It’s idiotic that most people think that China will surely continue to grow as strong as in the last 25 years, achieving average growth rates of over 8%. The blog “Free Exchange” from the magazine ” The Economist” compares the old Bretton Woods currency system of the 60s and 70s with the current situation of the Chinese Yuan. They guys from “The Economist” are probably unaware of an important point they make during this comparison:
“In the period during which exchange rates were pegged, Western European economies grew by some 3.6% annually. Thereafter, growth slowed—from 1975 to 2004, Western Europe grew by about 1.9% annually compared to America’s 2.1%—but that decline is easily attributable to the end of postwar catch-up growth, spiking oil prices, and pain generated by sclerotic labour markets in a slower growth environment.”
Well, let’s see: China has been catching up like hell for 30 years now. The richer provinces have almost got to the same level of Gross Domestic Product as the Eastern European countries. The oil price exploded since 2002, just as it did between 1973 and 1981. Recently, China introduced a new labor law that makes it harder to hire and fire, though it hasn’t been strictly enforced yet. In 2009, China seemed to have a slight recession for the first time since over a decade. Last, but not least, the labor force will start to shrink as the population ages (and because of the 1-child-policy). So wages will have to rise massively in the industrial factories due to labor shortages. This will hurt the price competitiveness of Chinese products.
Furthermore, just like the European governments of the 1970s, the Chinese government will not want to believe that its economy will inevitably slow down. They will fight it with massive stimulus packages (in fact, they already do) and they will print more money (what they also already do). It will end in bubbles, busts, and the end of the saga of unlimited growth for China. When this happens, it will also hurt the OECD countries. They will have to find new export markets and new countries to save for them.