Thirteen years ago, a supposed "expert" on China, Gordon Chang, wrote a book about the coming Chinese economic collapse. Since that time, Chang has continued to predict disaster in East Asia. Today we got the latest installment of this ongoing prediction of doom. According to Chang, China is either entering a recession that will last for decades or a depression; neither is a particularly good prospect.
So is Chang finally correct? Is China descending into the economic abyss? The only correct answer to that question is "maybe". China's problem is that the force that drove its economy for decades of growth can no longer work very well. Forty years ago, China was a backward place that was greatly in need of investment in all sorts of things. It needed modern transportation systems (like airports, rail lines, and highways). It needed modern housing. It needed modern offices and other business locations. And for the last forty years, China has built these things. It has invested and gotten a modern country. But once a city has a modern airport, it does not need a second one. Once there is a high speed rail line between Shanghai and Beijing, there is no need to build a second. Once there is adequate housing for the Chinese, the continued building of apartment buildings just results in empty apartments for which there is no need. All that investment that the Chinese have been making for decades no longer works. And that's the big problem. All those millions of Chinese who have invested in the boom or who work in the industries that produced products used in these investments are now at risk.
It's not just the Chinese who suffer, though. As China stops investing and building, all the industries world wide that furnished the needed products to China are getting slammed. Copper is used mainly in electric wiring. When building construction in China started to fall, the demand for copper collapsed and the price plunged. Mines in Peru, Australia and elsewhere lost big. Steel production also fell in a major way. As a result the world price of iron ore has fallen by close to 75%. Miners in Brazil and many other countries have suffered major losses. Indeed, the collapse of commodity prices around the world is, more than anything else, the result of the end of the Chinese investment economy and the concomitant reduction in demand.
According to Chang, the problem in China is compounded because Beijing financed most of the investment through debt. Chinese debt is about 3.5 times its GDP according to the figures used by Chang. If the economy contracts, there is no way that such a large debt can be serviced. The result will be default and massive losses for lenders around the world. That outcome would spread the Chinese recession/depression around the world.
There is no need for such a gloomy outcome, however. China may stagnate rather than collapse. It could even achieve a slow growth rate. That would not be great for China, but it would likely avoid a worldwide disaster. A major increase in growth in the other developed world economies could also offset a Chinese contraction. That would require a switch in the USA from the stagnation policies of president Obama to a strongly pro-economic growth posture (which will be dependent on the results of the 2016 election.) A push for growth in Europe could also help provide support for the world economy.
The truth is that Chang has been wrong for more than a decade in his discussions of China and its economy. Let's hope that he remains wrong into the future.
So is Chang finally correct? Is China descending into the economic abyss? The only correct answer to that question is "maybe". China's problem is that the force that drove its economy for decades of growth can no longer work very well. Forty years ago, China was a backward place that was greatly in need of investment in all sorts of things. It needed modern transportation systems (like airports, rail lines, and highways). It needed modern housing. It needed modern offices and other business locations. And for the last forty years, China has built these things. It has invested and gotten a modern country. But once a city has a modern airport, it does not need a second one. Once there is a high speed rail line between Shanghai and Beijing, there is no need to build a second. Once there is adequate housing for the Chinese, the continued building of apartment buildings just results in empty apartments for which there is no need. All that investment that the Chinese have been making for decades no longer works. And that's the big problem. All those millions of Chinese who have invested in the boom or who work in the industries that produced products used in these investments are now at risk.
It's not just the Chinese who suffer, though. As China stops investing and building, all the industries world wide that furnished the needed products to China are getting slammed. Copper is used mainly in electric wiring. When building construction in China started to fall, the demand for copper collapsed and the price plunged. Mines in Peru, Australia and elsewhere lost big. Steel production also fell in a major way. As a result the world price of iron ore has fallen by close to 75%. Miners in Brazil and many other countries have suffered major losses. Indeed, the collapse of commodity prices around the world is, more than anything else, the result of the end of the Chinese investment economy and the concomitant reduction in demand.
According to Chang, the problem in China is compounded because Beijing financed most of the investment through debt. Chinese debt is about 3.5 times its GDP according to the figures used by Chang. If the economy contracts, there is no way that such a large debt can be serviced. The result will be default and massive losses for lenders around the world. That outcome would spread the Chinese recession/depression around the world.
There is no need for such a gloomy outcome, however. China may stagnate rather than collapse. It could even achieve a slow growth rate. That would not be great for China, but it would likely avoid a worldwide disaster. A major increase in growth in the other developed world economies could also offset a Chinese contraction. That would require a switch in the USA from the stagnation policies of president Obama to a strongly pro-economic growth posture (which will be dependent on the results of the 2016 election.) A push for growth in Europe could also help provide support for the world economy.
The truth is that Chang has been wrong for more than a decade in his discussions of China and its economy. Let's hope that he remains wrong into the future.
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