Le·gal In·sur·rec·tion

You are presumably aware that The Economist, the WSJ, and the other parts of the right-wing "free market" press have been loudly braying that China is on the verge of economic collapse for the past 20 years, right? My favorite entry in this was Gordon G. Chang's "The Coming Collapse of China" which made many of the same points you're citing...in 2001.

You're also presumably aware that the right wing press has spent the past decade constantly predicting that India's economic growth rate will soon surpass China's. However, due to India's deep dysfunctions, particularly pervasive illiteracy and malnutrition, this never actually happens and China continues to grow at roughly 9% a year (faster than India is growing) and now enjoys a per capita GDP over twice that of India.

When compared to the United States, China is still a desperately impoverished country with a GDP per capita less than 20% of our own. As should be obvious, because of this deep poverty China does not need to follow textbook-perfect economic policies in order to achieve relatively high rates of growth. Indeed China's ability to continue enjoying the low-hanging fruit of catch-up growth is so blindingly obvious that anyone that argues that it is on the verge of a systemic collapse is either deliberately mendacious or remarkably ignorant.

Maybe the upcoming global crash will be re-educate Americans on the importance of being Americans and not global citizens. Tom Friedman's delusions about the superiority of a totalitarian "flat earth" global economy are about to be exposed. American's 300 million people, when riding the prosperity and innovation of our free society, are perfectly suited to out-perform a totalitarian economy even when that economy relies on short-term advantages of slave labor and gerry-rigged market advantages.

We remain the only superpower on earth. Use it or lose it. We are the only nation that can go to war against the entire world and win. If we could lean forward again as a nation instead of going on world apology tours, it will bring our "allies" back in line and force them to shoulder their share of the burden of protecting the free world.

But there is no avoiding it, things are about to get real ugly. We need to stay together in the upcoming struggle.

@Mark - the article quoted is not a part of the "right wing press" unless you define that to be anyone who disagrees with you. The author is a short seller who puts his money where his mouth is; that doesn't make his analysis correct, but it does debunk your theory that this is all part of some vast right wing conspiracy.

The "low hanging fruit" path to global dominance. Poverty is an advantage? Wow. An economy based on a slave labor force of over a billion illiterate and uncultured slaves. What could go wrong? China has finally perfected the obvious advantages (except to us mendacious and ignorant freedom-loving capitalists) of centrally-planned totalitarian economics. No need for inefficiencies like competitive forces and market-based pricing. Just command the results you want and dream becomes reality.

That is the foundation for demand-side economics. Instead of increasing supply, call those creating the excess demand for a rally at Tiananman Square and gun them down. Welcome to the future?

"When compared to the United States, China is still a desperately impoverished country with a GDP per capita less than 20% of our own."

So that's not exactly a strong argument in favor of emulating Chinese policies then, is it?

It's not a "conspiracy" and I never said it was. What this "analysis," and other similar anti-China analyses, is is demonization of the sort that any political movement engages in from time to time.

Because conservatives hate and fear the Chinese, and view them as a potential rival, they are a very handy target for criticism. The Indians, because they are our "friends," have their vastly inferior economic performance (and the vastly lower standard of living enjoyed by their population) studiously ignored and/or whitewashed by analyses like this. I don't think this is a "conspiracy," just people engaging in their own biases.

I'd like to add that the analysis you linked to isn't even internally coherent. One of the five biggest "dangers" facing China in the coming years is supposedly a growth in its labor force which will allow it to capture even more manufacturing from developed countries. This is a danger to short-term Chinese economic stability because...deflation! Or something, it's never really specified. One could argue that, over the medium and long-term, China's economy will not be able to absorb the influx of rural labor. But neither this nor deflation are short-term risks, by definition they are long-term dangers. Indeed arguing about the looming specter of deflation when China's inflation rate is both high and accelerating seems quite strange.

It is one thing to argue that China's state-directed and highly investment-dependent development model will, at some unspecified point in the future, hit a wall. I'd agree with that! But to argue that China is standing on a precipice of immanent social and economic collapse seems bizarre, particularly when such predictions have been constantly refuted for the past two decades.

Important topic.

1. I decline to project China's future until they've gone through at least one business cycle.

I said that when they were riding fast and high, I'm saying it now that they're looking wobbly, and I expect to repeat it when they're banged up from a fall.

2. Although apparently Michael Shulman is a talking/typing head rather than a trader or money manager, I agree that there are legitimate concerns about China which are not based on wishful thinking. Re Mark Admontis: Lord Keynes--a successful speculator, whatever one thinks of his economic theories--remarked that a market can remain irrational longer than a contrarian investor can remain solvent.

3. China might continue going up up and away; they might engineer a soft landing; or they might experience a hard landing/crash. In the third eventuality, it's what they do afterward that will count. To repeat, I am unwilling to estimate the probability of each scenario.

4. Again wrt Adomantis: unless either country implodes--more likely the USA, unfortunately--China will be a competitor/rival in the unfolding century.

So what? Competition is good, we wingnuts believe. ;-)

Potentially devastating, and hopefully avoidable, is for China to become an enemy.

60% of China's GDP is related to construction. They have property gluts everywhere (see the ghost cities article above). Economic history suggests that when trillions are misallocated to assets for which there's already a glut, bad things happen.

China has been gradually tightening monetary policy by increasing required reserve ratios at the banks. It hasn't worked, as inflation is now running over 5.0%. They had a failed 3 month bill auction yesterday which has forced the PBoC to unexpectedly raise interest rates.

Jim Chanos, long time Obama and Democratic supporter, and operator of one of the world's largest hedge funds devoted exclusively to short selling, has given several high profile inteviews the past year warning about the Chinese property bubble. He's been shorting materials stocks and the Chinese property developers, so of course he is talking his book in those interviews. He may be conflicted, but that doesn't make him wrong.

John Taylor, who runs the world's largest foreign currency hedge fund, said this weekend the Aussie dollar is a terrific short. The Aussie economy exports resources to China to facilitate its property development. Like Chanos, he thinks China's landing won't be as soft as the China bulls believe, and he's expressing that idea in a trade by shorting the Aussie dollar.

As for conservatives hating and fearing China, where does that idea come from? Did you just make that up and throw it in becuase you thought it somehow strengthens your argument? Because I don't see it. Ever since Nixon and Kissinger "opened the door" to China, conservatives have wanted more trade with China, not less. The hate and fear comes from the liberal left who are regularly crying and whining about China "stealing American jobs". Their answer is potentially disastrous protectionist trade policies (see Charles Schumer).

Maybe the Chinese central planners will engineer a soft landing. Economic history says the odds are against them. And being on the other side of a Chanos or Taylor trade usually isn't a good place to be in the long run.

China releases figures showing a 9% growth rate. The Chinese government says so. Totalitarian governments are not trustworthy. Who is going to release figures that contradict the Chinese state? Not the Chinese companies who are being subsidized by that state.

The Chinese are building railroads. They are ultra-smart, so we should do the same thing? Where is the US government approved analysis that building more US passenger rail is going to be profitable? And, if this is so obvious, then why not let the free market do it. Nah, only the government has a long history of profitable projects, especially those projects doubted by people who would invest their own money (sarc).

Our politicians almost always use "cargo cult" reasoning. For example, tax rates were higher under Clinton, and the economy was good. So, raise tax rates! Where is the reasoned and proven connection between higher tax rates, more government, and prosperity?

People spend money in a prosperous economy, so let the US government give them money to spend. Prosperity is sure to follow. Again, where is the government approved analysis which supports that policy? It would be a laugh to analyze it.

What is the similarity between our government and some superstitious Pacific islanders during World War II? --> Cargo Cult Economics

The above link doesn't work. It should be
--> Cargo Cult Economics

I'll leave it at this: Japan's development model, characterized by heavy-handed state intervention and overwhelming dependence on exports, is littered with glaring structural deficiencies. Despite these many weaknesses, at its peak, Japan was able to achieve a per capita GDP that was nearly 90% of America's. As I noted, China currently has a GDP per capita under 20% of America's. To me, this suggests that it China still has many growth opportunities available and that it will be able to continue growing for a lengthy period of time EVEN IF ITS ECONOMIC MODEL IS SERIOUSLY FLAWED (an example: The Soviet Union followed essentially Stalinist economic policies, which are anti-market, for over sixty years before suffering a collapse that had at least as much to do with declining world oil prices as it did with its own economic flaws).

I'm not saying that America should adopt Chinese-style economic policies, I'm not even defending China's model as far as it concerns China. All I'm arguing is that systems (even brutal and inefficient ones) have a great deal of staying power and can continue to follow their own internal logic for many years even if that logic is stupid and nonsensical. China is not going to suffer a catastrophic and wide-ranging systemic collapse in the near future, and anyone that expects that it will suffer such a collapse is engaging in wishful thinking.



Per capita GDP data taken from: http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&ctype=l&strail=false&nselm=h&met_y=ny_gnp_pcap_pp_cd&hl=en&dl=en#ctype=l&strail=false&nselm=h&met_y=ny_gnp_pcap_pp_cd&scale_y=lin&ind_y=false&rdim=country&idim=country:JPN:USA&tdim=true&hl=en&dl=en

1. Mark Adomanis, sorry to have misspelled your name in my previous comment. (After my antivirus software let me get infected, I enable Javascript in my browser on a page-by-page basis. That can be awkward: the submitted version of my comment was not the proofread version.)

2. In keeping with my reluctance to assign probabilities, I had softened unless either country implodes--more likely the USA, unfortunately--China will be a competitor/rival in the unfolding century to unless either country implodes or stagnates, China will be a competitor/rival in the unfolding century.

3. MAB&W, Chanos's track record gives his opinion weight. Don't try this at home is good advice for the individual investor who is bearish on China. Such an investor might consider purchasing short ETFs--with no more money than he can afford to lose.

4. Bill Jacobson, thanks for the Christmas wishes in another post. Merry Christmas and Happy New Year to you, to Kathleen, and to my fellow readers and commenters.

All of you "economist" types give me a pain. Never seem to know what you are talking about. Perhaps you should have learned to drive a truck. At least you would be useful to society.

I might also add that what is bad for China is ultimately good for the free world.

Interesting:

How many of you have actually visited China?

How many of you lived there?

It would be enlightening to find out.

Personally, I lived in China 2005-6. I saw incredible changes in my short time there. After I repatriated to the US, I have been there 4 more times.

From what I have seen and experienced, the growth is a double edged sword. The middle class is growing at an alarming clip. When I arrived at the city I lived in, there were few cars; traffic was chaotic. When I left a year later, they actually put up iron fencing along the double yellow line to keep cars in the proper travel lane.

The growth of the middle class is a hopeful sign. As people become more well off, it will make it more difficult for the CCP to keep their level of control. This will eventually lead to the collapse of the current regime, which is a good thing.

As for the few of you who stated that there are 1 billion uneducated and uncultured slaves, I suggest you try to rethink your bias. The Chinese civilization has been in existence for over 5000 years. While their culture may be "primitive" to Western standards, it seems to have worked for them. While their education might seem to be lacking by Western standards, almost everyone can read and write - that's how they get past the dialect thing. To say they are uncultured and uneducated is pure ignorance.