Is China a Paper Tiger?
A friend who attended the annual meetings of the IMF and World Bank in Istanbul this week described the atmosphere amongst the central bankers, finance ministers and other grandees gathered there: “There was this strong feeling that – ‘at last year’s meetings we thought it was the end of the world and the entire financial system would collapse. We virtually said to each other “who knows if we’ll meet again?” But we managed to pull through, the world didn’t come to an end and here we are – so let’s have a good time!”
That’s a fascinating insight into the mood among global policy-makers today versus one year ago. But let’s move on to the substantive discussions in Istanbul, which apparently had two foci. One was the debate over the future structure and regulation of the global financial system, centering on the vexed problem of what to do with banks deemed “too big to fail”. There are several proposals on the table and no clear agreement, or even consensus, as to which to adopt. We will skip over this as well – not because it isn’t very important, but because there’s something even more important. The number one item on the Istanbul agenda was how to address what the economists call ‘the global imbalances’, and which normal people know as the phenomenon in which the Chinese (and others) sell stuff and accumulate dollars (thereby becoming ‘surplus economies’), whilst the US (and others) buy stuff and pay dollars (thereby becoming ‘deficit economies’).
For some years, the central issue in the global economy was whether this state of affairs was ‘sustainable’, or would end in a crash. This column devoted not a few words to that subject during 2004-2007, projecting the so-called pessimistic case – i.e. the one based on reality, not make-believe. The crisis of 2007-08 resolved that debate in favour of the realists, so that today everyone accepts that there is a need to ‘resolve the global imbalances’. With regard to the US this is being done the hard way, by a sharp, crisis-induced reduction in the consumption of imports – but even then, the correction is only partial. On the Chinese side, despite the talk of restructuring the economy toward more domestic consumption and less reliance on an export-led model of growth, very little has been done. On the contrary, the gigantic stimulus applied by the Chinese government to the country’s economy is exacerbating the problem by creating additional productive capacity directed to a domestic and global economy in which demand is severely deficient. In plain English, there’s already too much of everything and people don’t want more, so what’s the point of providing more and more?
The Americans and Europeans want the Chinese contribution to the rebalancing to take the form of revaluing their currency, thereby making Chinese goods more expensive to Western consumers. The alternative to revaluing the Chinese yuan is to devalue the dollar, which the Europeans cannot tolerate. The Chinese, however, show no desire to take this step – hardly surprising, given the centrality of exports to their growth model.
The entire debate about rebalancing implicitly assumes that the Chinese economy is set to continue its tremendous growth and, in due course, to become the largest and hence the leading global economy. However, not everyone accepts this doctrine of inevitable Chinese ascendancy. Many analysts (outside of the mainstream, of course) are concerned that the Chinese response to the crisis, of government programs that threw huge amounts of money into corporate investment, mortgages and inventory accumulation, will provide a short-term boost to be followed by a terrible slump. The best-written analysis of this sort that I have seen is a newsletter from Hayman Advisors, an investment company, written by managing partner J. Kyle Bass – and cited in an excellent blog, www.zerohedge.com.
Bass provides chapter and verse on the incredible scale of the stimulus applied, as well as the evidence that it’s not working and the very negative implications this has for the Chinese economy going forward. He also paints a horrendous picture of the state of the Japanese economy and the impending demographic-social-financial disaster into which that country is headed. Whilst he has nothing good to say about the US, this review of the state of play in East Asia is very sobering and, for anyone who has been led to blindly accept the idea of the inexorable rise of China, very eye-opening. China is not going to save the world, rather it is creating huge problems for itself and it is firmly part of the problem, not part of the solution.