I am leery of featuring one writer too often in succession (Martin Wolf is a notworthy exception). However, Ambrose Evans-Pritchard presents a thesis that I thought would lead to some informative reader comments.
In “The crisis rotates from America to Europe, and Asia,” Evans-Prichard argues that many of the world’s other large economies will start to falter, not due to the US slowdown but their own flagging fundamentals. The bit that caught my eye was this:
I confess that I do not speak with authority on China, and may be wrong to doubt the miracle — so much like the Japan hype of the late 1980s to my jaded eye.
I look to clever people who know what is going on, such as Dr Kwan Chi Hung from the Nomura Institute — an esteemed figure in the Far East, and himself Chinese – who believes that China’s long-term prospects are “horrible”.
China’s workforce will peak in seven years (the delayed fruit of the one-child policy) and then go into the steepest downward spiral ever seen by a large nation in peacetime. It will, and do so long before it is rich. This demographic implosion cannot be reversed quickly.
Dr Kwan says China enjoys a dreadful return on capital because credit is still allocated by a Communist banking system pursuing political aims.
This is how disasters on a truly huge scale are incubated. Competitiveness is in any case slipping. It is already cheaper to produce cars in Japan than China, he says.
Charles Dumas, global strategist at Lombard Street Research and author of a new book `China and America: A time for Reckoning’, says China must soon slam on the breaks as inflation hits 8.5 per cent, or let overheating get out of control. “The Chinese will have to slow sharply, and it will start in earnest this autumn,” he said.
China’s two engines of growth are exports and investment. Exports will be affected by a US slump, and if the returns on investments are as poor as Dr. Kwan says, that will prove to be unsustainable. And the looming demographic shift will increase already rising political tensions.
A Japanese colleague said that China has spent 5000 years failing to live up to its potential. Will history repeat itself?
From the Telegraph:
Like others, I have been waiting and watching since the Fed went nuclear with emergency rate cuts in January, and even more nuclear in March by invoking Article 13 (3) for the first time since the 1930s to save Bear Stearns – and by extension to save the derivatives system.
I briefly shared a degree of “market infantilism” about a recovery. After all, the Fed has never acted quite so dramatically before. But it has since become evident, at least to me, even if it was already evident to Nouriel Roubini, Michael Panzer, and other Stern bears, that rates of 2 per cent cannot stop an ugly debt purge, and nor should they do so.
This is not to dismiss the latest Fed actions as a “failure”. The Bernanke rescue has averted a downward spiral that risked ending in depression. There will be no depression now, but nor will there be an easy recovery.
By using the term Global Slump, I do not mean a global depression along the lines of the 1930s. I mean a global downturn that persists long enough to do serious damage and change the lives of a lot of people.
The IMF defines a `global recession’ as fall in world growth below 3 per cent – a very rare event. It says there is a 25 per cent chance of this happening. Will the sky fall if that happens? That depends on who you are, and where you live. It did not fall for most people even in the 1930s.
One can glimpse a flicker of light already at the end of the American tunnel. The economic woes are still spreading as the delayed effects of the credit crunch hit home, but the shape of the downturn is becoming clearer – it looks like a W, with deeper dip on the second V. America’s bad news is mostly in the market.
What is not fully priced into the market is the second half of the story: that Europe, Japan, and arguably China are also coming unglued. This is not US contagion as such – though for Japan it surely is – but rather because these regions face their own internal boom-bust cycles.
Europe’s Latin bloc, the Baltics, Ukraine and Kazakhstan, all risk a crunch after letting rip with credit – indeed, Italy is now brushing recession and Spain is crumbling by the day.
Britain has become a disaster area, of course. Today’s RICS (Chartered Surveyors) report on housing was the worst since records began in 1978.
Commercial property has fallen by almost a third in the London region. The budget deficit reached 3 per cent at the top of cycle, leaving no fiscal ammo to fight the downturn. Household debt is 103 per cent of GDP. I weep for Britain as much as I weep for America…..
In answer to the commodity bulls, yes, the super-cycle is here to stay. Peak oil, peak metals, and peak food all loom, to some degree. But that does not preclude vigorous mini-cycles along the way.
The International Energy Agency has downgraded its oil forecast yet again, predicting that consumption will grow just 1m barrels a day this year, down from its 2.2m bpd call last July. Inventories are building up across the world, including China, nota bene. China’s copper stocks are rising too.
I dismiss the Goldman Sachs suggestion of $200 oil this year as one of those silly utterances that occur at the top of a spike.
Yes, I know that the Goldman seer Arjun Murti struck lucky with an equally outrageous prediction before, but that is just a curiosity. His arguments this time were very thin gruel, at least in the report I received. It seemed to rely – implicitly – on speculative momentum.
China’s two engines of growth are exports and investment.
Per Evans-Pritchard, the investment is made to take advantage of relatively cheap and competent labor, increasingly also (highly) skilled labor, e.g. engineering. The Chinese government has (in a rather hardball way) required investment in R&D as well from companies that originally only wanted to do manufacturing there. This growing professional sector may mitigate any (?) decline in export earnings which are, it is true at this point, based largely on manufacturing using relatively less-skilled labor. Also (perhaps) despite a “Communist banking system”, there is a pretty robust level of entrepreneurship in China.
There’s an old phrase by people who study demographics “demographics is destiny”. While I don’t believe it’s strictly true, I think demographics is often an underappreciated determinant of the fates of countries. Certainly the baby boomer generation in the U.S., the rapidly aging population of Japan, the outright declines of Russia’s population, and even the different birth rates between Jewish and Arab citizens of Israel will all have a tremendous long-term impact on their respective countries.
China will need to deal with the long-term consequences of its one-child rule, both the lack of youngsters, and the lack of young females (how do you manage a bunch of single, young males with no prospects of marrying and raising a family? That is, outside of starting a war to reduce their ranks?)
With regards to return on capital investments, it has been frequently pointed out that India, with about half the GDP of China, manages to get about 75% of China’s growth rate with about 1/10th the foreign capital investment. Soon people might start to wonder which country is a better investment.
Finally, to your points about demographics and investment returns, I’d add China’s looming environmental disasters. The NY Times had an excellent series on the staggering environmental degradation that China has tolerated, and continues to tolerate in the name of growth. Inevitably they will have to face those costs as well.
And of course, perhaps the biggest question mark is the stability of China’s political system, which is facing stresses and pressure to change despite achieving stunning growth for its people for the past few decades. What happens to the communists when they get their first recession? Perhaps they should ask Suharto in Indonesia what economic crises tend to do to authoritarian governments.
So I agree that China, despite achieving impressive goals in the past few decades, has difficult challenges ahead. And I wouldn’t be surprised if it stumbles over one or the other of them.
“The Bernanke rescue has averted a downward spiral that risked ending in depression. There will be no depression now.”
ROTFL! It ceases to amaze me that people think Bernanke and the Fed have stopped a Depression with their financial legerdemain. If there’s a Depression coming, the Fed isn’t going to be able to stop it.
Great post lune!
Demographics is amazingly ignored in modern economics. A simple look at population pyramids can tell us alot more about the economy in 10-20 years time than statistical modelling ever could.
It is the people that provide production in the economy and it is people that do the majority of the consumption. What happens when the number of dependents per working age person increases?
Agreed with Lune on demographics; I made the same point regarding the “Scandinavian miracle”. Children are society’s investment in its future; just as you can pump up short-term profits by cutting R&D, you can also increase short-term economic growth by drastically reducing the birth rate (fewer dependents equals higher productivity per capita.) But the consequences for such short-term thinking are inevitable, and once the demographic shift is underway, it is extremely difficult to reverse.
A more serious issue for China is the gender gap. With unknown millions of young men unable to form families, there will be severe consequences to the stability of society and of the nation.
“Inventories are building up across the world, including China…”
This is a misleading statement. The only inventories building up are in heavy crude, and that’s largely because some refineries built for the stuff are offline temporarily for maintenance. Meanwhile, in China, there are widespread gasoline and diesel shortages again. Of many links I could provide, here is one from yesterday: http://www.chinadaily.com.cn/china/2008-05/13/content_6681648.htm
And he’s misleading about Goldman’s prediction, which was a price rise to $150-$200 this year, with an average price of $200 next year. $150 is likely to be closer to the truth this year, although not until late in the year.
The rest of the article reads like classic Anglo China-bashing to me. Do you think China doesn’t know about its demographics and environmental problems? (China is way ahead of the U.S. on renewable energy policy: http://www.martinot.info/china.htm) And they’re addressing inflation too: http://www.reportonbusiness.com/servlet/story/RTGAM.20080512.wchinabonds0512/BNStory/Business
“Do you think China doesn’t know about its demographics and environmental problems?”
Is the issue whether China has a demographic problem, or whether China “knows” of its demographic problems?
But, continuing with your line of questioning, I must ask:
DO you not think that Evans-Prichard “knows” that China knows about its demographic problems—or, was Evans-Prichard in the dark on this as well? I can just see the relief/embarassment on Evans-Prichard face as he finds out that China is aware of this problem….”Wow, and to think I questioned China. I feel so foolish to be concerned. Now that I know China knows…well…I feel much better about this impending, inevitable downward demographic spiral. Hell, I just thought their unprecedented gender imbalance and geriatric explosion was going to catch them by surprise. Since they won’t be surprised…all’s well!”
And what exactly sets the precedent for “classic” Anglo-China bashing? [Personally, I thought the “bashing” had a post-modern feel to it, but it’s probably just me.]
I hope you don’t take this as Classic Moe Bashing.
Of course China is well aware of its demographic and environmental problems. The question is are they going to be able to do anything about it? With respect to its demographic issues, it’ll take a generation or two to turn things around, no matter what they decide to do. While massive immigration might be Japan’s salvation (if they ever lose their xenophobic tendencies and become willing to assimilate foreigners), there is no global reserve of youngsters large enough to fill China’s gap. They will have to be homegrown.
WRT to the environment. I’m sure chinese officials are aware of it. They even set up a “green GDP” where they attempted to account for environmental costs for each unit of GDP produced. The problem here is not recognition but priorities. China’s priority is growth, both because that is the path to geopolitical strength, and because the govt is well aware that they need 8-10% annual growth to placate their population and prevent mass uprisings. Just like George Bush recognizes the utility of trees but chooses logging companies over preservationists, China certainly appreciates the long term damage it’s doing to its environment, but has deliberately chosen growth over the environment. Do they have the political will to change those priorities? Witness what happened to the green GDP initiative, launched with great fanfare: a couple of years later, they scrapped it once they realized that under the new system, much of their GDP growth was being negated by the environmental costs.
As for Anglo china bashing, don’t worry. They’re just taking a break from their usual pursuits of Euro bashing and America bashing. they’ll return to their regular programming with next week’s columns :-)
With an estimated population of 1.3 billion, China has on the order of 800 million dirt poor subsistence farmers. Most of the latter are not involved at all in the export economy, and while they may now generate a very modest internal agricultural surplus leading to small relative capital increases, China could far more easily and liquidly raise capital on the public markets, presently and going forward. Furthermore, to keep social peace the authorities in China need to keep those 800 million fed, minimally educated and doctored, and ideally occupied away from the expanding but overstuffed metropolises. This is one reason why China’s GDP may ‘underperform’ relative to India in that those at the very bottom of India’s social latter live in absolute poverty with extremely little or no investment from India’s public authorities. And the waste stream from that 1.3 B contributes significantly to the environmental stresses there.
If China’s population was 650 million, they might very well be on track for a standard of living which could track with that in S Korea. I do not say this to be cruel or to denigrate any person’s life aspirations when I say that those 800 million subsistence farmers are a colossal drag on China’s development and future—and the Chinese public authorities well understand this. How, than, is a demographic contraction a ‘problem’ for China rather than a ‘solution?’
The extreme age increase in the Japanese demographic distribution is a major problem which will greatly undermine productivity in that nation. The impending absolute decline of population in the Eurozone will have a major social and political impact, probably one which only accelerates integration of unification. The point here is that changes in the _age distribution_ in a society lead to imbalances which may be a problem. Changes in absolute numbers may be far more manageable. But China facing a ‘demographic crisis?’ I think the issue there is completely misconceived in this article.
I’ll take issue with you on this one. It may indeed be to China’s economic advantage to try to whittle its peasant population, but it risks a political crisis.
Children are the only from of pension for the economically marginal. The one child policy has long been a hard sell even for the better off.
If you have agricultural areas depopulating due to well less than replacement birth rates, with an overhang of old people, virtually no safety nets, and young people who are stuck taking care of them via restricted access to the more prosperous mega cities, you have a prescription for revolution. Whether there will be the tinder strike to set it off is another matter.
Demographic transitions take time, and revolutions take young people with time on their hands. I suspect that we will get a steady drain of the best and the brightest to the cities, followed by a commensurate slow, steady increase of remittances back upcountry, followed more slowly be a slow increase of ‘breadbasket’ government pensionary supports to elders past working years. The issue here is a _gradual_ transition. China cannot afford generous pension support to rural elders unless that is _all_ that the government funds. China can’t afford to have the young decamp en masse to the cities. The authorities must not _appear_ to be corrupt and indifferent, behaviors which have a long history of provoking popular pushbacks in China. Demographically hollowed out rural burgs of greying elders on short rations with no support for a-rocking of the boat from on-the-rise urban populations aren’t the material of insurrections. Take a look at rural populations in Russia and the Ukraine as of today. They aren’t of the numbers we might see in China, but politically they are minimal factors, even non-factors. All the money, allies, and guns pool elsewhere.
I’m not saying this because I support ‘one child,’ but more to pursue the question, Is the demographic change in China at risk of crisis-inducing disparaties? I don’t think so, whereas I DO think this will be the case IN JAPAN. It does not strike me as a coincidence that the commentators talking down China’s prospects are mostly Japanese. I would find that perspective more credible if others with a different set of interests and a different set of numbers were taking a similar position. I’m not saying I have all the answers on this one; I just don’t see a ‘crisis’ in China on present projections.