Comments (33)

• Roger M

  The US economy finished the third quarter of this year by growing at an annualized rate of 4.3%. That's 4.3% of a $16 trillion economy. China has grown at 8% for the past ten years, but that's 8% of a $500 billion economy (I'm not certain of China's GDP, but know it's a tiny fraction of ours). China will have to grow at a much faster rate to catch up to us. Much of China's growth has come from massive state spending and foreign investment, neither of which can continue forever. For example, I've read that Shanghai has more empty office space, due to government building programs, than New York City has office space. My point is, those who would make China the world's next great economy risk the fate of those who proclaimed Japan as the next great one in the 1980's. Sure, the US has problems, but they're small compared to those of Asian countries.

  Published: November 30, 2005 9:11 AM

• Chris

  It is a good thing I am taking steps to ween myself off of U.S. Dollars. The Liberty Dollar just may be what the doctor ordered.

  Published: November 30, 2005 9:21 AM

• Curt Howland

  Imagine how strong they could be, economically speaking, if they declared a gold standard...

  Published: November 30, 2005 11:01 AM

• Jim Bradley

  How is it that the command economy (especially in finance) of China is used now to defend the libertarian position as if they are "more wise than us"? And what should have been done about the Xiongnu -- nothing? Allow them to invade at will (just like the U.S. and communism I suppose).

  It's interesting that so many paths of libertarianism these days lead to the left-wing. I would have thought the opposite, but they share a philosophical adherence to materialism in practice, and the restriction of knowledge to "scientism" (i.e. what I can conceive of is natural while what is inconceivable is "supernatural" thus outside of any positive claim to knowledge).

  That so many of these "lessons" degrade into a George Bush bashing is reprehensible. GW did what certainly is more moral than the economic embargo (essentially U.S. sponsored terrorism) -- and took down what was felt to be a significant threat but ultimately of unknown degree (as there is no perfect knowledge). His action may prove to be far better than posited over time.

  Published: November 30, 2005 11:03 AM

• Stefan Karlsson

  Roger M., you've got your numbers all messed up. Third Quarter U.S. GDP was $12.6 trillion, not $16 trillion. China's GDP this year is likely to be about $2 trillion at current exchange rate. And if you adjust for the much lower price level, China's GDP is more like $6 trillion. Moreover, growth have averaged 9.5% , not 8% in China. And I have a strong feeling that fourth quarter U.S. growth will turn down, as the third quarter number was based on a decline in the household savings rate from 0.1% to -1.5%.

  Published: November 30, 2005 12:24 PM

• Stefan Karlsson

  Correction, the savings rate declined from -0.2% to -1.5%, but that is still a rundown that can hardly be repeated.

  Published: November 30, 2005 12:34 PM

• Frank N Stein

  Jim,

  I can relate to some of what you say. The US government has its faults, but to pretend that China's shallow capitalist face is something to admire, is silly. I also cringe when Mr. Rockwell speaks at obviously leftist anti-war rallies. You have a greater chance of alienating reasonable people who share much in common (but happen to think the war was a good idea), than changing the minds of neo-marxists who think profit is the devil. However, with regard to this post, I don't think it is pro-China as it is saying that US monetary and foreign policy is playing right into their hands. It's not admiring the Chinese, it's predicting what happens when you steer your car towards the embankment. And that is hard to argue with.

  Published: November 30, 2005 12:36 PM

• Stefan Karlsson

  China's economy is still not as free as that of its "special administrative region" Hong Kong, but it is steadily moving in the right direction, unlike the US. And in some aspects it is already a role model, like its lack of a welfare state.

  Partly as a result of this and partly because the Chinese have lower time preference, China have a extremely high savings rate, which ensures that China's long-term prospects are strong.

  Published: November 30, 2005 12:49 PM

• N. Joseph Potts

  This story is pretty incoherent as far as message is concerned. OK - maybe history IS that way, but could not history be so RENDERED as to yield SOME sort of coherent lesson? Leong doesn't tell us (and I don't know) what befell China in the decades following Han Wudi's reign (except that their northern barbarian enemies were dispersed, evidently permanently).

  If China is going to keep speculators (currency or otherwise) out, and/or is going to maintain exchange rates for its currency, it will ineluctibly go the way of all socialist flesh. So long as the country I'm tied to (the US) doesn't do that or too many other such things, I don't expect it to be eclipsed by anybody, anywhere. And when it does, it will be - maybe by the Chinese, if they wise up.

  Published: November 30, 2005 1:01 PM

• David White

  Call it growth if you will, but as Bill Bonner and Addison Wiggin point out in "Empire of Debt: The Rise of an Epic Financial Crisis":

  "The entire homeland economy now depends on the savings of poor people on the periphery to keep it from falling apart. ... Asians now own enough U.S. dollar assets to buy a controlling interest in every company on the Dow. They have enough T-bonds to destroy the U.S. economy on a whim. Their economic power is growing at three to five times the GDP rate of Western nations. So far, they have shown little interest in political power; that is for a later stage of the cycle, another role for another time."

  Like, say, in 2008, when millions of Boomers start retiring, and Bernanke cranks up the printing presses to inflate away the government's massive financial obligations to them.

  Frank N Stein:

  The point isn't that Lew spoke at a leftist rally but that he spoke at an anti-war rally, the importance of the latter trumping that of the former.

  Published: November 30, 2005 1:16 PM

• Andy D

  David-
  Careful not to fall into the Marxian version of history - that the poor are the ones keeping us afloat. Most poor people have a negative net worth, and typically do no sort of investing. Remember also, it is not demand which makes an economy grow, but savings and investment - which the poor do neither.

  Also, with t-bonds and the such, they are meaningless as dollars if they were ever called. Just because they own peices of paper doesn't mean those are titles to anything tangible, such as gold. The capital is here in the US, our universities and computers. We give them peices of paper, and we get capital. Goood trade?? who knows what the future will bring...

  Published: November 30, 2005 1:46 PM

• Roger M

  I should have checked my figures before posting earlier. According to the Economist, the 2005 ytd GDP for China is $1.9 trillion actual, $8.5 trillion at PPP. Real growth was 8.7%, but that is expected to slow to 7%. The 5-year average growth has been 8%. The US GDP this year has been $12.6 trillion. Still, our economy is over 6 times the size of China's. A growth rate twice ours won't catch them up very fast.

  On top of that, they're still very very poor. Our per capita GDP is about $40,000. China's is $1,462 at market rates, $6,513 at PPP.

  It will take them a long time to catch up to us, but none of that obscures the fact that much of the growth comes from government spending on infrastructure, including office buildings.

  Don't get me wrong. I'm happy to see the Chinese grow wealthier. But they did so by copying us.

  Published: November 30, 2005 1:49 PM

• David White

  Andy D,

  To quote from "Empire of Debt" once again:

  "American spending created a boom in China, where the average person works in a sweatshop, lives in a hovel, and saves 25 percent of his earnings. ... Meanwhile, in the United States, the average man lives in a house he can't pay for, drives a car he can't afford, and waits for the next shipment from Hong Kong for distractions he can't resist. He saves nothing and believes the Chinese will lend him money forever, on the same terms."

  Nothing Marxist about that, just consumerism run amok amid the fraud of central banking.

  "The capital is here in the US, our universities and computers"?

  Ha! Our universities, along with the rest of our "educational" system, are a rip-off, and our computers are increasingly made offshore. Or as one Chinese offial remarked, "We outsource the marketing to you guys." At least for now.

  Published: November 30, 2005 2:33 PM

• Andy D

  Are our schools any more of a rip-off than other countries?

  It seems that if the chinese laborers were so efficient at saving, that they would improve their situation by investing in education or capital.

  Since the majority of the goods we purchase are labor intensive, I imagine that most of the costs we pay go into labor, which basically they consume their wages trying to survive. Also, with such a command economy, who is gonig to invest? They either have to become more liberal with their economy, or they will eventually collapose.

  Published: November 30, 2005 3:51 PM

• Jim Bradley

  Frank -- If you agree with the doomsday scenario, then you probably will agree that our monetary policy is joined with China's and the conjoint policy is hurting both of us. Our ability to direct something of value to future foreign buyers (such as Chinese) is compromised and China is hurt because they are accumulating dollar financial assets which have less and less tradeable collateral backing them. As long as we have something tradeable to sell when they are ready to buy, then the process will end better than it seems.

  Published: November 30, 2005 4:24 PM

• David White

  Andy D,

  "Are our schools any more of a rip-off than other countries."

  Try these, for starters:

  http://www.cbsnews.com/stories/2005/09/13/national/main838207.shtml

  http://www.lewrockwell.com/north/north270.html

  Jim Bradley,

  "China is hurt because they are accumulating dollar financial assets which have less and less tradeable collateral backing them."

  China is sitting on some $700 billion in dollar reserves. Meanwhile, at today's price, the roughly 155,000 tons of above-ground gold are worth around $2.3 trillion. Simply put, China could "go for the gold" tomorrow and send the US economy down the tubes, while making a killing in the process.

  Tomorrow's not the day, however, but when the Asians finally decide that lending us the money to keep our economy afloat is a losing proposition, the Day of Reckoning will be at hand.

  Published: November 30, 2005 4:51 PM

• KY Leong

  My article is not an endorsement of the oppressive Chinese communist regime, but an indictment of the Bush Admin’s reckless foreign policies and preposterous methods in economic management.

  Let there be no doubt, the Chinese have some real serious economic mismanagement of their own e.g. rotten banks, property-rights violation, corruption…all of which are NOT due to market liberalizations initiated by Deng Xiaoping (late 70s), but a legacy of Mao Zedong’s statist economic direction (since 1949).

  The Chinese banks have some U$200 billion (optimistic side) in bad loans which were given to mostly bankrupt SOEs (state-owned enterprises). DVD piracy is rampant because the state imposes a tight restriction of what Hollywood movies can and cannot be broadcast via cable or satellite TV. Any government official (surviving on meager socialistic pay) with a modicum of authority to approve an investment project will demand payment in kind – washing machines, air-conditioners, Mercedes and (more recently) Chinese antiques…

  If you think the current housing bubble in the US is scary, you should go see the huge Commercial & Residential development projects currently going on in Shanghai & Shenzhen today – I am one thoroughly convinced we shall witness a major malinvestment boom-bust cycle of the Austrian type in these Chinese “growth� cities soon.

  Yet, all these manifestations of the failure of central planning do not necessarily imply superiority of the democratic form of government so much flaunted by GW Bush and his warfare-welfare indoctrinaired friends. Instead, we observe that a far-sighted and pragmatic authoritarian state can demonstrate short-term economic “miracles� on the road to modern Democracy (if GW Bush et al have their way), with subsequent “Hoppean� civilisational decline.
  

  Published: November 30, 2005 4:55 PM

• lucretius

  Roger,
  You forget that, in China, growth rate at roughly 8% has been sustained for at least two decades, and that most of the growth comes from coastal cities, with the rest of the country being relatively stagnant. The east coast of China grows at 12-15%, and is much wealthier than western China. In other words, the coastal cities will reach U.S. standards much sooner than you think. And that's at least 300 million people we are talking about.

  Published: November 30, 2005 4:55 PM

• David Andersson

  While China still has insufficient protection of property rights, it is clearly moving in a free-market direction. An illustration of this is that more than 1 million Taiwanese have voluntarily left Taiwan to live and do business in mainland China (that's 5% of Taiwan's total population). Meanwhile, in democratic Taiwan, the government wants to increase defense spending, raise the sales tax from 5% to 7%, raise income taxes, introduce a compulsory pension system and other welfare programs, subsidize investment in Central America (!) instead of mainland China, and continue with its ban on direct flights to mainland Chinese cities.

  What does this tell us about democracy?

  Published: November 30, 2005 8:00 PM

• John Craig

  Irrespective of who is the lender of last resort in the next financial crisis, I suspect that it may well be China who will be the most exposed borrower.

  In a financial crisis, what matters most is your balance sheet, and unfortunately China's economic methods have boosted growth while using capital most unproductively - see China's Development: Assessing the Implications.

  Published: December 1, 2005 4:53 PM

• Roger M

  Ky, I get your point. I just don't agree that the Chinese are as far sighted as you give them credit. Their economic growth came about because their people were starving to death when Chairman Mao died. The US kept them alive with low interest loans for food. Deng sparked growth by getting the government out of the way and allowing some private enterprise. They're building a huge military. Though they haven't attacked anyone yet, they continue to threaten Taiwan. Mainland threats are the reason for Taiwan's military buildup. Military experts expect China to attack Taiwan in the next 5 years.

  Yes, China's economy has grown at impressive rates for the last 20 years, but consider where they started from! The high percentage rates of growth has a lot to do with the starting point being such a small number. For example, you can increase your per capita GDP by 100% just by growing from $1/day to $2/day, but you're still very poor. As China reaches developed world status, i.e., larger numbers for GDP, growth will slow to developed world rates. In addition, the bad loans, excessive government spending, corruption, lack of the rule of law, and many other problems will force a slow down in growth.

  Should I even mention that many economists doubt the Chinese state-supplied GDP figures. Writers for The Economist and others have used proxies to calculate China's GDP and, as a result, have cast a lot of suspicion on the official figures. Also, they're just too darned consistent. Their figures don't vary like those of other developing nations.

  Published: December 1, 2005 4:59 PM

• KY Leong

  Roger,

  We all dispute accuracy of GDP figures, esply those provided by statist Central Planners. You have to go to China today to get an actual feel on the ground. Talk to the folks who are now in their 30s & 40s, those who've lived through 10 years of Maoist hell (The Cultural Revolution) to appreciate life before and now. To see first hand the tireless entreprenuerial drives, the industry of the people, the ingenuity of businessmen. There's real work and production going on! Lives are constantly improving, and folks are saving for the future. Don't just read the stuff on Economist.

  Now as for China's (supposed) military ambitions, that's another story. But consider for a moment where would GW Bush's friends sell their F-16s, B-52s, patroit missiles etc... if the Chief Warmonger does not "talk up" the show?

  Published: December 1, 2005 7:27 PM

• lucretius

  Roger,
  I'll bet you 2000 dollars that China won't attack Taiwan. In fact, anyone who makes such predictions should not be considered a "military expert." And yes, the only way to understand China's economic miracle is to visit China today, and to talk to all the Taiwanese businessmen who live there. As for the growth in personal income, let me remind you that math works--that at high rates of growth China will catch up very quickly. To give you a concrete example, in 1990 a good college grad in Shanghai makes about $20 a month (after tax). In America, say $2000. Today he makes about $400 a month. And the American college grad--maybe $3000. And if you take into account purchasing power--the difference is not that big today. for example, you can get lunch for less than $1 in Shanghai. In purchasing power, $400 in Shanghai is something like $1200 in America.

  Published: December 2, 2005 6:58 AM

• Roger M

  I certainly hope China catches up to the US quickly. I love to read about the dramatic successes of the Chinese. A wealthy China will make the world a much better place. I just think there is a lot of hyperbole out there about China that sounds very much like what people said about Japan in the 1980's. In case you don't remember, popular songs of the day talked about how we would all be working for a Japanese company and Japan would own all of the good real estate in the US. It's trivial, but the US does not sell military hardware to China. In fact, we're trying to stop the Europeans for doing so.

  Published: December 2, 2005 9:57 AM

• Stefan Karlsson

  Roger, a important difference between China and Japan is that China have more than 10 times as many people as Japan and more than 4 times as many as the United States. So in order for its economy to become larger than the American economy they don't even have to become richer. All they have to do is become one fourth as rich. And given the fact that all three other majority-Chinese countries -Hong Kong, Taiwan and Singapore- have already achieved that with a wide margin, I can't see why it should be impossible for mainland China.

  Published: December 2, 2005 2:24 PM

• Roger M

  I have no doubt that China will catch up to the US. I hope it's sooner than later because I'm not afraid of a rich China as many mercanilists are. China won't get rich by taking our wealth, but as a complement to our wealth. However, they currently have 4 times our population, but 1/6 our economy. It's much more difficult to drag 1.2 billion people into prosperity than 300 million. If China is going to accomplish that growth, it needs to mend its ways and immitate the US more, particularly in the rule of law.

  Published: December 2, 2005 4:07 PM

• lucretius

  Roger,
  I certainly agree with you on the rule of law. In that respect China won't catch up soon. And of course lacking the rich naural resources in the US, in certain areas China will never catch up. But the point of Leong's insightful article is that the US has much to learn from today's China. Above all, government spending as a percentage of GDP is I believe much higher in the US. And the Bush administration is not improving things in this regard. And in my experience the Chinese people in the coastal cities today are firmer believers in the free market. Even in the universities you won't find the sort of left-wing nonsense that you find in US universities. This is ironic since China is supposed to be a "communist" country...

  Published: December 2, 2005 6:20 PM

• Paul Marks

  The defence spending of Taiwan is not "massive", it is actually quite small.

  The military power of the People's Republic China is growing all the time - and that of Taiwan is not.

  Published: December 5, 2005 12:59 PM

• The cat

  Navigating through the discussion I get some Austrian perspective and some Austrian quips but not a picture of an Austrian analysis of China's economic performance.

  Can anyone tie the following observations (and or correct them) together with Austrian analysis?

  a: Chinese currency was "pegged" to US dollar

  b: Currency devalued 50% in 1994

  c: FDI boom post 1994 followed by 2nd boom 2000-1 on.

  d: Chinese stockmarkets perform well then badly

  e: Chinese money supply growth and credit booms

  f: Apparently large portfolios of poor loans

  g: On/off increases in urban/rural income differences

  h: Large increases in inequality

  i: Current and capital account surpluses and large increases in foreign reserves

  j: High savings rates rising incomes but widespread and growing? lack of affordability of private sector housing

  k: Huge increases in private transport ownership in cities

  l: US bond market conundrum

  m: 0% interest rates and (deflationary? condiitions) in japan

  etc etc

  Published: December 6, 2005 6:32 AM

• KY Leong

  The Cat(?)

  If you bother to look a little harder, you will find most of the answers already on mises.org. E.g. you can click on Resources (mises.org/studyguide.aspx) and find that almost everything you need is in there i.e. Austrian Theory and Applications (and some Keynesian nonsense too!)

  And to start you off, I'll give you the direct link to your last two requests:
  l. US Bond Market Conundrum - See Stefan MJ Karlsson's "Greenspan's Mysterious Conundrum" (mises.org/daily/1859)
  m. Deflation in Japan - see Richard CB Johnsson's "Deflation and Japan Revisited" (http://mises.org/journals/qjae/pdf/qjae8_1_2.pdf)

  Happy Reading!

  Published: December 6, 2005 8:00 AM

• David Andersson

  Regarding the China-Taiwan relationship:

  The problem is that the PRC government consists of Chinese nationalists, while Taiwan's currentt government is made up of Taiwanese nationalists. If Taiwan's government would give up its counterproductive Taiwanese nationalism (since the name of a country is unimportant to the material welfare of its people anyway), there would be no PRC threat to Taiwan. My advice to Taiwan's leaders would be: Let the PRC win all meaningless symbolic victories, but keep Taiwan's legal system completely independent (it's still much better than China's legal system).

  Published: December 8, 2005 9:41 PM

• Stefan Karlsson

  Here is a news item which is relevant for the debate about China's relative economic power.

  Published: December 17, 2005 5:46 AM

• lucretius

  Regarding Stefan's post:
  The question about China's real economic power has resurfaced lately in light of the recent news that China has consistently underestimated the productivity of its private sector.
  While a reliable measure of an economy as huge as China's is extremely difficult, the latest news does not at all surprise those familar with China. I have always thought that the Chinese government's published stats are too low.
  Why? Because if you know anything about the private sector there, you know that most of the businesses will do anything to conceal how much money they actually make to avoid taxes. This is of course common throughout the world, but in China it's even more common. Therefore, the government simply does not have much info on how productive the private sector really is.
  

  Published: December 17, 2005 10:30 AM