China Law Blog

I think a number of external and internal factors are going to mean that tougher times lie ahead for the Chinese economy. 4-6% GDP growth in China will probably feel like a recession for many people as fixed asset investment makes up such a large part of that growth and a lot of that capital is misallocated.

The country simply can't go on forever building office buildings, highways, industrial parks and "pet projects" in the provinces that are not being utilized properly.

My prediction is that in five years time the U.S. economy will be looking healthier than the Chinese economy as the U.S. will deal with needed reforms much quicker.

Looking 30 years ahead is tough but demographics may be China's biggest challenge by then - getting old before it gets rich.

Eighteen years after it started opening up its economy, India, for the first time, has replaced China as the most promising destination for foreign direct investment in the medium-to-long term, says a UN agency.
The World Investment Report (WIR) prepared by the United Nations Conference on Trade and Development (Unctad) released here Wednesday said that in the short term, however, China again ranked at the top, followed by India.
The report quoted a survey by the Japan Bank of International Cooperation (JBIC) for its remarks.'The JBIC survey of Japanese manufacturing TNCs (transnational corporations) found that China again ranked at the top although the number of firms planning to expand production in the country continued to decline,' said the this year's report.

I agree that plotting out something out 20-30 years is risky, but there are many indicators that the next 1-2 generations will have a tough time.

I would point you to Joseph Stiglitz's latest article. As an economist whose views have proven correct in the past, his views are worth something. In his article he says that this recession will not be V-shaped or U-shaped, it will be L-shaped.

http://www.vanityfair.com/politics/features/2008/11/stiglitz200811?currentPage=1

Considering the scope of the damage, it is safe to say that the easy credit consumer-driven growth period of the US economy is over. The US economy will look a lot more like the Argentinian economy than the former US economy.

It may be two years, it may be twenty years. On this issue, I would not mind being proven wrong.

I think it's a safe bet that the next two years, at least, will be tough for the US. Note that I say "bet", because economic prediction is always a game of chance.

As for the 20-30 year prediction, to me it's ridiculous to try and pinpoint where we'll be 20 years down the road. To put this in perspective, in 1988, who could have predicted the dot-com boom (and bust), the rise of China, 9/11, the Iraq war, and the current economic crisis? Twenty years is a long time.

"In his article he says that this recession will not be V-shaped or U-shaped, it will be L-shaped."

There is a lot to be said for this comment because what is happening today could be the end result of the US and much of the world going off of the gold standard. You can question what the real value of gold is but throughout human history it has had intrinsic value (and it has real value in medicine, electronics and aerospace to boot now). Paper is just something to write on and commercial paper has less real value than toilet paper for obvious reasons.

The world has been leveraging based on what an IOU says or what a computer monitor says but was there anything real to back those numbers up? We may be getting the answer to that question now.

The best way of seeing the effect of a recession in the US/EU on Chinese growth is to look at the effect that previous Euro-American recessions have had on boom economies like Taiwan, South Korea, and Japan. A review of the period 1971-1991 (that is, covering both the world energy crisis, the recession of the early eighties, and the crash of '87) shows two years in which real per capita GDP declined in western Europe (1974-75, 1980-81), with the US, Canada, Australia and New Zealand also suffered two periods of decline (1973-75 and 1980-83). In the same period, the Taiwanese economy suffered only one decline (1973-75), South Korean per capita GDP also only saw decline in 1980-81, Japan declined only in 1973-74. What does all this show us? Mainly that while export-led growth economies are sensitive to world economic crises like the oil shortage, they aren't very sensitive to financial crises in the west. In the period 1987-91 Western European per capita GDP grew by only 4.3%, and US GDP grew by only 4.7%, but in the same period Taiwanese per capita GDP grew by 16.2%, Japan by 19% and South Korea by a whopping 36%.

Paul Denlinger's analysis seems to presume that the Chinese economy is especially sensitive to a US slowdown, but I'm not exactly sure why he should think this. The US is actually a smaller market for Chinese exports than the EU, and tighter money is likely to increase sales of cheaply manufactured goods - at least relative to more expensive high-quality goods. China also has big pockets with which the government can make up for any economic slowdown through public spending on infrastructure etc. The only thing that could damage the Chinese economy is greater protectionism in the west (say, a re-play of the 1930 Smoot-Hawley tariffs), however the WTO and other trade agreements stand in the way of this.

Put simply, China's exports to the west would continue to increase even if western economies stood still for the next ten years, because these exports are driven mainly by western consumers switching from more expensive sources to cheaper Chinese ones.

Finally, if back in 1978 we had all sat around and tried to suss out how the world economy would be doing in the distant year of 2008, we would surely have gotten a lot of things dead wrong - 30 year predictions aren't worth much.

Finally, I can say that I agree ENTIRELY with one of FOARP's comments!!!

Intelligently argued FOARP, if you don't mind me saying so.

I don't see China going anywhere without foreign capital and foreign management (creative entrepreneurs that drive growth). In the lead up to the Olympics China has pissed off lots of entrepreneurial start ups including myself (now I live full time in America after spending 5 years in China). Chinese government might be a little too heavy handed in how they are treating foreigners at the moment with the new labor laws and other policies...which has a high chance of backfiring. Also FDI will surely dry up in the near future and real estate is one huge bubble.

Realistically there is no way I can see China with it's anti creative approach, taking over any substantial ground from the US in the next 5 years. It will probably stay that way until/if China makes huge reforms and starts educating their people instead of brainwashing them.

It is predicted that China's economic growth will fall from 10% to 7 or 8% this year. Still, the government has a stimulus plan, that will help to surpass the economic crisis. So their market place should be alright, in the future, I think.

The way China, a communist country, managed to become the biggest producer of wholesale goods, the way they managed to have such big numbers of imports and exports, they will manage as well with overcoming the economic crisis the entire world is facing.