About Me

Jul 16, 2011

Waiting for an Economic Crisis from China- And Secret Economic War 2.0

  Capitalism has always had crises, and will go on having them, Robert Skidelsky wrote in an article in Syndicate Project titled Life after Capitalism. [1] America has experienced a number of economic crises already. China, currently the most promising developing country, has yet to meet ones.
Professor Kenneth S. Rogoff of Economics of Harvard University predicts:  within a decade China’s lofty property bubble and its mounting debts could cause a regional recession in Asia and stifle growth in the rest of the world.[2] He used to serve as chief economist for IMF and co-author of “This Time Is Different: Eight Centuries of Financial Folly.” The book studies financial crises over the last eight centuries. I am not sure if what he means by This Time Is Different? I haven’t read the book.
As I mentioned before, Capitalism is new to China. And Capitalism has crises. So, it won’t be long before China meets an economic crisis. I expect a recession for China’s economy in the near future and a big one in 2030s. I think the coming recession from China is a short but greatly painful one.
I totally agreed with Professor Kenneth S. Rogoff. All bubbles, sooner or later, will burst. The property bubble of China is no exception. It is high likely that the bubble will burst at some point within this decade. Ironically, I believe that recession will hit the rest of the world harder than it hits China.
China is the largest holder of foreign reserves, totaling more than three trillion dollars. At the same time, China is now diversifying its holding of foreign reverse by mainly buying European debts in exchange for export markets and investment. The collapse of China’s economy will have severe ramification for the whole world.
The economies of US, EU, Japan, Russia, India and China are heavily linked together by many fields.  The failure of an economy makes a dangerous snowball effect. There are two points convincing me that China won’t hit hard by a property bubble.1. The saving rate of Chinese people is very high.  2. Chinese Government is holding a large amount of foreign reserves 3. China has a great deal of hard working people.4. China is a “State Capitalism”, meaning that the State is both powerful and flexible. However, one should be noticed Dragonomics estimated that total Chinese government debt at 82% of GDP at the end of 2010.[3]
Americans and Europeans are not the same. Most Americans are indebted and their largely future is dependent on the rise and fall of the values of housing markets. And that’s the point that Americans find it hard to get back on their feet. Europe is busy dealing with the problems of defaults of member countries.
Again, the secret economy is not over. The Fed is considering another Quantitative Easing measures (QE3). The Fed floods the economy with money. 1. Low interest rate is in favor of both business and job creation.  2. It also attracts investment from abroad, especially from China and Europe. Last but not least, it reduces the inflow of bad money. As I said before, there was a huge capital flight in the aftermath of economic crisis, mostly to emerging markets.
I read an article by Reuter. It reported that the money flowed to emerging is turning into long term investment. I argued in previous article that it’s actually an investment flight. You can imagine the benefits of investing in foreign countries.
Now, let’s turn to European countries. EU can’t use easy-money policy as US did. Their debt-to GDP ratios are already high enough. Printing more money will be counter-productive and endanger investors’ confidence. I would like to use the term “Politics of Economic Decline” to describe the situation in Europe. Greece will eventually default on its debts.
 But I don’t think that other European won’t have the same lot. European leaders create fears in Europe to weaken the Euro by using Greece as the Obama admin is using Ben Bernanke.  The have got the same advantages, cheap currency for the sake of export and inflow of investment from abroad.[4] China and many countries are manipulating their currencies.[5]
China’s property bubble will burst because of two main reasons. 1. it’s because of the nature of Capitalism.[6] 2. The willingness of Chinese government. Since China has opened its economy to the world, the poor Chinese have been extensively exploited. The rich has become rich enough. Social injustices need to be changed. The problem is unacceptable when it comes to house ownership.
If a Chinese blue-collar worker had been working nonstop since the Opium War, then he or she might have enough money to buy an apartment in Beijing today. A prostitute would have had to work every night from the age of 18 to 46, an anonymous said. [7] 80% of people living in coastal areas either couldn’t afford or don’t have houses. If they don’t buck the trend, social unrest will happen.
As the price falls, average Chinese people could afford to buy the house.   And it will reduce social inequality. So, prepare yourself for that crisis.

[1]He is a member of the British House of Lords.
[3] Dragonomics is a Beijing-based research firm.
[4] I meant it is beneficial to EU in the long run.
[5] The term “Currency War” was coined by Guido Mantega, Brazil's finance minister.
[6] For an excellence investigation of the causes of financial crises, I suggest you read “Manias, Panics, and Crashes: A History of Financial Crises” by Charles P. Kindleberger.