop failures/food shortages. China has been a slight net exporter of corn (except during years of massive drought caused crop failures) as recently as five yars ago. Now they’re a big importer of corn. They already consume an amazing 60% of global soybean production. They have a voracious, insatiable demand for corn and soybeans as all those newly middle class chinese upgrade their diets and eat more meat.

    It’s simply inconceivable to me that the Chinese economic miracle of the past 30 years will go on indefinitely without a major hiccup. We’ll see.

  • George

    The Chinese are nearing the end of their demographically-induced growth spurt caused by restricting births.

  • Django

    And, if it all goes to hell, the ruling bureaucracy will blame it on China’s flirtation with e-e-evil capitalism. They’ll return to a highly repressive form of government with the same people in control. Of course, a few will have to take the fall and be the new “Gang of Four”.

    With a a rebooted Maoist/Stalinist regime and an angry, frustrated populace looking to lay blame, who’s going to be on the receiving end of China’s palliative aggression? It won’t all be directed internally and this new China will have weapons technology Mao never dreamed of.

  • Bob

    Numbers don’t lie, but governments do. It would be foolish to put much faith in Chinese economic statistics.

    China’s economy will dramatically decline due to lack of property rights and rule of law, crony capitalism, labor unrest and an increasingly restive populace. China’s “Spring” will make the “Arab Spring” look like a spring break party.

  • Koblog

    I prefer Samsung to GE or Kitchenaid.

    Perhaps it won’t be long before I prefer Chinese over Chevy.

  • ThomasD

    China has less than one generation left in order to convert their largely third world agricultural system into a first world system. Otherwise they will become a net food importer.

    Unless the majority of their population proves willing to resume their former third world diet those imports will quickly rise to a degree that will flip the balance of trade to a degree their foreign assets cannot hope to sustain.

    Bootstrapping only works so long as you do not pull hard enough to break the straps.

  • Pettifogger

    Koblog says: “Perhaps it won’t be long before I prefer Chinese over Chevy.”

    I already prefer Japanese over Chevy.

    Historically, many repressive regimes use external conflict to distract the citizenry from hard economic times. Who wants to make bets on Taiwan?

  • Luke Lea

    China’s biggest economic challenge is the development of an internal market, something centrally planned economies are inherently not good at. It’s one thing to ramp up production of Western consumer goods for which there is already a large, proven market, quite another to discover and produce those things the Chinese people themselves want and can afford, in the proportions they want them, and in the most efficient possible way. Hayek made a career of pointing this out.

  • http://backwardsboy.blogspot.com/ BackwardsBoy

    You know, it’s not unpossible that we might have to actually discard this whole idea of a global economy. We could still trade with other countries, don’t get me wrong, but being dependent upon any other nation for just about anything doesn’t appear to be a very good idea for the foreseeable future.
    Would a return to greater self-sufficiency be a bad thing to do about now?

  • John

    Is China due for a slowdown? Yep. But they can whether that storm easily for two reasons:

    1) They are a creditor nation, they have not bankrupted themselves like we have.

    2) There’s so much room for economic growth that will cushion the economc lows, room that mature western economies don’t have.

  • http://www.jrganymede.com mrmandias

    Your second point has some merit, but the first one doesn’t. The loans they have made only benefit them if they get paid when China calls them in. Which isn’t going to happen, because we’ve bankrupted ourselves, just likey ou say.

  • EngineerScotty

    China can’t “call the loans in”–they are mostly Treasury bonds, and they have a set payment date. At that date, they are payable in full; prior to that date China (nor any other creditor holding such bonds) has any expectation of anything.

    China could sell its bonds on the open market–there is a tremendous market for US government debt right now, and if US policymakers limit the ability of the US Treasury to sell more of them; China might find it worthwhile to become a secondary market for these things. And of course, China might decide to stop buying so many Treasuries in the future; but there’s no indication that they have done so.

    But this notion among some that the Chinese have America’s collective balls in a vice, and can demand immediate repayment of US debt should the US sufficiently aggravate them, is utterly incorrect. (And at the present time, the PRC is in no position to forcibly collect on debts should the US default–not that I’m at all recommending such a thing).

  • http://nelsonfrancojobim.blogspot.com Nelson Franco Jobim

    Sooner or late China will face an economic crisis, and then the new middle classes will question the Communist Party power monopoly. They will have to go through political reforms. High growth legitimizes the communist power. Low growth puts the regime on the dock. That’s inevitable. If they liberalize the regime successfully, China will resume its development. Hicups are inevitable. A revolution may be avoided.

  • Mark

    The only thing we know for sure is that the models don’t work; long term GDP growth estimates are always wrong…and not by a small amount.