Chinese uncertainty

TIME Correspondent Michael Schuman has an interesting take in his article “Why China Will Have an Economic Crisis”

Chinese bureaucrats today suffer from the same problem that led Japanese bureaucrats astray — they believe the economy can be managed by fiat. The tools of classical economics — getting prices right — are secondary. Why guide an economy with abstract measures like interest rates when you can just tell the banks what to do?

That attitude is what killed Japan’s economic miracle, and now I see China slipping toward the same fate. Japan could not escape the forces of basic mathematics. China can’t either, no matter how brilliant its policymakers might be. When would a meltdown happen? It is interesting to play with a bit of history. Both Japan and Korea suffered their crises roughly 35 years after the Asian development model was switched on — the early 1950s to ’89 in Japan, and 1962 to ’97 in Korea. That puts a China crisis at around 2014-15 or so. I’m not predicting a firm date here. What I am saying is that China is running out of time to fix the problems of its economy.

I think it is interesting to put that into context with recent accusations by American and European photovoltaik producers, that China is unfairly subsidising a sector that is even with the subsidies not profitable:

The Commerce Department in Washington on Wednesday [the 9th of November 2011] opened an investigation sought by American manufacturers who accuse the Chinese of “dumping” solar panels into the United States at prices, aided by government subsidies, lower than the cost of making and distributing them.

Whether or not those accusations are right – to me they seem to be at least partly true - something is going on and we will likely see movement in these areas. A 2014 deadline might be too soon although the Chinese housing bubble is another risk factor too.

The Eurasia Group also wrote an interesting report on the topic (PDF). As co-author Even A. Feigenbaum puts it:

China’s leaders will have to make serious and deep reforms to many elements of their country’s political economy. They will have to overcome inertia and “reform fatigue,” fight through the opposition of powerful constituencies among state-owned enterprises and entrenched financial interests, introduce a more market-based approach to energy policy, roll back subsidies (for example on land and energy), reform financial markets to free up capital for entrepreneurs and private business, boost domestic consumption, and so on. In short, they will have to alter the underlying structure of China’s political economy.

For me the actual question is whether the Chinese leadership has the power to change the path. The problem is not just that the Chinese leadership is in a transitional period from one generation to the next, really we have to ask how  control the CP holds over China. Just as one example: the five-year-plan growth(-reduction) target for 2006-2010 was missed by a wide margin and the 2011-2015 one too is unlikely to be met. Even if they want to, can the Chinese leaders change course? I’m skeptical.

And what if the Chinese government successfully starts a transition to a new developmental model?

Gary Becker, commenting on the World Bank’s China 2030 report, which also calls for a change of China’s development model:

The experiences of both the Soviet Union and Japan shows both that it is very hard for countries to change their ways when they have had considerable economic success, and that the slowdown in growth rates is abrupt once it happens. Still, I would not bet against the ability of Chinese leaders to radically change their economic ways once again if that becomes necessary to continue to grow rapidly.

No one can currently say with certainty what the economic and political power structure of 2015 might look like.

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