For years I used to simply discount Minxin Pei. As China kept rising, Minxin Pei kept talking of its imminent collapse. Though I always appreciated his analysis, I stopped reading him as he became more and more the boy who cried wolf. It has been at least two years (I am guessing) since I bothered reading any of his stuff.

But as my optimism regarding China has been tempering and as I see more and more of my firm’s clients starting to view China as increasingly risky, I did something unusual this morning and went ahead and read a Minxin Pei article. It’s gloomy, sure, but I found myself agreeing with much of what he was saying and I did not discount a single thing out of hand.  The article is “China’s Bumpy Ride Ahead” and I would love to know what you think. Has China changed or is it just me? Who moved my cheese?

I am also going to ask this same question over at our China Law Blog Linkedin Group, which if you have not joined yet, you should.

  • Volker Müller

    The best option is to ignore that guy.
    For what reason ever, he hates China. Well, he could have said this in one sentence but it is not necessary to write three pages that say little more than, “I, Minxin Pei hate China”.
    Doing business today is risky. What will happen if the Euro-zone disintegrates? What will happen if the USA goes bankrupt?
    The way China navigated its economy through the Asian financial crisis and the world economic crisis is more than impressive. China continues to have a highly regulated economy. This may cause inefficiency in daily operations of an international company (foreign exchange, customs), but these firewalls also protect foreign investors in China.
    China has its home-grown problems. But in a regulated economy like China it is possible to let the air slowly out of a bubble, the Chinese government has more options to control the economy than their western counterparts, and history has proven that the government is able and willing to use the available tools.
    No question, if there is a real meltdown in Europe or the USA, the shockwaves will also be felt in China. But if there is a really bad crisis, I still feel much safer in this part of the world.

  • Bill Rich

    No one moved your cheese. You didn’t have any to begin with. The Chinese growth model relying on converting low or non productive farmers to factory workers on government led investment and government/foreign built factories, using disregard of worker safety and pollution to reduce cost as competitive advantage is just not sustainable. Add to that the little problem of corruption, lack of trust from foreign investors and consumers, total disregard of government policies, laws and regulations by government officials, and the general public seeing the examples set by government officials, you have a messy economy at best. And then the inevitable complication of the one child policy accelerating the aging of the population, and more importantly, reduction in working age people, you have a train wreck made in heaven. And the totally mismanaged currency policy just aggravate the problem.

  • Sandy Ranford

    @Bill Rich: “No-one moved your cheese. You didn’t have any to begin with”
    Couldn’t agree more. Well said.

  • pug_ster

    Minxin Pei seems to be making mountains out of a mole hill. As in many other countries, if it has problems keeping people fed or keeping people having a roof over their heads, there will be problems. The problem with inflation and food prices does not just affect China, but all over the world. This is the underlying reasons for the unrests in the middle east (and not democracy.) Besides, the Chinese government is very adaptive so if there is a problem that will affect its sovereignty, it will handle it.

  • Falen

    When does a broken clock stop being a broken clock?
    With economics, there are a lot of things that are said, but there are also a lot of things that are left unsaid. Can’t account for every factors like other sciences… Merely listing a litany of China issues and drawing a conclusion fails to account for China’s ability to cope and respond.
    I read the likes of Minxin Pei and Gordon Chang to discover not about China, but to psychoanalyze a person who hates China. If Gordon Chang were so right about China, dysfunctional bank, loans… why didn’t he see the same problems in the US and write about them as the Wall Street was imploding on itself? Why focus on troubles half way around the world when the very thing he wrote about is happening right outside his doorstep? Way to miss the big picture… ironically, it seems like the world is intend on making a mockery of Gordon Chang.
    Let people put money where their mouth is. At least Jim “Threadmill to Hell” Chanos put the his money on the line and we can all cross our fingers and see how the numbers turns out.

  • Dennis

    ” But in a regulated economy like China it is possible to let the air slowly out of a bubble, the Chinese government has more options to control the economy than their western counterparts, and history has proven that the government is able and willing to use the available tools.”
    What tools are these? Michael Pettis has made a pretty convincing case over the last couple of years that China can easily enter a period of stagnation as malinvestment by the various banks/SOEs have to be absorbed by the already hard pressed consumer.

  • James Wu

    For all the ranting and raving on here… the bottom line is those who will do business here will still do business here. If you have issues with China, the solution is quite simple. Don’t come here, don’t live here, and certainly don’t do business here. Opinions are just like assholes, every moron has one and they often stink.

  • Aaron

    There are always risks, and downs. Especially considering what has happened in the world economy, Chinese economy is not doing that badly.
    Bubbles? With any growing economy with positive attitude, there will some amount of speculative exuberance. But I would say China’s exuberance is more rational than most.
    If you want to see a dangerous bubble, you need to look at what’s happening in the Indian Real Estate market, the Indian agriculture sector, and the Indian economy in general.

    As for the doomsaying prophets, if you wait long enough, every one of their doomsday prophecies will become true, because eventually we will all die, the human specie will end, and ergo, the Chinese economy will collapse.

  • I wouldn’t put Minxin Pei in the same class as Gordon Chang. For one thing, Minxin Pei does actually have a fair understanding of China, rather than just being, like Chang, a lawyer who writes articles about China and North Korea without having studied them at all. For another, Minxin Pei has not made specific predictions which then failed to come true, and then behaved as though he had not made them, as Chang has with his prediction of imminent banking collapse in the early 2000’s.
    Nor is Minxin Pei a “China hater”. It seems there are people for whom anyone who criticises the Chinese government’s policies is a “China hater”.
    As fr the accuracy of what he’s saying, well, it’s true that China’s growth cannot continue at the previous rate forever. Based on what we’ve seen in Taiwan, South Korea, and Japan, we would expect China’s growth to slow, but there is nothing in the histories of other countries which have experienced this kind of break-neck growth which would lead me to expect a crash at this stage. However, I am not an economist.

  • Rodrigo Nunes

    I think the world is getting more difficult to deal with for all nations. China is sure having to make some hard choices and will find obstacles in all fronts. But thats true also for all countries, as we try to adapt to a new world where the American influence declines and asian economies becomes huge development engines.

  • Anon

    I suppose the scary thing about the boy who cried wolf is that the wolf actually came in the end. Both the bulls and the bears present persuasive cases in many ways, and it’s impossible to say for sure how things will turn out. Looking back to the year 2000, it’s pretty amazing how quickly the US’ “hyperpower” label has turned to one of decay and decline.
    The question that I think about quite a bit these days is, what if Volker’s right? What if the Chinese leadership has created a perfect system of enlightened leadership controlling potent regulatory mechanisms? What if all of the supposed chinks in the armor are nothing but the psychological defense mechanisms of people who “hate China”? What if the CCP becomes the most powerful political entity the world has ever known, many times over? Will the world be a better or a worse place? It will certainly be different…

  • Falen

    People are hyperventilating about inflation and raising wages. Let’s see… putting the two together, is wages raising faster than inflation? Yes it is.
    People are hyperventilating about “bad loans” and poor investments. But is the poor investments overwhelming the good investments? Hard to tell but clearly nobody cares to mention that it is the balance that matters.
    I don’t want to get started on the populist BS about the high speed rail road…

  • Twofish

    Ummmm…. The biggest reason that people are moving out of China right now is that wages are increasing so that profit margins are getting killed. That doesn’t sound like a country that is about to fall apart.
    Rich: No one moved your cheese. You didn’t have any to begin with. The Chinese growth model relying on converting low or non productive farmers to factory workers on government led investment and government/foreign built factories, using disregard of worker safety and pollution to reduce cost as competitive advantage is just not sustainable.
    Nothing lasts forever, but China has gotten about thirty years from that approach, and it’s likely that they can get another decade or so. As far as moving toward another growth model. Being done.
    Minxin Pei has been predicting the collapse of China for the last twenty years. One day he’ll be right, but there is no particular reason to think that he’ll be right this time. The issues with asset inflation has a “been there done that” aspect to them. The Chinese government will hold off on stopping inflation until things almost get out of hand. Then they’ll slam the brakes. The property markets will crash. The government will have to do various bailouts. Repeat.
    “What tools are these? Michael Pettis has made a pretty convincing case over the last couple of years that China can easily enter a period of stagnation as malinvestment by the various banks/SOEs have to be absorbed by the already hard pressed consumer.”
    Which can be done. Chinese consumers are saving massive amounts of money, which means that when everything falls apart in a few months, you’ll have the cushion to do a bailout. Also Pettis and Pei think that China is fundamentally mal-investing. Given the difference between the subway systems in New York and Shanghai, I’m not sure that it’s the cause that China is over-investing in infrastructure but rather the US is massively under-investing.
    What makes that really scary is this paper
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1053541
    It argues that the reason the Soviet Union economy started to fall apart in the 1970’s because of massive underinvestment in the 1960’s.
    FOARP: For another, Minxin Pei has not made specific predictions which then failed to come true, and then behaved as though he had not made them, as Chang has with his prediction of imminent banking collapse in the early 2000’s.
    Actually he has. Around 2000, he was basically making the same predictions as Gordon Chang. For that matter around the time of the crash in 2007, Michael Pettis made his predictions that the Chinese economy was doomed.

  • Alfred

    What would Jesus do?

  • Twofish

    Also I tend to agree with most of what Minxin Pei says in that particularly article, but that’s because he is being rather moderate. What is he saying?
    1) China is going to struggle with inflation. Sure.
    2) China is going to have frictions with US, Japan, and SE Asia. Sure.
    That’s not a “there will be blood in the streets, run away now!!!” prediction.
    Pei: China’s external environment has deteriorated so significantly that many veteran observers are saying that its relations with major powers and its neighbours are the worst they’ve been since the dark days of the Tiananmen crackdown in 1989.
    People have really short memories. What about the third Taiwan straits crisis of 1996. What about the Hainan island collision of 2001, or in 1994 when you had the Chinese and Vietnamese navies shooting at each other or 1999 when you had a collision between Chinese boats and the Philiphines. Then there is Taiwan, where things are a comparative love-fest now compared to the 1990’s.
    The problem is that things have calmed down so much, that people get totally excited over tiny insignificant things that don’t really matter that much. People are screaming at each other over trade and small islands that no one is really willing to go to war over.
    Pei: All of these measures will slow growth—if they are applied in panic, the Chinese economy could have a destabilizing hard landing.
    Sure. And if the PRC nuked Los Angeles, we’d have a diplomatic crisis. There’s no reason to think that the government will apply things in a panic.
    Pei: Beijing will be hard pressed this year to alleviate the suspicions of Washington that its new capabilities are directed at the United States and designed to deny US armed forces the ability to operate freely in East Asia.
    That’s going to be difficult do because Beijing’s new capabilities are specifically directed at the United States and are designed specifically to deny US armed forces the ability to operate freely in East Asia. You ask anyone in the Chinese government why they are modernizing the military, and the answer is so that China can prevent the US from intervening if Taiwan declares independence. For that matter, if you ask the US Navy why they want to modernize their carriers, it’s not as if those are intended at al-Qaeda or Fiji.
    Pei: Changing such a self-destructive mindset will clearly take some time, and may need practical proofs, in the form of push-backs by the United States and its allies and friends, that such a mindset endangers China’s national interests.
    Except that it doesn’t.
    In international politics, you sometimes need sharp elbows. Rolling over and playing dead, and doing everything that the US wants you do to is not in the interests of any nation other than the US. So you are going to have bickering, friction, raised voices, but at the end of the day, people will work something out.

  • @Twofish – I stand corrected.

  • Frank Schultz

    I’m starting to believe it too and I see the next couple years as the key.

  • Justin Liu

    Of the political motivated authors about China, Min has been probably the most consistent. Chances are if you are agreeing with him, it’s not him that has changed.

  • Kyle

    I do not think China will “collapse” at all, but I do not think that they will continue growing at the huge growth rates they have seen for the past few decades. I think that, like Japan, they are going to at some point have a huge bubble blow up on them, which will stall their economy. I think their real-estate sector in particular is vulnerable because of all the building they are doing.
    Some talk about how China’s economy has proven “resilient” to the global economic crisis, but I don’t see this as the case at all. It was very vulnerable, and in response, the Chinese enacted a massive stimulus that, proportionally, would be the equivalent of a few trillion if done in America.
    Historically, fiscal stimulus has never worked because it takes too long to get the money out (along with other logical fallacies to it). The Chinese however got the money out very quickly. Their banks are nationalized and they lent the money to state-run enterprises that were ordered to utilize the loans very quickly and build, build, build.
    Well in the short- term, that may stimulate, in the longer-term, they are going to suffer the effects of over-investment in very unproductive infrastructure and real-estate. There is no way to spend that much money, that quickly, and to do so in a methodical, carefully-thought-out manner.
    If the United States nationalized the banking system, nationalized the construction industry, enacted $2 or $3 trillion worth of stimulus, which was given to the banks, then loaned to the construction industry, who were ordered to say build hundreds or thousands of skyscrapers, then yes, that in the short-term would stimulate. Longer-term, it would prove disastrous.
    We can see the problems of over-building in China right now from their having the largest mall in the world that is mostly vacant to even a whole nearly vacant city. Their economy, most of which is manufacturing and construction, is being propped up a good deal by the the government.
    Some say, “Well China has over $2 trillion in reserves to handle any crisis,” yes, but what are the liabilities? Those could be close to $2 trillion as well. There was a mistaken notion in America that “housing prices always go up” just because they had done so for the past 40+ years. Didn’t make it true. Now there seems to be a view that because China has grown at phenomenal rates for the past 30 years, that it will keep growing at phenomenal rates for many years to come. Doesn’t make it true.
    We will see the true strength of the Chinese economy when their stock market crashes, or their real-estate market crashes, something like that.

  • FrParlentAuxFr

    China will have a velvet revolution. That´s it, a bizarre slowdown transition, buy all you can Chinese stocks when that happens, because after that, it is absolute fireworks, China fully dominates economically. Too many people made too much money in China, the military in China want a good economy so they have nicer and nicer toys to play with, no return to Mao whatsoever.