China is heading for big trouble. Fearful of a political backlash from the sort of deep recession being suffered in the west, Beijing has embarked on a program of reckless expansion that is providing short-term gain at the expense of long-term pain.
This is an unfashionable view. The conventional wisdom is that China has taken the bold steps necessary to tackle the global downturn, and that its mixture of Keynesian pump-priming and Leninist centralised control will help drag the rest of the world back to prosperity.
Strategically, it’s a pivotal moment. It is assumed that at some point in the 21st century, the role of the world economic (and hence political) superpower will be ceded by the US to China, and that the slump of the past two years will hasten this process.
Why? Because traditionally it has been the US that has acted as the locomotive for the rest of the global economy and this time it is China in the vanguard; if German manufacturers now look to Guangdong rather than the Midwest to boost their order books, that marks a shift in power.
One half of this argument certainly rings true. The US remains by far the most powerful nation on earth, but bubble economics and military overstretch have sapped its strength.
Little wonder, then, that consumer spending is weak. With unemployment likely to hit 10 percent over the coming months and total hours worked in the economy’s private sector down 7 percent on a year ago, the US is in no position to act as the buyer of last resort for the rest of the world.
The US economy has deep-rooted problems: It has a hollowed out industrial base; it has over-indebted consumers; it has a crippled housing market.
To make matters worse it now has an exploding budget deficit and gently rising long-term interest rates. There is a very real risk of a double-dip recession in the US.
As a result, all eyes are now on China. On the face of it, there are encouraging signs. China’s economy bounced back in the second quarter and on some estimates grew at an annual rate of almost 15 percent in the three months ending in June. Put another way, the global economy grew by 1.6 percent in the second quarter; without China it would have been flat at best.
The optimistic case goes as follows. China is doing the heavy lifting for the rest of the world by pouring trillions of yuan into infrastructure projects and by expanding its money supply at a faster rate than any other country. Beijing’s actions will provide an outlet for exports from the rest of Asia and from Europe, while giving the US time to recuperate.
This all sounds a bit too good to be true. First, China, despite its explosive growth in the past three decades, remains a much smaller economy than the US. Measured by market exchange rates, the size of China’s economy is about 20 percent of the US or the EU, and that limits the extent to which it can act as an economic locomotive.
Nor are its economic statistics as squeaky clean as they might be. John Makin, in a piece for the American Enterprise think tank, said China was having a “bogus boom.” Dodgy accounting practices, he said, meant that goods count as sold when they leave factories, not when they are actually bought by consumers, and bank loans count towards GDP as soon as they are disbursed, even if companies hoard the cash or use the money to buy shares.
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