China and the next global crisis – maybe there’s something to this 2012 thing…

posted at 2:19 pm on February 1, 2010 by CK MacLeod
[ Economics ]    printer-friendly

Economist Andy Xie is now writing at Caing.com, the successor to Caijing On-Line, and his first two columns are, as always, well worth reading in full.  They explicate the bear case on China accessibly, in concrete terms and with careful logic.  If the author betrays a rooting interest, it’s not for or against China, but against policies whose effects may be devastating for the Chinese, and, at a minimum, dangerous for everyone else.

Xie’s side-observations are sometimes as interesting as his main themes.  I didn’t know, for instance, that both Russia and India were experiencing double-digit inflation well in excess of nominal growth rates.  His next-decade economic forecast for the U.S. and the Eurozone is summed up in one word:  “terrible.”  Yet the most eye-catching takeaway from his first two pieces at Caing.com – “Trapped Inside a Property Bubble” and “Pumped with Cash – And Ready to Crash?” – is his designation of 2012 as a target year for the Chinese bubble to burst amidst another global financial crisis:

2012 is building up to be another crisis year. Governments and central banks did not handle the last crisis well. They did not reform a global financial system plagued by incentive misalignment and wild speculation. All the money governments and central banks released is turning into global inflation. And they resorted to bailing out speculators, laying the foundation for another crisis.

The focus of the Chinese problem, in Xie’s view, is property speculation, the same property bubble that has made for those striking videos of empty, never-occupied skyscrapers and never-alive ghost towns, but which, more important, is also pricing China’s large, but proportionally small middle class out of the housing market, and spreading inflationary pressures on wages while also turning potentially productive citizens into compulsive speculators.

It’s mere coincidence if Xie seems to be reading from a Mayan calendar.  He bases his prediction on rough but reasonable calculations derived from historical precedents and real-time observations, not on ancient prophecy.  As Xie explains, the conditions that made China’s decade-long growth spurt possible have disappeared, and are unlikely to return.  Even as China has lost its status as “lowest of the low-cost producers,” the country remains heavily export-dependent, yet prospects for a worldwide resurgence in export markets are dim at best.  Like other economists, Xie expects near-zero growth in the Eurozone and Japan, at best, and low growth in the U.S., with no prospect for other countries to take up the slack, especially since many of them are almost as export-dependent as China, if not more so.

China seems, however, to be far from having adjusted psychologically or politically to this new reality.  Rather than undertake a re-adjustment of expectations, and face attendant political strains, China has been taking a path of least social and political resistance, in a manner that will strike some familiar chords for Americans:

The biggest risk to China’s economy is the desire to maintain past economic growth rates by maximizing investments in property – an unproductive asset. It supports short-term growth by sacrificing long-term growth as capital’s average productivity declines over time.

Local government performance in China is measured according to GDP and fiscal revenue. Property development can achieve high numbers for both quickly. This is why property’s share in China’s capital allocation is rapidly rising as prices appreciate and volumes increase. This is a politically driven bubble — and it’s already massive. Unless the trend is reversed by reforming incentives for local governments, China’s property bubble could mushroom in two years from what’s now a dangerous level.

Xie is building on his own past work here – he is one of the world’s proven experts on economic bubbles, especially of the Asian variety – but you don’t need to be an economist or China expert to follow him:  The inflation of the Chinese property bubble amounts to “mal-investment” on as gigantic a scale as you would expect from the non-transparent, un-free, deeply corrupt public administration of an economy encompassing the lives and fortunes of over 1 billion people.  The supposed advantages of authoritariansm, so impressive to New York Times columnists and some American presidents, can come at an unimaginably steep price.

Observers of the world scene – including JE Dyer in recent posts at the Optimistic Conservative Blog and elsewhere, or people like the international diplomats cited in Sunday’s Washington Post – have good reason to view China as a great power on the rise, a potential peer competitor to the U.S.  It’s tempting to look at the financial crisis that Xie sketches, or at China’s well-documented and widely discussed demographic and resource issues, and assume that the challenge to American status is taking care of itself, but it would be imprudent to assume that a bad decade for China will permanently simplify our strategic lives.  Indeed, the prospect of China’s weakness may turn out to be more dangerous than the prospect of Chinese ascendancy – even before we begin to consider the direct effects of a Chinese implosion on our own immediate interests.

The stridency of Chinese diplomats reacting to U.S.-Taiwan arms deals may reflect new self-confidence – or it may foreshadow a more bellicose, even desperate reaction to increasing pressures at home, amidst historically new, decisively frustrated expectations.  Countries quietly confident that their hour is coming can afford to be patient.  Countries sensing that their hour is passing – Germany 1914, Japan 1941, to note two of the more famous examples – often become more aggressive.

cross-posted from Zombie Contentions

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