Sunday, October 21, 2018

China at the Cliff

In 2007 I suggested that flaws in China’s growth strategy would eventually cause it to self-destruct. As China approaches the end of its frenetic growth cycle, analysis and forecast appear correct.

In September 2007, as our credit bubble was starting its collapse, China’s meteoric rise was the subject of universal admiration. We disagreed with this view, and wrote an essay titled “The Chinese Disaster” outlining the flaws in the Chinese growth model and suggesting a potentially disastrous end to the experiment.

Four years later it is appropriate to revisit both analysis and forecast.

Our first theme in the original essay was the lack of an ethical system underlying China’s current development. After Mao had “burned the books” and destroyed China’s 2500-year old ethical foundation he set up scientific materialism as a substitute. This has not changed. As before the goal of policy is to maintain the absolute power of the Communist Party, a power that is based on ongoing economic success.

This success has been extraordinary, with China acquiring, at extremely low cost, western investment and technology as well as the status of dominant economic power. On this basis (plus low cost labor and an elaborate mercantilist apparatus) it has built a huge industrial economy backed by a massive trade surplus. The internal price, however, has been high, as outlined in the 2007 analysis:

  • Economic inequality is worsening, with the new wealth of the middle class being eroded by inflation.
  • Environmental degradation has continued unchecked
  • Misallocation of capital is endemic, as manifested by the still developing fiasco of the high-speed train network.
  • Corruption is now universal, and in certain areas like finance it is beyond central control.

These systemic flaws will not, by themselves, bring about a collapse. But the hardships they impose on the people require some form of compensation. This has been achieved through the cultivation of national pride, founded in turn on continued economic progress.

Optimists expect this growth pattern to continue unabated, with China destined to mature into the reigning superpower of this century, displacing both Japan and the United States.

In our essay we disagreed, and pointed to what we believe is the fatal flaw.

China’s growing GDP has three legs: internal investment, consumption and exports.

  • Consumption’s share is shrinking as income is concentrated at the top.
  • Exports are subject to the western economic cycle. When the crisis hit China had to vastly increase internal investment in order to compensate.
  • Internal investment, however, has limits. There are only so many empty buildings and railroads to nowhere one can build before the return on money invested becomes negligible.
  • To overcome this decline on returns, the money supply has to be increased far beyond any safe limit, creating what amounts to a giant credit bubble.

Sucked dry by China’s predatory mercantilism, Western economies teeter on the brink of recession, and political pressure to halt the drain is rising. Thus China will get no relief from increased exports; in fact the trade surplus is likely to shrink even as, internal consumption’s contribution is declining and investment has reached its limits.

Thus Chinese economic growth is coming to an end. If so, the promise will have proven empty, and the hardships endured by the people will go uncompensated. There is no ethical ideal around which the rulers can rally the population.

Historically, this is the recipe for the “end of dynasty” disaster, seen many times in Chinese history. In this scenario, as corruption rises and the economic pie begins to shrink, the ruling class both raises its share and, wary of insurrection, increases the oppression of the people. The end result is desperate revolt, economic and political collapse, and general disorder until a new source of power arises.

In the past such rebuilding was structured around the traditional ethic founded by Confucius, the system that Mao rejected and destroyed. In the absence of a workable substitute China’s descent is likely to be hard, long and deep.

About the Writer

Jack_Popiel is a writer for BrooWaha. For more information, visit the writer's website.
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9 comments on China at the Cliff

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By TonyBerkman on October 29, 2011 at 07:01 pm

What about the trillions in savings that the country has. They certainly appear to be the economic super power of the 21st century. Their manufacturing industry is booming. Their wage rates are negligent. We continue to import from them. Even if our rate of imports decreases substantially they will still lead the world in manufacturing and profits.

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By Jack_Popiel on October 29, 2011 at 09:43 pm

China does appear to be the super power of the 21st century. Everything seems to be booming. Yet China can't sustain this growth because its infrastructure is built on others inventions and innovations and stress fractures are starting to undermine their foundation.

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By TonyBerkman on October 29, 2011 at 10:33 pm

Jack aren't all innovations and inventions built on the past to some degree? What the real cracks in Chinese foundation? They don't seem to be economic and politically you aren't hearing the same cries out of China or from American's for Human Rights or seeing the demonstrations that we used to see in China.

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By Jack_Popiel on October 30, 2011 at 01:00 pm

China has in place a security appratus as powerful as those of the Soviet Union and Nazi Germany. There is heavy censorship of the internet often accompanied by blogger arrests and harrassment. Despite all this China officially tallies over a hundred thousand "social" events (civil disturbances, protests, demonstrations and riots) per year. This is not a satisfied and peaceful population in full accord with government policies.

The above information is public knowledge in world-class newspapers, publications and websites.

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By TonyBerkman on October 30, 2011 at 02:56 pm

Hey Jack, I know that and that's what makes it frightening. I don't have the knowledge that you do about China. I am curious about why you believe they will collapse.

You make 3 points above that are the reasons for the Chinese economy being held up. The first 2 I am not positive I agree will cause the collapse though I am curious about learning more about

3. To overcome this decline on returns, the money supply has to be increased far beyond any safe limit, creating what amounts to a giant credit bubble.

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By Jack_Popiel on October 30, 2011 at 09:39 pm

Perhaps you might be interested in reading "The Chinese Disaster" which is on my website under the blog section 'Peace and War'... it will answer many of your questions.

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By TonyBerkman on November 03, 2011 at 04:34 am

Jack, I will check it out. Thank you.

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By Uttam Gill on November 03, 2011 at 05:30 am

The dynamics of growth and decline/destruction of economies is a matter of interest for the entire world. The Rise of China as an emerging economic power apparently looks very real. The alarming trend in the emerging markets Chinese presence is very much acquiring a dominating position. I have yet to read your article "The Chinese Disaster" but I can gauge why China will collapse and that would be because of very weak fundamentals on which Chinese economy appears to be booming. I just beg to differ with one word which you used that China’s descent is likely to be " long"...As I gather the oppressive subjects don’t follow deliberate long term mechanics of growth and decline...When the frustrations of the oppressive subject reaches a saturation point it would crumble the entire edifice of Chinese economy within no time. Rather it would be very fast and repercussion would be horrific...It would unsettle the world economy too... There are many socio, economic and political factors which would facilitate rapid collapse...

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By CekMagdurlari on November 05, 2011 at 05:03 pm

Plank roads were built along the cliff outside the caves and scaling ladders were also built there so as to connect those caves. Relevant traces can be found till now. Çek Magdurlari

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