[T]he risk of a hard landing in China is sharply rising; a deceleration in the Chinese growth rate to 7% in 2009 – just a notch above a 6% hard landing – is highly likely and an even worse outcome cannot be ruled out at this point. The global economy is already headed towards a global recession as advanced economies are all in a recession and the U.S. contraction is now dramatically accelerating. The first engine of global growth – the U.S. on the consumption side – has now already shut down. The second engine of global growth – China on the production side – is also on its way to stalling.
Thus, with the two main engines of global growth now in serious trouble a global hard landing is now almost a certainty. And a hard landing in China will have severe effects on growth in emerging market economies in Asia, Africa and Latin America as Chinese demand for raw materials and intermediate inputs has been a major source of economic growth for emerging markets and commodity exporters. The sharp recent fall in commodity prices and the near collapse of the Baltic Freight index are clear signals that Chinese and global demand for commodities and industrial inputs is sharply falling. Thus, global growth – at market prices – will be close to zero in Q3 of 2008, likely negative in Q4 of 2009 and well into negative territory in 2009. So brace yourself for an ugly and protracted global economic contraction in 2009.
John Pomfret of the Washington Post wholeheartedly agrees with the doomsters (and Roubini’s track record is spectacular, there’s no denying that). He also specifically takes issues with the NYT editorial board for its somewhat rosy belief that China can spend its way – and the world’s – out of a recession.
There’s been a lot of talk in recent weeks about how China could ride to the rescue of a global recession, using the latent power of 1.3 billion consumers to power global GDP. Who would have thought that we’d be calling on China to save our bacon? Witness a New York Times editorial on Oct. 26 with the remarkable headline: “As China Goes, So Goes….” What the Times called for, and what others have seconded, is for China to unleash domestic demand, ramp up imports, thereby keeping the global economy afloat.
First, before we get into why this probably won’t happen, let’s pause for a second to reflect on just how amazing it is that we’re asking China to prop us up. Yes, yes, China did yeoman’s work during the Asian financial crisis of 1997. But that was a pretty localized mess. What the Times — and others — are asking China to do is not just be a responsible player in its region (which at the time simply meant not devaluing the yuan). No, what the Times and others want China to do is to step forward and in a flash take over the United States’ position as the engine of global growth. That’s a pretty big demand for a country with a per capita GDP that’s in 109th place on the International Monetary Fund’s World Economic Outlook Database, squarely between Swaziland and Morocco.
As to whether China will take up the challenge: I think not. China would have to restructure its economy if it wanted to significantly grow its domestic demand. But right now China’s economy is facing real problems.
You have to read Pomfret’s entire post to see why he so strongly agrees with Roubini, and why he believes the crisis will make the CCP only more reactionary (as opposed to enlightened, as the NYT editors optimistically hope). After looking over the dismal situation, he comes back to his central thesis, first discussed here back in 2004, i.e., that as long as China’s pig-headed reactionary government is in charge, they will keep blocking their own path to superpower status and will probably never arrive there.
Unlike Pomfret, I’ve predicted China would have yet another soft landing. I’m willing to consider that I may be wrong, unlikely as that may be. The Roubini-Pomfret scenario is too frightening to imagine. If they are right, we are talking about the possibility of civil war. If there were a true financial collapse in China, either that or anarchy are not inconceivable. China’s situation is so, so tenuous, despite the amazing strides it’s made. That’s why so much here is subsidized and the iron rice bowl is still an important crutch, and why the government is going to be the candyman for the unemployed, either simply handing out money or setting up massive infrastruture projects to keep people employed and, most important, pacified.
Which brings me to my last half-baked point. I was speaking with a friend today who is involved with one of those gigantic Chinese manufacturing companies; this one makes concrete. When I expressed my worry that concrete makers would feel the pinch when overseas orders drop off and Chinese businesses stop expanding and building new structures, he said that scenario is simply wrong. “China is about to pour billions and billions of dollars into infrastructure projects to keep the economy going,” my friend reminded me. “This company is planning on a huge expansion of business.” So again, can China spend and build its way out of this? Stranger things have happened, no?
So many tectonic plates rubbing against one another, so many ways this whole thing can go, not just for China but for the world. For now, perhaps out of willful ignorance, I stick with my prediction: a relatively soft landing for China. Pomfret’s one of my heroes and I’ve agreed with him on just about everything in the past. Same with Roubini. But this time, they both had better be wrong. Otherwise, we are all in a lot more trouble than we ever imagined. It won’t be at all pretty, no matter how much we may dislike the CCP and hope for its demise.
Richard Burger is the author of Behind the Red Door: Sex in China, an exploration of China's sexual revolution and its clash with traditional Chinese values.