Events in China will affect the world — including America — like few or no other nations. As these articles show, we can only guess at what will happen.
- Powerful insights about China
- A note about China currency, the RMB
- Update: China’s ugly demographics
- For more information, and an Afterword
(1) Powerful insights about China
- “Nurturing the Chinese Economy“, Joe Studwell, Far Eastern Economic Review, December 2009
- Why China’s exchange rate policy is a common concern, Martin Wolf, Financial Times, 9 December 2009
(2) A note about China currency, the RMB
As Martin Wolf explains in the above article, China must allow its currency to appreciate in value — breaking its peg with the US dollar. The consequences for China and the world probably will be unpleasant if they do not do so — or do so too late, or poorly execute the transition.
I doubt this will be easy to accomplish, for these reasons:
(a) While the need is obvious and urgent, China has grounds for concern. We pressed Japan to revalue the Yen in 1985, resulting in the Plaza Accord. They suffered a massive asset bubble and crash, from which they have yet to recover. This might make China skeptical about our advice.
(b) There is strong if vague resistance in many nations to international coordination of public policy.
(c) Appeal to team spirit probably will no suffice. China will want concessions in return, which we might not agree to.
(3) Update: China’s ugly demographics
- “China’s Family Planning Goes Awry“, Nicholas Eberstadt, Far Eastern Economic Review, December 2009
For more about this revolution sweeping the world (compared to which the jihadists are trivia), see the FM reference page Demography – studies & reports. Articles about China from that page:
- “A Surplus of Men, a Deficit of Peace: Security and Sex Ratios in Asia’s Largest States“, Valerie M. Hudson and Andrea M. Den Boer, International Security, Spring 2002
- “Power and Population in Asia“, Nicholas Eberstadt, Policy Review, February/March 2004 — “Demographics and the strategic balance”
- “The Graying of the Middle Kingdom: The Demographics and Economics of Retirement Policy in China“, The Center for Strategic & International Studies, April 2004
- “Will China Grow Old Before Getting Rich?“, Goldman Sachs, February 2006
- “China’s Growth to 2030: The Roles of Demographic Change and Investment Premia“, Rod Tyers and Jane Golley, College of Business & Economics, Australian National University (May 2006) — 36 pages
- “The Graying of the Middle Kingdom Revisited“, Center for Strategic and International Studies, 22 April 2009
(4a) For more information from the FM site
Reference pages about other topics appear on the right side menu bar, including About the FM website page.
Posts about China:
- Power shifts from West to East: the end of the post-WWII regime in the news, 20 December 2007
- What you probably do not know about China’s food crisis, 21 April 2008
- China becomes a super-power (geopolitical analysis need not be war-mongering), 9 July 2008
- Words to fear in the 21st century: Lǎo hǔ, lǎo hǔ, Lǎo hǔ, 14 July 2008
- A different perspective on the US and China, seen by an American living in Russia, 23 March 2009
- China – the mysterious other pole of the world economy, 22 July 2009
- Another big step for China on its road to becoming a great power, 27 July 2009
- Will China collapse?, 5 August 2009
- A revolution is not a dinner party. Thoughts about the future of China, 19 August 2009
(4b) Afterword
Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 word max), civil and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
Shame that the Far Eastern Economic Review is going under. Those articles you linked to presented some of the most lucidly argued economic reporting I’ve ever read.
Excellent article by Studwell. Boy, leaving China alone(at their insistence) to work things out for themselves sure was a good idea. We should codify this as one of our highest principles: to not interfere in the evolution of other cultures, no matter how tempting, even on pain of death if necessary. We could call it the “First Directive”…”The Prime Instruction”…It’ll come to me.
What effect would China (theoretically) buying shittons of gold have on the value of the RMB?
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FM reply: Zero.
First, investing their reserves in a non-interest bearning metal would not inherently strength them.
Second, their reserves are too large; aprox $2.5 trillion in foreign exchange reserves (China, Hong Kong, Macao). At current prices, that could buy half of all the world’s gold (which total aprox 160 thousand tons).. They could buy the entire world’s production every year, aprox 2,500 tons. They could buy enough to send the price of gold to the moon — and still not make a dent in their reserves.
I fear that it would be impossible to totally avoid all interference with other cultures. Unless maybe we choose to hide behind a Great Wall. Or maybe on some other planet. He he. Worse yet, as our ideas infect them, some of their thinking might well contaminate us. Uh oh.
Oh, FM, here we go again with the China disaster articles. Yes, China no doubt has considerable risks, but please cite better analyses than Studwell’s trite “tried and true” and Wolf’s the last empire’s chauvinism. In particular, Studwell’s observations have been making the rounds ad nauseum for months — if not years. I hardly call these “powerful insights,” more like a hacked rehash or a mashup without the automation. (I’ll note that the difference is that Chinese government officials are actually aware of asset bubbles and talking about the problem versus Greenspan, Bernanke, et al.)
A better one you ask? How about Pettis’ latest on urbanization of China as its “salvation?” You’ll find that both the article and the comments to be truly more insightful.
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FM reply: As for your other comments, both these articles discuss matters of widespread concern — and debate — among economists. You, perhaps being smarter than everybody else, wave your hands and declare them void. Congratuations.
Prof Pettis article is excellent, as usual: “Is urban migration the solution to China’s problems?“, Michael Pettis, at his website, 13 November 2009.
Another interesting report is “China’s Investment Boom“, Pivot Capital, 21 August 2009 — Abstract:
No FM, I didn’t declare them void. I declared them oft-repeated pablum. Tell me something new and *truly* insightful. A real debate about these issues would be interesting and refreshing.
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FM reply: How charming. Write the many famous economists and instiutions (e.g., IMF) who have written about these issues. I’m sure your analysis of “pablum” will be considered definitive.
FM, let us now praise famous men! Repeat the pablum often and religiously enough and then they become…true! Repeat after me: “The subprime crisis is well-contained.”
My point is to make a fine point of it: These are rather pedestrian observations about the risks facing China and don’t in my book make it as “powerful insights” until someone (like Pettis or his caliber) provides some real evidence of their gravity.
Don’t want these trite cites from you to turn the “Fabius” into “Gluteus.”
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FM reply: Enough; you’ve said the same thing 3 times. Nobody cares about your opinion of these economists. If you have a substantive comment about their analysis, make it. Otherwise, please stop.
Thanks for posting these interesting articles. Studwell struck me with his admission that he doesn’t know the future, and his insistence on a measured viewpoint. I was also interested to hear how little his analysis depended on “economic theory”. It seems like Studwell views China in an almost parental way. His recipe for developmental success:
1. developer needs relatively equitable land reform
2. developer keeps their own “capital controls”
3. export discipline is good in reasonable doses
4. developed nations should support & indulge
It all sounds like, “Give your kids a certain degree of self-control, within their own lives, but also discipline them so they can deal with the wider world. Understand you’ll be supporting them for some time.”
Eberstadt’s piece was sobering, and he’s right that it’s science-fiction material. The aging workforce issue is a problem, but the surplus of males sounds dangerous. I suppose the Chinese men could deal by getting gayer or getting foreign wives, but overall it sounds like a recipe for unrest. The most affecting part of the article was the description of the “kin-less families”. I’ve always enjoyed a wide familial network. The “kin-less family” sounds lonely.
China is an awfully young economy to bear the weight of being the economic center of the world. There’s lots of bad things that can happen in their less-than-open society that can build up to catastrophic proportions without anybody outside the system (or even inside the system) being the wiser until it is too late.
Here’s an example: “China’s banks copy Citigroup in hiding bad loans off their balance sheets“, Jubal’s Picks, 18 December 2009
I have a very incomplete understanding of what a Chinese bank implosion would do for the world economy but I can safely say that it would NOT be beneficial.
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FM reply: China is not the economic center of the world in a conventional sense, and probably will not for generations. It is the center of the world’s growth, the biggest engine of the train. As such it has importance disproportionate to the size of its economy. The primary question is the nature of this growth.
Some say that its well-founded, and will vary from fast (5%/year) to faster-than-light (15%). Others says that the speed results from unstable factors, such as imprudent leverage — creating yin-yang-like inevitable swings between boom and bust.
The banks are de factor state-owned (like our big banks), and hence any problems would be derivative of a crash — not a cause of one. The financial system is a weak link in a capatalistic economy, as seen by crashes going back to the circa-1720 South Sea Bubble and Mississippi Bubble, whose collapse during a downturn spreads the shock widely throughout the economy.
Dear God, more China nonsense. It is:
Strong/weak
Rich/poor
Growing/shrinking
And all of those in between, plus a lot of others as well.
‘Spengler Fear’ I call it. Someone who is not white is making a buck and we are all terrified (or, his real worry [he is an Israeli after all] breeding rates). They are brown/yellow whatever so what. I had to go through this rubbish in the 80’s/90’s about Japan.
The amazing thing I find (as an old leftie) is that the biggest people who worry about this are the so called ‘free-market’ conservatives, who mouth endlessley about ‘competition’ but run to their little Gov’t every time they actually face it. “Save me” they cry .. while offshoring .. which here is a dark secret, only works due to the tax havens.
Fine move on, let tham make their crap while we make the good stuff .. which they have to buy. Oops we cant do that now (except from Germany of course) because we have slashed education (look at the UK 25% of Physics PHDs gone), the US doubled your populatiomn while your Physics PHDs have stayed the same .. and they all come from .. and will all go back to .. other countries. Whatever you have left will goto Goldman Sachs to work out better ways to put more ‘bonuses’ into their pockets (and pay off politicians .. quell suprise…. Blair now make millions a year).
Maybe you could make Fusion power plants.
Sadly we are talking about the ‘modern’ US now, they’d spend about $1 on actually trying to make it and $1 trillion betting on it in Wall Street. Plus the US ‘national security forces’ will probably try to assisinate/rendition every Physics PHD holder around the world (if they are not making weapons for us or are endangering our Coal industries hey they must be hunted down .. I can hear the cry .. maybe the US Congress will pass a law to that effect… strike that, the idiots will probably try).
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FM reply: I don’t see how your hand-waving voids the legitimate analysis of economists. Esp given the extreme nature of the Chinese experiment in mixed public-private economy (a big success, so far). Perhaps you could do the same for gravity, to cut our energy budgets.
“I had to go through this rubbish in the 80’s/90’s about Japan.”
You should have paid more attention, as the critics were right. Japan’s economy crashed in 1989 into a series of rolling recessions, with no end in sight.