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China: Boom or Bust?
As China’s economy has continued to put up stellar economic growth in the midst of one of the worst global economic crises on record, it’s widely believed that China will lead the world out of its downturn and soon rise to global economic dominance.
So it’s no surprise that there was a lot of attention given to Chinese President Hu Jintao’s visit to Washington this week.
But those who have been swept up by this tide of popular sentiment might be surprised to hear that there’s an alternate scenario that’s equally plausible: China’s economy could represent a major and imminent threat.
Indeed, throughout the crisis, I’ve been making the case that China could be a big problem for the global economy for at least a couple of reasons …
China’s Currency Manipulation
China has gained economic prowess through maintaining an artificially weak currency — to corner the world’s export markets. When times were good, the rest of the world was happy to ignore the ultimate costs of China’s currency policy to the global economy.
But now that the world remains in flux, the Chinese currency manipulation has become a front-burner issue for its trading partners — most notably the U.S. And this is particularly an issue as long as global trade remains out of balance.
Moreover, its currency policy has given rise to currency wars, political divisions and protectionism as I laid out in my column last October.
We may find, though, that China’s currency policy will be moved to the backburner this year. The main reason: No one wants to see China slump. They realize that a significant slowdown in China’s economy would pose a more imminent threat to global stability.
China Boom Could Be Turning into a Bubble
We’ve seen a dramatic slowdown in Thailand and Malaysia, and now the easy-money-based spending in China is coming to a head, threatening its much-beloved growth story.
The speculative boom that drove a mass overbuild in Chinese infrastructure — and that spilled over into real estate and financial markets around the world — has done very little to build domestic demand for the country.
In short, we have to ask: Is China’s rapid growth sustainable? How much of it was driven by China’s easy-money policy responses to the global slowdown?
Remember: When the global economic crisis was at its peak, governments around the world responded by rolling out massive fiscal stimulus packages in hopes of kick-starting recovery. China, still growing around 6 percent, rolled out a package of its own — to the tune of 16 percent of GDP, by far the biggest in the world.
On top of that, the state-owned Chinese banks showered the land with new loans — and continue to do so today.
Take a look at the chart below. It shows the growth in money supply (indexed at 100) in China since late 2007, relative to the U.S.
You can see the explosive growth in China’s money supply, climbing 79 percent since the onset of the global economic crisis. That’s five times the rate of U.S. money supply expansion!
Now, the Chinese government is beginning to rein in that growth — in an attempt to curtail runaway real estate and food prices. Again, we must ask: Is that a recipe for a major slowdown in China?
Consider this: It was China that supplied cheap credit to the world, financing the unsustainable consumption boom in the U.S.
Therefore, it’s only fair to ask: As the other party to that boom, will China experience a bust of its own?
In this alternate scenario, instead of being the springboard of economic recovery for the world, which much of the world has embraced, it’s reasonable to expect that the Chinese story could end badly.
For a world that has been hitched to the idea that China can grow at a double-digit rate year in and year out, you now have to ask the ultimate question: What would the global economy look like if China slowed down to 5 percent?
Growth at 5 percent would be recession-like territory for China. It would threaten the employment of its billion-plus people, and could even pose the risk of a public uprising against the government.
What This Could Mean for Commodities
And the Sovereign Debt Crisis
Fitch Ratings reckons that a Chinese slowdown to 5 percent growth would result in a 20 percent plunge in global commodity prices.
Meanwhile, the most extensive study on global sovereign debt crises — by the academic team of Harvard Professor Kenneth Rogoff and Maryland Professor Carmen Reinhart — finds that, historically, falling commodities are a common trigger that can set off a contagion of sovereign debt defaults.
They also find that the decade-long credit boom is likely to be followed by a decade of deleveraging. Given that analysis, it’s equally possible that the decade-long boom in China could be in for a decade-long retrenchment.
Factor that scenario into a global economy that remains vulnerable to the growing sovereign debt crisis and you can conclude that a flight to safety is in the making.
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