China’s coming crash?

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WASHINGTON, DC:  It’s time to worry about China.

On any list of calamities threatening the world economy, a China crash ranks at or near the top. Just what would constitute a “crash” is murky. Already, China’s sizzling rate of economic growth has declined from 10 percent annually — the average from the late 1970s until 2011 — to 7 percent, which is still high by historical standards. The question is whether the deceleration continues and growth goes much lower.

A faltering China could tip the world back into recession. Because China is a huge customer for raw materials (grains, metals, fuels), their prices would remain depressed.

China’s surplus capacity of basic industrial goods, such as steel, would be increasingly exported, also depressing prices. This would dampen any recovery in global business investment. Confidence would suffer.


What about political fallout? “The Chinese government has maintained its legitimacy by promising economic progress,” says economist Eswar Prasad of Cornell University. If the promise seems broken, it’s hard to know how China’s masses would react. Or China’s leaders. Would they become more nationalistic and aggressive to deflect attention from economic disappointment?

Americans are exposed to all these potential spillovers. Prasad doubts the worst-case scenario will come to pass; plenty of other experts agree. After all, China’s leaders have repeatedly disproved doomsayers. There are many reasons the economy can flourish. The most obvious: Consumption spending was only 37 percent of the economy (gross domestic product) in 2014, the lowest of any major country (the US figure: 68 percent of GDP). If the Chinese become a bit more spendthrift, their economy could thrive.

Still, there is the example of Japan. In the 1980s, it was widely regarded as the world’s most dynamic economy, overtaking the United States. Then, Japan’s prospects collapsed.

New Asian competitors (Taiwan, South Korea) and an appreciating currency destroyed its economic model of export-led growth. Unable to build a new model, Japan has foundered ever since.

China is now at a similar juncture. There’s broad agreement that its economic model is outmoded. It also emphasized export-led growth and high investment spending (the counterpart of low consumer spending). The 2008-09 financial crisis showed the limits of both.

Exports fell, as China’s biggest customers — the United States and Europe — went into recession. To bolster its economy, China announced a $586 billion stimulus package, almost 13 percent of GDP, in late 2008. But unlike the US stimulus plan in 2009, which was part of the federal budget, much of China’s extra spending was channeled through state-owned banks and local governments. What ensued was a credit boom that has now left a large overhang of unsold housing, surplus industrial capacity and questionable debt.

Housing looms as the largest drag on China’s growth because it amounts to about 25 percent of the country’s GDP, including major supply industries such as steel, cement and glass, says economist Prasad. With housing supply exceeding demand, building is already slowing. Housing prices are down roughly 6 percent from their recent peak. The decline will go to 10 percent, says economist Yukon Huang of the Carnegie Endowment for International Peace.

Compounding this weakness is a slackening of local government spending on infrastructure projects (roads, airports, hospitals). To finance these projects, local government debt surged from about 6 percent of GDP in 2008 to 33 percent of GDP in mid-2013, according to the global bank UBS. The central government is now trying to slow the growth of this debt.

With hindsight, argues Huang, the 2008 stimulus package looks excessive. “They overdid it” — lent too much, he says, and “too much money flowed into housing and property [development].”

None of this preordains a full-scale financial crisis. There are mitigating factors. Housing purchases in China are generally made with more cash than in the United States; in most cities, there is no property tax. These practices limit carrying costs and pressures for default. As for government debt, China’s is moderate by global standards, despite the recent increases.

China’s economic predicament resembles America’s. It needs a formula for sustainable growth that’s not dependent on repeated bursts of artificial stimulus, whether by deficit spending or prolonged easy credit.

Interestingly, Chinese policymakers and foreign economists generally agree on the steps needed to shift spending from investment (now, too much) to consumer spending (too little). The social safety net needs to be strengthened so that people can save less to meet personal disasters. And banks need to be overhauled so that artificially low interest rates don’t subsidize business borrowers at the expense of depositors.

Though the way forward seems clear, it is strewn with political and psychological obstacles — vested interests and ingrained habits. The reasonable fear is that China can’t get from here to there without a major debacle.

© 2015, The Washington Post Writers Group

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7 Comments

  1. genesisbughaw on

    its nothing but pure stats. let us see your projection with due respect , BRICS will be the most dynamic economies in years to come.
    God bless.

  2. Nobody remains unscaved in a war. Everybody loses something. It was a risk for the US to invest in China. Now the Chinese monster it created wants to gobble everything it can.
    Get your investments out of that country as fast as you can and prepare for the eventuality of war. Its coming. Unless a third party can defuse the situation. But we are talking about freedom of trade and travel in that neck of the woods as well as security. And it doesnt stop there. China appears to be poised for world domination. And should the US flinch, all its allies who are already losing confidence and fate in the US resolve will side with China. Good luck.

  3. Soon China will suffer more esp. their economy due to poor quality… we will campaign to boycott all products of Made in China… land grabber…

  4. For the last 5 years at least, China have had already internal economic problems which they are trying to hide from the outside world. China is guilty of trying to manipulate world economy like producing cheap but low quality products and ignoring sensible economic policies. They continue to resist capitalization with the communistic views of their leaders in the pulitburo. The Chinese just do not get it. Because of their being hard-headed, the world economy will also suffer. If the economy of China will collapse, yes other countries will be affected but one believes that flexibility will come in. Not only China can manufacture the products they usually export, right.

  5. Mariano Patalinjug on

    Yonkers, New York
    29 May 2015

    If Robert J. Samuelson’s analysis proves to be correct, China may suffer the fate of Japan soon.

    Apparently all the elements of a severe downturn are there, and China’s Establishment may find it impossible, at this juncture, to implement the “correctives” needed fast enough to slow down the descent into a downturn, let alone master it completely with a decade.

    But China may soon be confronting another very serious problem, which is the problem it is causing all by itself with its illegal grabbing of islands in the South China Sea which its neighbors claim belong to them under international law. With the United States involved in the sense that it has a vested national interest in keeping the sea lanes stating from the Middle East through which oil passes and ends as far east as the west coast of the United States, and the possibility that soon China may declare and ADIZ in the South China Sea, the present simmering “cold” war between China on one side and Japan, Viet Nam, the Philippines and the US on the other side, could soon turn into a “hot” one.
    In the event, there is no telling how China’s economy will behave as a result of unforeseen circumstances such as a hot war.

    MARIANO PATALINJUG
    Lapulapu1927@yahoo.com

    • China is trying hard to show off their military might. But the kind of war China knows best is the kind needing millions of soldiers and troops which will not work in current warfare. Those millions will only need maybe a hundred of two drones with powerful bombs and they will be gone. China should find a way to match the hi-tech warefare of the U.S. England, Germany, France and other free world countries.