Many people in the US and around the world are fascinated by China, its population of 1.3 billion, growth over the past decade, and its ability to seemingly weather the storm of the global recession. China's apparently unshakable growth has impressed economists and politicians everywhere. Free-marketeers who typically shun government involvement in industry in their homelands, have praised China for its approach and involvement in industrial policy. Despite China's rise to become an economic superpower, it still has rookie status, and appears to be making rookie economic errors.
Last week the Chinese government announced that it will be forced to pump the brakes on its booming economy. It seems that Chinese officials are beginning to recognize the massive bubble they may have created through massive stimulus.
The gigantic stimulus package implemented last year now represents about 14% of GDP. The government has poured money into infrastructure and capacity improvements. This spending is on top of the tremendous amount of money spent on infrastructure over the past ten years. Don't get me wrong, there are surely long-term benefits to having improved highways, high-speed railroads, and more hospitals. But government traditionally does a poor job of allocating capital, especially this much and this fast.
As an example of the overcapacity the stimulus has created, Chinese excess capacity in cement is greater than the combined consumption by the United States, Japan, and India combined.
Also, Chinese idle production of steel is greater than the production capacity of Japan and South Korea combined. Similarly disturbing statistics are true for many other industrial commodities. The enormous stimulus amplified problems that already existed to financial-crisis levels. China is a less shiny but more drastic version of Dubai.
There is speculation that the Chinese consumer will pick up the demand slack for the U.S. and European consumers who are deleveraging and buying fewer Chinese-made goods. This may happen, but it will take decades. The U.S. and European consumers are two-thirds of much larger economies.
Additionally, China has manipulated its currency to achieve growth. If China had let its currency appreciate during the past decade, its exports would have become more expensive, and demand for Chinese products would have declined. Had China let its currency to price at market levels, there is little chance that its economy have grown at 10% annual pace. The purchasing power of Chinese consumers, who represent only about a third of the Chinese economy, is significantly undermined by the undervalued renminbi.
How long do you think will it last?
0 comments:
Post a Comment