We’re so vain…
Posted August 26, 2015on:
We’re so vain, we probably think this economy is about us,
We’re so vain, we bet future swaps this economy is about us,
Don’t we? Don’t we?
A few years ago, when the Chinese economy was booming, politicians said it was an orchestrated plot to take America down. Now that the Chinese economy is struggling desperately, those same politicians are just as convinced it is – wait for it – a plot to take America down.
The political discourse around this issue is genuinely unhelpful. Just like Seinfeld’s Soup Nazi, Scott Walker snapped, “No state dinner for Xi,” the Chinese President Xi Jinping scheduled for a formal state visit. I guess the closest Benihana will have to do. Given the impetuous inanity passing for policy, here’s what you need to know about the China Syndrome of the Chinese economy in less than 800 words.
China’s stock market is relatively small. It’s mostly mom and pop investors who have borrowed the money to buy stocks – a majority of them don’t have a high school education. After gaining 140% last year, this year the Shanghai Composite Index has fallen 40% in the face of a tremendous amount of active intervention by the Chinese central government. It seems as though the Politburo can’t stop the crash.
The reason all these unsophisticated investors got into the stock market was the implicit support of the Chinese Communist Party. It appears to have been an overly optimistic act of faith in the Chinese Politburo’s economic stewardship.
With an abundance of labor, China bet the farm on being the world’s low-cost manufacturer and assembly line. Such an economic model is not sustainable for an economy needing to grow at a double-digit multiple to service a burgeoning middle class. The Chinese government has been notoriously optimistic in its economic forecasts (some say notoriously deceiving). There are more than a few economists who believe the Chinese economy is on the verge of recession, if not already there.
This is how it happened: When global demand went kaput in 2008, China decided to focus on massive domestic construction projects. There has been a massive, and I do mean massive, overbuild in China with unused stadiums, skyscrapers, and even whole cities. They sit empty.
Add to this the relocation of 250 million Chinese from rural settings to cities in just twelve years as official state policy. In essence, this top down policy from the Politburo turns China into a majority urban country in a dozen years. Put another way, it would be the equivalent of relocating 5 of every 6 Americans in the span of three presidential terms.
Chinese leadership is terrified of political unrest reminiscent of Tiananmen Square. Without sustained growth at a level sufficient to service a growing middle class, the leadership of China is at a crossroads. At once they are both risk-willing to try just about anything to thwart economic upheaval and at the same time, risk-averse against any potential calamities resulting from their actions.
There is a group of millennial Chinese numbering about 300 million – about the size of the total U.S. population. This group is better educated and likes its taste of the middle class lifestyle. The Communist Party worries most about this group. Quelling political unrest in this group would be difficult, almost impossible, because of the nomadic nature of these 300 million workers and their widespread geographic dispersion.
In its simplest terms, the problem is transforming a manufacturing, rural economy into an urban, consumption-based economy in less than a generation. For perspective, it took Great Britain 200 years, the U.S. 100 years, and Japan 50 years to do the same thing.
As with all instances of massive historical change, there are naysayers within the Chinese system. China’s top-down, hierarchical structure ensures elites have control over policy and decision-making. These traditionalists are wary of many of the enacted economic reforms. This current economic tsunami strengthens traditionalists at the expense of reformers like President Xi Jinping.
How does this affect us? Throughout history, when absolute control is threatened in China, it retreats back in on itself. Hibernation of the world’s second largest economy would be the equivalent of a worldwide recession and catastrophic to our economic well-being and the world economy in general.
Even more sobering is this: Political instability in a country with a standing army of 200 million soldiers and perhaps 3,000 nuclear warheads is indeed a worrisome thing. This is especially true in a region where China is surrounded by emerging economies – the “if you can’t make it, take it philosophy” would indeed present existential threats.
Again, my apologies to Ms. Simon: “Instead of clouds in my coffee, clouds in my coffee,” there are clouds on the horizon, clouds on the horizon.
Take the conversation in any direction you might like.
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