China’s economy is now regarded as the largest in the world, by most normal standards of measurements. Many – in some economic sectors, most – of the consumer goods sold in Europe and the USA are sourced from Chinese factories. Any impact on the Chinese economy would undoubtedly have a ripple effect in our own – and not just economic, either, as I’ll explain later.
That’s why three recent reports have concerned me. I’ve linked to each one, followed by an extract to highlight the issues they note. Click each headline to read the rest of the article – which I highly recommend, if you’d like to stay informed about this.
Warehouses in southern California are full to bursting with Chinese goods rushed across the Pacific ahead of President Donald Trump’s tariff deadlines.
. . .
Those chock-a-block dockyards seen in mid-January are evidence of a phenomenon in global trade which economists are still struggling to capture the full extent of: “front loading.”
Customers for Chinese goods brought forward their orders in the expectation that duties would rise at the end of 2018, cushioning the blow from the trade war on China’s economy through most of 2018. Problem is, that forward buying means that fewer orders than normal are set to get booked now, depressing trade at the start of the year.
How this distortion in the U.S.-China trading relationship combines with the other risks to China’s export performance this year will help determine how bad the slowdown in the world’s second-largest economy will become.
China is one of the few countries that target economic growth, and growth numbers are manufactured to be consistent with the objectives of various Chinese development plans.
Notice, unlike most developed countries, the quarterly rates are amazingly stable, quarter to quarter. Yet, financial markets accept and trade on the announced growth numbers as if they are a real measure of the actual state of the Chinese economy.
Some years ago, while I was on a business trip to China, the authorities announced the growth rate for the September quarter in the middle of the month of September, before the quarter had ended. In Australia, our statistician would not be able to announce the September quarter result until about the first or second week of December.
Recently a Chinese professor was censored after suggesting that growth was below 2 per cent in 2018, not 6.5 per cent as announced by the authorities.
One of the reasons offered for why the Chinese government consistently exaggerates growth numbers is its concern about social unrest if the Chinese people were told the truth about growth and the state of the Chinese economy – that economic performance was falling well short of the objectives or promises of its economic plans. There is real concern as to how to continue to control a population of 1.4 billion.
China is in the grip of a dangerous downturn and may be forced to rescue large parts of its financial and economic system, the world’s leading expert on debt crises has warned.
Harvard professor Ken Rogoff said the key policy instruments of the Communist Party are losing traction and the country has exhausted its credit-driven growth model. This is rapidly becoming the greatest single threat to the global financial system.
“People have this stupefying belief that China is different from everywhere else and can grow to the moon,” said Professor Rogoff, a former chief economist at the International Monetary Fund.
“China can’t just keep creating credit. They are in a serious growth recession and the trade war is kicking them on the way down,” he told UK’s The Daily Telegraph, speaking before the World Economic Forum in Davos.
“There will have to be a de facto nationalisation of large parts of the economy. I fear this really could be ‘it’ at last and they are going to have their own kind of Minsky moment,” he said.
The thing to remember is, if past history is anything to go by, China’s government will invoke some foreign “threat” (real or imagined) to blame for its economic troubles. It’ll try to mobilize public opinion against that “threat”, rather than against their own government, in an attempt to maintain and/or regain control over their people. China is not a democracy, despite outward appearances. It’s a top-down, hierarchical, highly structured, authoritarian society. The authorities will do whatever it takes to maintain that – up to and including massacring their own rebellious people, if necessary.
For example, China may decide it’s time to forcibly reintegrate Taiwan into the People’s Republic, and to hell with anyone else’s opinion on the matter. That will satisfy its own people’s carefully inculcated sense of patriotism, while portraying China as a “strong man” in diplomatic terms. What’s more, there’s effectively nothing the rest of the world could do about it militarily – China’s become too powerful. All other countries could do is impose economic sanctions; and because so many nations rely on imports from China, that would be very much a two-edged sword, and probably unsustainable. Besides, if the Chinese economy is already in trouble, its rulers probably wouldn’t regard sanctions as much of an additional problem – merely more of the same.
Economic trouble in China may translate to serious trouble – not just economic, but probably also diplomatic, and perhaps military as well – for the rest of the world.