China’s Growth Miracle Will End Some Day

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.”

(my emphasis)

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.


5 comments on “China’s Growth Miracle Will End Some Day

  1. Yes, China is growing fast from a very low level of development.

    Even without much competition, there are diminishing marginal benefits to development. The growth curve eventually flattens out. With competition, it flattens out even sooner, but trade and innovation can maintain relatively high growth rates for quite some time.

    At some point, Chinese will want to consume. They may not reach the tragic debt levels of Americans, but they’ll definitely want cars, homes, clothes, vacations, and other luxury goods.

    Unfortunately for the developed world, they’ve got 400 million idle potential laborers. India has a population of 1 billion. Indonesia has a population of 230 million. Brazil a population of 192 million.

    There are still a lot of foreign countries with plenty of room for development growth.

    China’s problem is its relative scarcity of natural resources. They are quickly consuming all the domestic supplies and rely primarily on imports for their food. As the economy develops, their demand for food will only grow. The breadbaskets, mineral, and energy producers of the world will thrive on Chinese growth. However, those things will rise in price for everyone around the globe.

    Europe (and Germany), I’m sorry to say, are totally screwed. You don’t have the land or natural resources to sustain your economies for very long. Your social welfare states will bankrupt you. We’ve got more abundant natural resources, but our social entitlements are a severe problem too.

    • Theoretically, it doesn’t matter which country has more natural resources as long as they are all traded on global markets. The total supply is decisive. Nevertheless, Europe is indeed screwed because it doesn’t do enough to achieve higher productivity growth rates which could offset the increases in import prices.

      Regarding the huge population of emerging countries, the potential they’ve got is very different from what they make of it. China’s markets are still massively regulated (regarding mobility of labor, investments), India is practically still a half-communist country, and Indonesia, well, I admit I don’t know anything about Indonesia.

  2. I predict Plague will sweep through China.

  3. By no means am I declaring China, India, Brazil, and Indonesia the next wonders of the world. I’m merely pointing out tremendous untapped labor resources which will eventually have enough human capital to become productive.

    I agree with you about natural resources. I brought up that point only to illustrate that China’s favorable balance of trade will soon be at an end. In a decade, they won’t have enough fresh water to live on, much less produce.

    Remember though that some natural resources like iron ore are controlled by strong cartels and metals like molybdenum (for steel production) are not sold on conventional markets. China and the iron cartel didn’t agree on a price until July of this year.

    BTW, one of my favorite posts on my blog is called Rare Earth where I talk about China’s virtual monopoly on the metals which will be used in hybrid vehicle motors and batteries and computer memory. Prices are going to soar unless we find easily extractable alternative supplies.

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