If China???s economy was a bubble waiting to burst it would have done so already. By most accounts, the worst of the global financial crisis is over and most industrialized, consumer oriented economies are expecting economic growth as soon as this quarter (fourth quarter 09), albeit diminutive growth. Indeed, unemployment is high and growing in absolute terms but the rate of unemployment has abated to a manageable level. The U.S. government has extended the duration of many of its automatic stabilizers (unemployment insurance) which, in conjunction with its expansionary monetary policy-interest rates near zero-and unprecedented fiscal stimulus, both tax cuts and government facilitated demand (spending), American consumption is sure to augment considerably by year end. Americans are reluctant to save their incomes. At the first hint of long-term economic stability, they will begin buying Chinese goods at pre-recession levels which will of course further assuage China???s resilient, but slightly wounded, economy. I might add that China???s economy is in fact an export oriented economy but with double digit economic growth, circumspect domestic economic policies, and an incipient middle class, China could be more than a decade away from being the next consumer society, something which is already fruitive. Their dependence on export oriented growth will diminish if it hasn???t already.
Can China’s Good Fortune Last?
The nation's economy has recovered more quickly than many expected. But why and how is up for debate.
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For all the debates over what the Great Recession means for the global political economy, there does appear to be consensus on one point: China has had a very good year.
In response to the economic crisis, China deployed massive fiscal boosts, aggressive expansions of credit, foreign-exchange interventions, and tax rebates for the export sector. The short-term results have been impressive. The Asian Development Bank projects China's GDP to grow by 8.2 percent in 2009 and 8.9 percent in 2010—up significantly from forecasts made earlier in the year. The result: job creation. As The New York Times pointed out last week, the image of workers streaming back into Chinese factories stands in sharp contrast to the United States, where the unemployment rate continues to march toward double digits. During this week's G20 summit in Pittsburgh, China will have more weight to throw around on everything from climate change to macroeconomic imbalances.
How should we interpret China's swift recovery from the financial crisis and what it means for the future? Here the consensus breaks down into different camps.
Let's call the first camp the Extrapolators. These analysts look at China's recent astonishing growth rates and assume that Beijing will be the geopolitical equivalent of the Energizer Bunny: growing and growing and growing. The Chinese model of authoritarian capitalism has been working for several decades with more stability than many Western analysts believed it could sustain. Writing in The New Republic, Zachary Karabell asserted: "China's economy is showing no signs that it's about to collapse or even contract ... While many question the recipe that China has followed, the results speak for themselves." As China continues to grow, the Extrapolators presume that Beijing will shoulder a larger burden of supplying global public goods.
In the second camp are the Bubblers. These analysts look at China's economy and see unsustainable imbalances. China's economy is fueled by an export engine—but with the United States and Europe saving more and consuming less, that engine will not be able to rev so hot now. True, China's government forestalled a deep recession with its easy lending policies, but this has come with a credit bubble that is about to pop. Soon after Beijing cut off the credit tap, the Shanghai Composite Index started to fall. In August it fell by 22 percent, and Bubblers predict an additional 25 percent decrease. As far as political stability goes, Bubblers concede that China's Communist Party is not going away. Still, this is a country that faces periodic unrest in Xinjiang and Tibet, daily worker riots, and mounting ecological catastrophes. Assuming that past growth equals future growth with such shaky foundations seems unwise: a crash is coming at some point.
I belong to the third camp—the one that believes that the Bubblers and the Extrapolators can both be right. My camp looks at China and sees the parallels with America's rise to global economic greatness during the late 19th and early 20th centuries. From an outsider's vantage point, America looked like a machine that could take immigrants and raw materials and spit out manufactured goods at will. By 1890, the U.S. economy was the largest and most productive in the world. As any student of American history knows, however, these were hardly tranquil times for the United States. Immigration begat ethnic tensions in urban areas. The shift from an agrarian to an industrial economy led to fierce and occasionally violent battles between laborers, farmers, and owners of capital. With an immature financial sector, recession and depressions racked the American economy for decades.
It is not contradictory for China to amass a larger share of wealth and power while still suffering from severe domestic vulnerabilities. From the perspective of the rest of the world, however, this is not a good thing. A steadily rising and confident China would have little difficulty shouldering a greater burden of providing global public goods. A China that experienced an obvious reversal of fortune would be less able to assume aspects of global leadership—but less would be expected in this instance.
A rising and domestically fragile China, however, is the worst of both worlds. Other countries would expect Beijing to act as a responsible great power—but the Chinese elite would view themselves as too weak and fragile to oblige. Again, the parallel is with the United States. For the first four decades of the 20th century, the U.S. was so absorbed with its own problems that too often it failed to recognize the role it needed to play in the world. Eventually the United States took a more active interest in world affairs—but the 50 years it took for Washington's reach to match its power were rocky ones for the rest of the globe. Let's hope that the global political economy does not suffer from a case of déjà vu.
© 2009
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