Will China's Economy Collapse? E-Book

Ann Lee

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Blackwell Companions to History
• Sprache: Englisch

Seitenzahl: 133

Veröffentlichungsjahr: 2017

Beschreibung

The recent downturn in the Chinese economy has become a focal point of global attention, with some analysts warning that China is edging dangerously close to economic meltdown. Is it possible that the second largest economy in the world could collapse and drag the rest of the world with it? In this penetrating essay, Ann Lee explains both why China's economy will not sink us all and the policy options on which it is drawing on to mitigate against such a catastrophic scenario. Dissecting with realistic clarity the challenges facing the Chinese economy, she makes a compelling case for its continued robustness in multiple sectors in the years ahead.

Leseprobe

Contents

Cover

Title Page

Copyright

Acknowledgments

Preface

1 The Modern Chinese Economy: The Good, the Bad, and the Ugly

A Closer Look at China’s Debt Situation

Corporate Debt

Local Government Financing Vehicles

Shadow Banking

China’s Property Bubble

Notes

2 Preparing for a Soft Landing

Consumption as Third Engine?

SOE Reform

Monetary Policies

Financial Markets

Closed Capital Account

Internationalization of the Renminbi

Fiscal Policies

Belt and Road Initiative/Asian Infrastructure Investment Bank (AIIB)

Green Development

Poverty Alleviation

Healthcare

Worldwide Recruiting

Notes

3 Even Black Swans Won’t Kill

The Anti-Corruption Campaign

Resilience

Shrinking Labor Force

Geopolitical Tensions with the United States

Another Cold War?

Worst Case Scenario?

4 Can China’s Economy Lift Us All?

Notes

Epilogue

End User License Agreement

Guide

Cover

Table of Contents

Begin Reading

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The Future of Capitalism series

Steve Keen, Can We Avoid Another Financial Crisis?

Ann Lee, Will China’s Economy Collapse?

Will China’s Economy Collapse?

Ann Lee

polity

Copyright © Ann Lee 2017

The right of Ann Lee to be identified as Author of this Work has been asserted in accordance with the UK Copyright, Designs and Patents Act 1988.

First published in 2017 by Polity Press

Polity Press65 Bridge StreetCambridge CB2 1UR, UK

Polity Press350 Main StreetMalden, MA 02148, USA

All rights reserved. Except for the quotation of short passages for the purpose of criticism and review, no part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher.

ISBN-13: 978-1-5095-2017-6

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Acknowledgments

I want to extend a warm thanks to Dr Louise Knight for approaching me to write this book. I have given speeches about this topic on a number of occasions, but putting it in writing has enabled me to flesh out my argument. I also want to express deep gratitude to Frank Arlinghaus, Alex Castaldo, and Dominieck Dutoo for their feedback on early drafts of my manuscript. A tremendous thank you goes to Javier Hernandez, who provided extensive legal assistance and generosity in numerous other ways. And my biggest thanks go to my parents and my brother John for their unending love and support for all that I do in life.

Preface

Will China’s economy collapse? Many informed people have publicly stated that they believe it will. Books that have prognosticated this outcome declared this state of emergency over a decade ago. While China has not yet collapsed as of this writing, many hold on to the belief that such a calamity remains imminent. There are numerous logical and compelling reasons to support a scenario of collapse. Without doubt the growing uncertainties around the world have added to this fear. Moreover, as China is the largest trading nation in the world and second largest economy as of 2016, there is an underlying fear that, according to the popular saying, if it sneezes, the world will catch a cold. Events such as China’s stock market crashes during the summer of 2015 and January 2016 in addition to the well-publicized existence of its ghost cities and its shadow banking industry have investors and politicians alike increasingly worried.

Although there is no specific definition of economic collapse, there is a general consensus that it is a situation in which there is a sudden occurrence of extreme negative conditions that then persist in the economy for a prolonged period. Various manifestations of an economic collapse could include any combination of the following conditions: an unusually high number of bankruptcies, high unemployment, breakdowns in civil society, increasing mortality rates, and widespread famine. History is littered with such scenarios.

While the reasons behind the collapses vary across continents and centuries, there appear to be some common themes and cycles. One common pattern is that when countries or empires undergo disruptive social change like growing liberalization, economies often experience high growth. This was the case both in the ancient world and in medieval times when growing social and economic liberalization paved the way for the Greek and Roman empires and the Spanish Empire, respectively. However, when these countries and empires overstretch themselves in military adventures, economic collapses often follow. In the case of the Roman Empire, once the army took control (ca. AD 276–401), they taxed the middle class out of existence to fund expensive wars so that all that remained was a slave underclass. Spain’s ongoing wars also led to its collapse as a global power in the seventeenth century. In more recent examples, Great Britain’s empire began with the nation’s industrialization, which likewise coincided with growing social and economic liberalization during the eighteenth and nineteenth centuries. Similarly, the end of Pax Britannica coincided with involvement in two world wars. The Soviet Union also experienced rapid growth following the Communist takeover, which liberalized its society from generations of feudalism. However, its economy collapsed in the 1980s after engaging in a decades-long Cold War against the United States.

Whether China will undergo an economic collapse comparable to the examples above is something to explore. Like the aforementioned cases, it has experienced growing economic liberalization in the last few decades that has enabled it to attain its current superior economic status. However, many in the West now wonder whether China is on the brink of collapse since they believe its financial system, military program, and growth model are opaque and unsustainable. While it is impossible to cover all possible scenarios given the infinite number of variables that would need to be taken into account for a truly comprehensive analysis, in this book we will explore the most probable causes of economic crisis in China. Common arguments for an imminent collapse will be dissected and subsequently found to be grossly exaggerated. Years of working in the financial markets and countless discussions with policymakers and regulators have shown me time and again that reality does not necessarily line up with academic theory. But let’s first begin by analyzing the vulnerable aspects of China’s economy to discern whether they are indeed sufficiently weak to generate forces that could have catastrophic domestic and global consequences.

1The Modern Chinese Economy: The Good, the Bad, and the Ugly

China’s modern economy is an intricately complex web of state capitalism, laissez-faire capitalism, Keynesian economics, Austrian economics, Soviet-inspired planning, and good old-fashioned entrepreneurialism. Contradictions are a fact of life in the Chinese economy, and no simple definition or ideology can adequately describe everything that it encapsulates. One of the reasons for this complexity is that China is simply too large to manage uniformly. With 56 recognized ethnic groups practicing close to 300 living languages and spread over 3.7 million square miles among over 1.3 billion people, China gives rise to as many variations in economic activity as there are on the planet.

Despite such variability, China managed to modernize as one country with a speed that truly was unforeseen. For the past quarter-century, its miraculous growth has resulted in bringing the equivalent of the entire US population into the middle-income bracket. This remains the biggest economic news of our lifetime. China largely achieved this feat through a combination of exports and investments, which, as a percentage of gross domestic product (GDP), remain among the highest in the world. While other nations such as South Korea and Japan have also grown rapidly in past decades to achieve developed country status, the scale and duration of growth that China has achieved remain unparalleled. Some of the factors that distinguish China from other countries were the subject of my prior book, What the US Can Learn from China.1 As noted there, China’s leaders adopted a number of approaches that minimized problems and enhanced the probability of better outcomes for the nation as a whole.

However, there have been some developments in China that many find concerning. From strong capital outflows to volatile stock markets, a rising chorus of pundits such as David Shambaugh predict an economic crisis for the country. When China began developing, it was a small trading state and thus had tremendous room for growth by taking market share at the expense of other countries. Initially, it followed the same growth model adopted decades earlier by the four Asian Tigers of South Korea, Hong Kong, Taiwan, and Singapore. As they demonstrated, economic growth is primarily determined by (1) domestic economic competition, (2) infant industry protection, (3) state control of financial resources and international capital flows, (4) incentives that promote industrial production and exports, and (5) labor movement from rural to urban settings coupled with productivity increases. The principles driving growth haven’t changed. Today, as the largest trading nation in the world, China is nonetheless constrained by the size of the world economy. It can no longer grow faster than the world economy through trade alone.

The problem of overcapacity emerged more severely in China since the world was unable to absorb its exports, resulting in a slowing of its export engine. This overcapacity led to even more severe price cuts and eventually massive layoffs of workers, who, during the 2008 financial crisis, were no longer needed in factories for everything from textiles to steel. For instance, China has the capacity to export two-thirds of the world’s steel, but the world only needs half of China’s steel production. Thus, in an attempt to forestall worker unrest, Chinese policymakers created a second engine of growth by inducing heavy investment domestically in the years immediately following the financial crisis of 2008 in order to rehire the unemployed workforce. China’s second growth engine was characterized by infrastructure investments of all types, from sophisticated water treatment systems to rampant real estate investments that created entirely new cities out of the blue. Yet, even domestic infrastructure investments that were needed to offset the drop in exports have hit their limit for China. High-speed trains have now been constructed all over the country, and real estate expansion among third-tier cities lacks the residents and commercial activity to sustain it. A third engine of growth is now needed to keep China growing in order to lift the rest of its population out of poverty.

Developing a third engine of growth while the two former engines are slowing dramatically is challenging in itself, but the difficulty is compounded in China by its ballooning debt.

The problem with China’s credit growth is that the country had already accumulated vast amounts of both public and private debt in order to fund its second leg of growth following the 2008 financial crisis. China’s debt increase since 2009 has been faster than the debt buildup that occurred in the United States before the global financial crisis. Since China’s GDP did not grow commensurately, its debt-to-GDP ratio has also shot up. The continued growth of its credit while its GDP growth continues its downward trajectory has caused many people to predict that the country is headed for an inevitable debt crisis that will bring about the collapse of its economy.

A Closer Look at China’s Debt Situation

Throughout the modern world, the phenomenon of financial crisis usually results from a prolonged cyclical credit surge that leads to widespread and sustained deterioration in various financial and economic indicators. Hyman Minsky, an economist who observed these cycles, documented this pattern of financial fragility. The question is whether China’s set of circumstances will follow this template.

While it is undeniable that there are signs that China’s economy does not seem as robust as in years past, its broad economic health actually appears rather stable. Yes, its debt is sharply higher, but that alone cannot trigger a crisis. When one examines its other economic indicators, one sees a different story which doesn’t fit the stereotypical picture of the prelude to an economic crisis. For one, China’s GDP growth has continued to be among the highest in the world for over two decades while its inflation and unemployment levels remain consistently low. China also has largely maintained a current account surplus even at its more advanced stage. This surplus has shrunk considerably in recent years, but it still contributes to the country’s enormous foreign exchange reserves. Despite sharp drops in 2015 and 2016, these reserves continue to be the highest in the world and can be used as an effective buffer against financial contagion. China also has modest fiscal deficits that give its government additional financial leeway for future action. The country’s high savings rates at roughly 50% could also potentially drive growth. Most importantly, China has very low external debt, which is no more than 10% of its GDP.2 By way of contrast, Japan’s foreign debt is 60% of its GDP. With such low external debt, China would not be under threat from a foreign entity for repaying its debt under less than ideal conditions and thus avoid “the sudden stop” to its economy that other nations with high external debt have suffered.

China’s banks are also financially healthy. They have a very low number of non-performing loans in their portfolios (around 2%),3 are more transparent than the large US banks such as JP Morgan, and, despite the removal of the 75% cap on loan-to-deposit