Arguably, the worst thing that could happen to China this time around is a growth recession similar to Japan’s in the 1990s. No Zimbabwe. No Argentina. No Weimar. No Iceland. No United States. The average Chinese citizen not only has little debt but actually saves more than half of his annual income. Student loans, auto loans, and credit-card loans are as plentiful as purple pandas.
China as a whole will be able to adapt to market conditions and prosper because sick companies will have been expelled from the marketplace and capital will be reallocated to the most efficient participants. Conversely, because the West has given up on bankruptcy and the freedom to fail, they will continue to flounder as they prop up poorly managed firms. FULL ARTICLE
{ 23 comments }
NASDAQ created a new bailout index (http://finance.yahoo.com/q?s=^QGRI) of companies bailed out by the Feds. It was established on January 5 with a base value of 1000.
It is already down 35% in only 2 weeks. Too bad no one has created a double-short ETF for this index.
Question: If the Chinese have been doing things right by privatizing businesses and saving, why are so many businesses collapsing? In other words, if the cause of all bubbles is government intervention as those on Mises.org indicate, and the government of China is deregulating and privatizing, it would seem the only explanation for their troubles is that there businesses are at fault, not their government. If doing things “right†according to Austrian economics causes the Chinese economy to collapse the way it has, what good is doing it right?
SweetLiberty,
These are short-term changes. Many of those factories existed to serve American demand. Now that demand has faded, those factories are no longer profitable. Allowing them to fail allows other entrepreneurs to pick up those laid-off workers and hire them for whatever comes next.
The difference is that the Chinese have savings, so they can pick themselves up and do something new. We don’t have savings, and must depend on loans from other nations.
It always galls me when articles are posted ripping on Americans, as individuals, for not saving. Who in their right mind would be saving dollars? The inflation is coming, it’s just a matter of time.
Don’t forget China’s central bank, which inflates the yuan to maintain the currency peg, even without U.S. Fed inflation—but China had to inflate even faster to stay ahead of the Fed. Now the bubble pops. The takeaway is that China is letting the market clear to a far greater extent than the West, and the overall trend is that China continues away from statism.
Tim,
This is an outstanding article. China versus the US is a good real life experiment to measure the truth of Keynesian economics. It is not to say that China is perfect economically but they are headed in the right direction while the US has accelerated its Keynesian efforts.
Your analysis gives us something to measure against and I am putting my money on exactly the same analysis.
I wonder the books of the Mises institute are published in Mandarin. I am sure the Chinese will read it. I am not sure what will happen next though.
My god, Tim, do you get any news besides what’s printed in the China Daily? Step outside and open your eyes, man!
There are many great things Chinese and many wonderful Chinese people. A whole mess of them, actually.
The “average Chinese person” has no teeth and is lucky to get a little meat to eat once a month. There are pockets of great economic development which the government loves to point out, but the “average Chinese person”, Tim, sleeps in the same hut as their pig and some chickens, if they’re lucky enough to have a pig and some chickens. The average Chinese person saves half their “income” because there is nothing for them to buy. Chinese banks may require 20% down on a new house, but they’re still insolvent. In fact, Chinese banks have never been solvent. Solvency wasn’t even a remote consideration when they were created.
The best and brightest have traded en masse the starvation of dried-out farms for the starvation of the the cities, where they huddle in shantytowns begging for work in factories making cheap crap for Westerners who aren’t buying it anymore. They bathe infrequently, shit in their drinking water, breathe tuberculosis and their cornucopia of parasites will make excellent journalistic fodder for some lucky WHO scientist watching vulture-like for the outbreak of the next great plague.
The illustrious Chinese history is a sleepy story of brutal repression and iron-fisted control by a central government that knows the next bloody rebellion is simmering just before the surface scum of bureaucratic corruption and greed. The Chinese political story is filled with endless bloody dynastic wars, interspersed with the occasionally invigorating foreign invasion. (In other words, not much different from the rest of the world.)
China cannot afford to feed its own people. At the same time, as a result of its disastrous attempts at population control it is faced with a rapidly-aging society. The crippled ye ye will not be leading a glorious new economic revolution. The CCP can only hope that the aging peasants go slowly into that good night, too weak and old to mount any serious attempt at armed rebellion, while their Little Emperor offspring are appeased by the government-sponsored import of immigrant wives, who will gladly hoe the fields grateful for the opportunity to live in a country where they are allowed to eat rice at the same time as their husbands and are not forced to wear a burqa while picking rocks from a dry field.
You sound as if you are long on humanity, Tim, not long on China. Of course over the long run the human animal will find a means to survive and thrive. Or you won’t have to worry much about your retirement pension. But long on China for, say, the next 10 years? Tim, I have a dam to sell you. It is going to create a huge surplus of electrical power which will catapult everyone into the future of economic development and obviate any need for new oil and gas reserves. First we will need to evacuate a million people or so and prepare for the inevitable flooding. But don’t worry, this will just create more jobs. Which is, you know, not Keynesian at all.
Haven’t you heard? Decoupling is dead.
Geoih,
You are right. It would be foolish for Americans to save dollars when it is apparent that the dollar could depreciate at a rapid rate. However there are others ways to save money and accumulate capital.
Dirtyrottenvarmint ,
The “average Chinese person” has no teeth and is lucky to get a little meat to eat once a month. [..]The best and brightest have traded en masse the starvation of dried-out farms for the starvation of the the cities, where they huddle in shantytowns begging for work in factories making cheap crap for Westerners who aren’t buying it anymore. They bathe infrequently, shit in their drinking water, breathe tuberculosis and their cornucopia of parasites will make excellent journalistic fodder for some lucky WHO scientist watching vulture-like for the outbreak of the next great plague.
Sounds exactly like the US in the XIX Century. Yep, there is no bright future for that lot, indeed!
Very interesting! The US is heading in the wrong direction while China is heading in the right one. The future is in China!
SweetLiberty: “If the Chinese have been doing things right by privatizing businesses and saving, why are so many businesses collapsing?”
Most people in the US have been doing the right thing and they will suffer as well. Good intentions are enough. You have to be informed and be able to process that information through correct economics. The Chinese benefitted from US monetary inflation. Had they understood economics, they would have known it couldn’t last and prepared for it. In addition, much of the Chinese bubble was inflated by rapid printing of money by the state. The Chinese aren’t innocent in this. The big difference is that they didn’t have the debt we have, and they have the savings we don’t. In a way, their high rate of savings is how they prepare for unexpected reverses in the economy. So they will recover much faster.
Europe, Japan, USA, Canada are wealthy, and China and other nations are doing what is necessary to join them. The financial crisis is an opportunity for Americans to change their spending and saving habits. What is likely today is that Americans will choose bigger government, similar to the Canadians and Europeans. Americans want cradle to grave protection and want rich people and corporations to pay for it. They do not understand that arranging society this way will cause stagnant growth and high unemployment. Prosperity is linked to capitalism. Why innovate or save or risk capital if government is going to take your profit?
If we as a nation continue to make bad decisions individually and elect politicians who ruin our prosperity we will receive the natural consequences of those bad choices. The last president doubled the national debt, started 2 wars, and initiated an expensive Medicare drug program. The dollar logically weakened against the Euro and other currencies.
Hopefully, Japan and China will invest in each other and Europe instead of buying American debt. When those fiat dollars come home quickly we will experience severe inflation and rising interest rates. When the American people learn about economics they will elect new politicians. Germany had to learn about inflation after WWI, and Americans had to suffer through the late 70s and early 80s.
Maybe the collapse in wealth will downsize our huge military presence. Do we need to provide troops forever for South Korea and Germany? Does the national debt carried to pay for Korea, Vietnam, Afghanistan and Iraq bring more or less security to our nation?
Maybe the collapse in wealth and high taxes will convince Americans that they should spend or save the fruits of their own labor instead of the government confiscating it with excessive taxation. Should the state, local and federal governments spend more than one third of GDP? Certainly, it is dangerous to trust our individual prosperity and freedom to government.
fundamentalist: “In addition, much of the Chinese bubble was inflated by rapid printing of money by the state. The Chinese aren’t innocent in this. The big difference is that they didn’t have the debt we have, and they have the savings we don’t. In a way, their high rate of savings is how they prepare for unexpected reverses in the economy. So they will recover much faster.”
You are correct about the Chinese bubble being inflated by the rapid printing of their own currency. According to the accounts I’ve read, the Chinese were pumping the monetary system even more than the Americans. You have to understand the relationship between China and America the last few years. Americans buy Chinese goods. The Chinese receive American dollars in return. The Chinese banks buy those dollars from the merchants and industrialists. How do you think they buy them? They print yuan to buy up the dollars.
The high rate of savings among Chinese is precisely the reason why the Chinese Banks (and the Americans) were able to sustain such rapid credit expansion. The loss in purchasing power was socked up by the average Chinese workers foolishly holding on to their savings while the credit expansionists raped and pillaged the real pool of goods and services. There is nothing really sensical in saving money when the monetary base is expanding rapidly. The Americans were smarter letting the Chinese do the saving while they did the spending. Unfortunately, their government would be in a much better position right now if it had devoted an appropriate portion of that spending to debt repayment while inflation was eating away at it.
No, no, no. This is all wrong. In the first place, the idea that China is closer to the laissez-faire ideal than the US is completely false. Something like 75% of the economy is still comprised of government consumption or state-owned industries.
OK, so China’s PPP-adjusted GDP is around $7 trillion. Of that, 40% is comprised of exports. 2/3 to 3/4 (possibly even more) of that is going away in 2009 and the beginning of 2010. The exporters were made to look profitable by central bank meddling in the exchange rate; as China is forced to redirect export demand inward, most of those firms will go bust. Conservatively, subtract $1.8 trillion.
So, we then have another 40% in private (or pseudo-private) investment; since most of that investment comes from export earnings, I’d say the outlook for that is roughly the same as with exports, as China’s investment boom was nothing but a leveraged play on western consumers. Investment is grinding to a halt as the nature of China’s export-oriented industrialization policies becomes known to investors. To be conservative again, I’ll only say 50% – subtract $1.4 trillion.
Next we have private consumption, which is around 35% of the economy. As I mentioned, China is now forced to redirect export demand back into consumer demand, so this will fare better. However, unemployment is and will continue to shoot up, significantly constricting consumer demand as well. Conservatively, I’ll say a 25% contraction here is a near certainty, but something like 35-45% is probably more realistic. Subtract $625 billion.
The rest – a little less than 15% – is government consumption, valued at around $1 trillion. All told, we’re looking at a contraction of around $3.8 trillion: more than half of current GDP.
Now, assume no change in current government spending, and add in the $500 billion stimulus. Hell, say they up the ante soon and throw in another $500 billion to make it a around a trillion. You still have over $2.8 trillion in slack demand, yielding a GDP contraction of around 40%.
Even if I’m terribly wrong – and if I am, it’s on the downside – and I’m throwing out twice the fall in demand that will actually be observed, that’s still tantamount to a 20% fall in GDP, a severe depression.
And that’s not even beginning to address the social unrest, which is rising precipitously. If you want to bet that a country with an export-dependent economy, run by an autocratic nominally Communist party dependent on high growth, and which is becoming so unpopular as to provoke violent protest, will dominate the world after the smoke clears, be my guest. However, I think that’s stark-raving mad.
Furthermore, I’d suggest the “America’s finished” crowd ease up on the geocentrism and take a good look at the (pointless, fraudulent, futile) monetary easing going on around the world, not just in the US.
China may have a severe depression on its hands but it’s indisputable that China is in a much better position for recovery than the U.S.
Four years from now, while the politicians and their cronies continue to wrangle over dwindling tax revenue, Chinese cars will be filling the streets of Europe and North America. Already, western corporations have partnered up with Chinese companies. Last count, China had 35 automakers. It’s obvious to me that the corporations have already picked China to take over the once profitable American auto industry and that what we are seeing with the Big Three is the dying swan song in English with a bit of Somali.
Like Japan in the 80′s, China is learning the value of quality. If they get that part right, they will have incredible potential. It’s too bad they are not on the gold standard, the gold standard would help to regulate growth and keep the profits in the country.
The Daily Elitist: “No, no, no. This is all wrong. In the first place, the idea that China is closer to the laissez-faire ideal than the US is completely false. Something like 75% of the economy is still comprised of government consumption or state-owned industries.â€
Those are good points. The Chinese have a ways to go to achieve economic freedom. However, they are headed in the right direction if they will stay on this path. On the other hand, the US sold its free market birthright back in the 1930′s and has been trudging toward greater socialism every generation since. We took the greatest leap backward this past year. The US is headed in the wrong direction.
China doesn’t give foriegn aid to countries around the world the way the United States does. It doesn’t spend on a bloated military in the way the United States does. It surely doesn’t have the taxation the United States does in terms of federal ,state, and possibly in some cases, local taxes something citizens in the United States have to face. The Chinese don’t face what Americans face in illegal immigrants coming into the country and putting an incredible strain on the American taxpayer to provide education, welfare, public schooling,etc to illegals who don’t have to pay taxes. Chinese businesses don’t come to the US to set up shop and provide employment for Amreicans in the way Americans businesses are doing in China. What dirtyrottenvarment says is right in essence. The avarage Chinese citizen is a poor powerless quasi slave to a ,still, ever present central communist government who has very little to live on and ,therefore, very little for himself or herself to save. You can’t really paint a picture of the Chinese being solvent and willing to save their money when there is little money to save and even less of a chance to obtain more money to improve their lives. They do not have the burden of having their finances strained and limited in the way Americans do. Contrary to what most believe here, Americans do not spend on just about everything, not by a long shot. They don’t spend on much when they don’t have the money to do so and they save when ,and if, they can. It is a point the “America’s finished” crowd here should remember.
To say nothing of political or civil liberties… ; )
I’m wary as to whether the recent (fairly rapid, especially for the uber-conservative Chinese) liberalization of financial and forex markets are a positive sign. I fear that it may just be the first salvo in a coming “beggar-thy-neighbor” campaign. Call me cynical, but I make it a point to be highly skeptical of the Communist party’s intentions.
Perhaps that’s true, but it’s socialism for the sole benefit of the wealthy.
I’d also argue that, while the New Deal was replete with downright stupid policies, it did put in place the infrastructure which (until the 1980′s) ensured the benefits of prosperity were shared amongst everyone who was responsible for it. But then again, I’m not a staunch libertarian.
You mean the TARP and the Fed’s leveraging up its balance sheet, or Obama’s election?
Hmmm… I’m not sure about that now.
I think most commentors and author have never been to China. The Daily Elitist makes an intelligent comment.
Chinese government recently announced a 4 trillion RMB investment plan.RMB is delibrately undervalued versus USD,in fact , 4 trillion RMB might be equal to 2 trillion USD. Obama’s plan is only 1 trillion USD, far less, isn’t it?
Buckley
It surely doesn’t have the taxation the United States does in terms of federal ,state,
China also has three forms of taxation.
The tax paid to central government, province governmet and local government. In chinese, this called :国税，çœç¨Žï¼Œåœ°ç¨Žã€‚
fundamentalist
The Chinese have a ways to go to achieve economic freedom. However, they are headed in the right direction if they will stay on this path.
————
Yesterday ,Chinese government anounced that medical business, which capitalized in 1999, now back to government command. China, just like America, is turning left.
China government allows enterprise to fail.
————–
Yes, but only to small bussiness without political background. In 1999, the four state-own commercial banks were bankrupt according to their balance sheet.Just like US government bailout the Citibank, Chinese government injected 0.5 trillion USD into four banks. A few weeks earlier, Chinese governmt injected 10 billion RMB into Chinese Orient Airlines Company and Air China，
I am sure that the author never investigate Chinese monetary supply data. China’s M2 increase never below 12% since 1990. The real estate price Index is increasing exponentially, from 2002, this index in big city has trippled.
Compared with China’s real estate bubble, US is only a vesicle.
Has Daily Elitist and A Chinese student been to China in the last few years???
I’ve been visiting Mise for a while, and for every Mise article about China A Chinese Student has pushed a comment.
“No, no, no. This is all wrong. In the first place, the idea that China is closer to the laissez-faire ideal than the US is completely false. Something like 75% of the economy is still comprised of government consumption or state-owned industries.
OK, so China’s PPP-adjusted GDP is around $7 trillion. Of that, 40% is comprised of exports. 2/3 to 3/4 (possibly even more) of that is going away in 2009 and the beginning of 2010. The exporters were made to look profitable by central bank meddling in the exchange rate; as China is forced to redirect export demand inward, most of those firms will go bust. Conservatively, subtract $1.8 trillion.
So, we then have another 40% in private (or pseudo-private) investment; since most of that investment comes from export earnings, I’d say the outlook for that is roughly the same as with exports, as China’s investment boom was nothing but a leveraged play on western consumers. Investment is grinding to a halt as the nature of China’s export-oriented industrialization policies becomes known to investors. To be conservative again, I’ll only say 50% – subtract $1.4 trillion.”
This is complete and utterly wrong.
China’s PPP per Capita is about 6,000 USD or 12,000 yuan- by no means “a starving, scum-filled peasant”. Considering meat in China is only about 10 yuan/pound and a TV about 500-800 yuan, it is not impossible to make a living earning the average wage.
The Chinese government makes up about 20% of the GDP, Max. and a great deal of that comes from private operators, who operate electricity, water services, schools, etc… “on behalf” of the government, paying it a small fee. The US would do well to study this model.
In terms of manufacturing, China’s steel production is five times that of the US, its ship production two to three times, its automobile production about equal to the US, and it leads in cement, chemical, and other measures.
I think one of China’s greatest strengths in this respect is that the Chinese people have realized what is good for them. They suffer no illusions about what the state will bring them, and they work and compete on themselves, and are extremely wary of the state. Although lately there some socialist programs(such as a limited medicare program) have been reinstituted, respect for the free market is live and well in China. For heaven’s sake, this is a country that gives the top student of every class 1,000 yuan in rewards.
In the long run of history, I’d think the Chinese are more laissez-faire than the west. The Han, T’ang, Song and Ming dynasties, China’s four golden ages in which they led the west by a mile, all practiced relatively laissez-faire policies. Of course, after the Manchus conquered China in 1644, the Chinese went into a long decline and haven’t recovered since.
Comments on this entry are closed.