China Syndrome: A Future That Was?
The country must resolve the fundamental global imbalances at the core of the crisis.
The Future That Was
China's economic model is reminiscent of seventeenth-century mercantilist policies. Thomas Mun, a Director of the East India Company, in England's Treasure by Foreign Trade (1664), wrote that the purpose of trade was to export more than you imported. At the same time, a country should amass foreign "treasure" that would be the basis of acquiring foreign colonies to allow control of essential natural resources. The strategy required reducing domestic consumption and imports and export of goods manufactured with imported foreign raw materials. China's strategy coincides almost entirely with Mun's views.
China's mercantilist strategies have important implications for other developing countries. Chinese investment in and trade with Latin America and Africa is concentrated on securing access to resources, forcing these nations to specialize in commodities. This reversion to a nineteenth-century trend may not be compatible with Latin American and African long-term development and stability.
The Chinese economic model may be unsustainable. It relies on global trade and investment (much of it export related), which together contribute a high proportion of China's GDP. This trade entails importing foreign components that are then reassembled and then exported. Domestic consumption has been kept low. Treasure has been built up in the form of domestic savings and trade surpluses.
Recently, China announced that its $2 trillion treasure would be used to make foreign acquisitions to secure exclusive access to raw material. The problem is that China's treasure is already invested in assets of dubious value and limited liquidity to finance global consumption.
Chinese Premier Wen Jiabao warned that the Chinese growth was becoming increasingly "unstable, unbalanced, uncoordinated and ultimately unsustainable." That was two years ago! Currently, China may be aggravating the problems by massive liquidity-driven stimulus to perpetuate a failed strategy. Speaking at the meeting of the World Economic Forum in Dalian on September 10, 2009, the Chinese Premier Wen Jiabao repeated his message from two years ago without signaling any change in direction: "China's economic rebound is unstable, unbalanced and not yet solid. We cannot and will not change the direction of our policies when the conditions aren't appropriate."
There's broad agreement that a key component of the Global Financial Crisis (GFC) was the problem of global capital imbalances. A central feature was debt-funded consumption by the US that allowed 5% of the global population to constitute 25% of its GDP, 15% of consumption, and 48% of global current account deficit. Japan, China, Germany, and the other savers funded the consumption.
Any lasting solution to the GFC requires this imbalance to be dealt with. The glib solution requires the US to save more and consume less and the savers to save less and consume more. The problems in implementing the solution are considerable. Timothy Geithner's recent discussion with Chinese officials, to assure his hosts of the safety of their investments in dollars and US Treasury bonds, reveals the dilemma.
On the one hand, America needs the Chinese to continue and increase their purchase of US government debt to finance its fiscal stimulus and bailouts. On the other hand, America needs China to cut the size of its current account surplus, boost government spending, encourage personal consumption, and reduce savings. All this should also occur ideally without any major decline in the value of the dollar or US Treasury bonds or the need for China to liberalize its currency and allow internationalization of the renminbi.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter