Tuesday, March 17, 2009

China: the score so far...

The role of China in the global economy is of crucial importance to farmers, especially soybean growers as they have surprised practically everyone with strong purchases all winter. So what exactly is going on over there?  More importantly, what is the future for this people and their rapidly expanding economy?

Well, I don't think anyone really knows.  Including the Chinese.  Three expert opinions I found contradictory and enlightening.

FORECASTERS OF the fortunes of nations are no different from Wall Street analysts: they all rely on the past to predict the future. So it is no surprise that China’s rapid economic growth in the last thirty years has led many to believe that the country will be able to continue to grow at this astounding rate for another two to three decades. Optimism about China’s future is justified by the state’s apparently strong economic fundamentals—such as a high savings rate, a large and increasingly integrated domestic market, urbanization and deep integration into the global trading system. More important, China has achieved its stunning performance in spite of the many daunting economic, social and political difficulties that doomsayers have pointed to as insurmountable obstacles to sustainable growth in the past. With such a record of effective problem solving, it is hard to believe that China will not continue its economic rise.
Yet, while China may sustain its growth for another two to three decades and vindicate the optimists, there are equally strong odds that its growth will fizzle. China’s economic performance could be undermined by the persistent flaws in its economic institutions and structure that are the result of half-finished and misguided government policies. A vicious circle exists in which the Communist Party’s survival is predicated on the neglect of fundamental aspects of society’s welfare in favor of short-term economic growth. And many of the same social, economic and political risk factors the government has thus far sidestepped—heavily subsidized industries, growing inequality, poor use of labor—remain. Some are becoming worse. [More]

At the same time another researcher looks at the same elephant and sees something completely different.

IS CHINA’S rise inevitable? Well, as we’ve learned to our great chagrin over the past twelve months, there’s nothing inevitable about continued rapid economic expansion or the near-term success of any economic model, and past performance is most emphatically not a guarantee of future returns. And, as with any lower-income developing country, there are plenty of visible and unforeseen pitfalls that could hurt China’s growth prospects over the coming years and decades.
However, as author and newspaperman Damon Runyon famously remarked, “The race is not always to the swift nor the battle to the strong—but that’s the way to bet.” And when taking odds on the potential of today’s emerging markets to mature into wealthier and more powerful states, you had best be betting on China.
The mainland is already getting there faster than any major economy before it. And, the risks of an outright economic derailing over the next ten to twenty years are much lower than commonly believed. [More - same source as above]

[Since I have learned not too many of you will wade through really long linked articles, here is the PhippsNotes version of the two superb essays above.]

Con:  China has already done the relatively easy part of the first steps toward modernity and greater percapita income. This march will be hamstrung by the lack of individual freedom and enormous unreformed sectors (finance, heavy manufacturing, etc.) Their near total dependence on on exports places their future at risk from slow growth in other economies - notably ours.

Pro: China is analogous to the US for most of our history until WWII - a place the world outsourced production and jobs to. Like us, they are now poised to deploy immense wealth in a single-minded effort to upgrade other sectors. They still possess untapped labor resources and growing political and economic clout.  They may even leverage their ties to other emerging economies (like Africa) to force concessions on trade from the First World.  In two decades, China could be #1.

Finally, to complete the confusion, the insights of James Fallows, who has lived and reported from China brilliantly for several years.

China is down. It is not out. This has important implications for America.

If China were truly like the old Soviet Union, the coming mass unemployment might be the shock that finally turned the people against their rulers. If it were truly like Japan, it might spend a decade or two chugging along but not aligning its systems to new international realities. In either case, Americans might feel sorry for China’s still-impoverished masses—but less worried about its competitive challenge.

I suspect that China will be like neither. Most of its people will still be very poor. Most of the jobs they hold—when they have jobs—will still be near the bottom of the global value chain. But they will not, I believe, be in fundamental revolt against the country’s governing system. And the companies they create, manage, and work for will be constantly trying to improve their position on that value chain. Two years ago, after reporting on factories in Shenzhen, I described an economic symbiosis in which Chinese workers assembled many of the world’s products—while inventors, designers, shareholders, and consumers from America or other rich countries got the lion’s share of the financial returns. It is the announced policy of the Chinese government, and of many Chinese companies, to keep more of the rewards in China.

Outsiders can rightly criticize the Chinese government if it tries to sneak in new export subsidies or push the RMB’s value back down. But no one can criticize its ambition to increase the rewards for its people’s work. Many Chinese companies will fail or make mistakes under today’s intense pressure. But many are using the moment to prepare for their next advance. The question for Americans to think about is how we are using the same moment. [More]

It is hard to imagine a meltdown of social order and politcal structure in China given the relative lack of familiarity with much of what we consider typical democratic reforms.  It would also seem likely the West will think twice about applying much pressure diplomatically (and we have little economic influence right now) to force reforms from the outside.

Nonetheless, I think much of opinion of Chinese leadership capability to be overestimated simply because the process is obscure at the top of their system. Chinese leaders remain capable of enormous blunders that could stagger their development, just as the West has discovered recently.

In the end, like every other nation in the increasingly interlinked global economy, China's future will be groping in the dark, coping with conflicting and formidable demographic pressure and struggling to control the rapidly advancing flow of information to a population eager to learn more.

In short, don't extrapolate China from past data points. Don't look at it as a monolithic entity. And above all, spend as much time as possible studying all the information we can get.  The constant for China will be unpredictability.

No comments: