03 October 2012

"The China Economic Boom Will Cease . . . . . "

A Turning Point for China

After a long run of good luck, modern China is experiencing multiple crises, each of which threatens to topple China from its important role as one of the world's main economic drivers.
China appears to be facing multiple crises, each exacerbating the other. China could have its turn at instigating global recession. The rest of the globe should expect turbulence and uncertainty.

There is a political crisis arising from the fact that the leadership transition is clearly not going as smoothly as planned: The party appears riddled with acute factionalism, heads are falling, but opacity remains. The dramatic fall of the powerful princeling Bo Xilai and his wife and their sordid scandal eroded the party’s legitimacy. The unexplained disappearance of the presumed incumbent to the presidency before his sudden reappearance two weeks later raised serious questions about the secretive party’s mode of operation.

The most profound crisis, one that lies at the heart of all the other crises, is the social crisis. In discussions with Chinese intellectuals in recent weeks, the word that keeps emerging is “anger.” People are angry at inequality, injustice, corruption, pollution, flagrant abuse of privilege, exorbitant prices of real estate driven by speculation. Social unrest is expressed through increasing number of demonstrations over quality-of-life issues, for example recently in Dalian, over a toxic chemical plant, and by a hyperactive blogosphere.

China’s environmental crisis, with the world’s highest levels of pollution and permanent urban smog, fuels the social crisis. The economic crisis arises not so much because of a 2 percent, or more, fall in the growth rate, but in a surprisingly widespread pessimism in respect to the future. The state is too bullying, the financial system is byzantine, the education system fails to provide needed quality, and the goals of innovation and higher value-added set out in the 12th Five Year Plan appear unattainable because of the party’s refusal or incapacity to carry out reforms.

The social and economic crises are rendered more acute by China’s looming demographic crisis as the population rapidly ages and the proportion remaining active in the labor market diminishes.

In some respects perhaps the most dangerous of all the crises is the geopolitical. Needless to say, it’s exacerbated by the simultaneous economic, social and political crises. China is currently in a state of territorial conflict with at least three neighbors – Japan, Vietnam and the Philippines – while relations with a number of major powers, notably India, Russia and the US, are tense. These are further fueled by increasingly strident rising nationalism, now being ramped up with anti-Japanese demonstrations and display of military might. Though war still seems a reasonably remote possibility, by no means can it be ruled out totally.

The world should take notice.... The China economic boom will cease; developing countries should anticipate a possibly steep decline in demand for commodities.

China will likely become more protectionist, reflecting the paralytic state of the global trade agenda and retaliation for likely protectionist measures from others, notably the US. _Asia Sentinel
These are all topics which have been discussed here routinely over the past few years, but are just now making their way into mainstream discussions at think tanks, among academics, and by government analysts.

For example:
... corruption and unreliable economic data is causing growing financial problems in China. There has been massive overbuilding, which has been impossible to hide. All those unoccupied residences and commercial buildings are very obvious. These were all built with loans from state-owned Chinese banks. The government refuses to reveal how badly the banking system has been hurt by all the obvious (and less obvious) bad loans.

There is a lot of corruption in China and several provinces and one major city (Dongguan) are talking about bankruptcy because they cannot borrow enough money to keep their unprofitable operations going. Sort of like what happened in Greece, but on a much larger scale. A major financial crisis could limit the loans needed to keep economic growth going. But it's become clear that much of the economic growth in the last decade was created by building stuff that was not needed and is non-productive. Manufacturing and exports are declining and, despite the absence of government data, there is growing unemployment. The Chinese stock market has declined 20 percent in the last year and the holdings of the richest Chinese have gone down by a third in the same period. _StrategyPage
No one can predict the exact sequence and timing of the coming changes in China, and the resulting consequences for China's trading partners and the global economy. It is safe to say that wise planners and investors will build a good deal of flexibility into their future plans.

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