The economic crisis and China’s role

I’m having a debate with a commenter/blogger about that topic over here. Very interesting, especially considering the great pains to which China is going to make sure the US gets 100 percent of the blame. And let me add, I believe the US deserves the lion’s share of the blame. But when you keep repeating it ad nauseum and reflexively, people begin to wonder what the motivation is. To those who say, “But it’s true!” I would respond with an analogy: It’s also true, for example, that Hillary Clinton is a white woman, but to add a parenthetical phrase about that every time her name comes up would be bizarre. “Today Hillary Clinton, who is a white woman, met with so and so…” That’s what the Chinese media are doing across the board with the economic crisis. “Washing machine manufacturers in Dongguan are losing their jobs due to the global recession, which the US caused.” “The crisis, which was caused by greedy bankers on Wall Street, may go on for years.” Again, it’s factually not inaccurate, but journalistically absurd. It’s called overkill.

Back to the debate – check it out and you can leave your comments there.

The Discussion: 70 Comments

I thought we have seen the worst of the economic crisis, at least in China. The stock markets are up. In cities like Hong Kong and Hangzhou, home prices are surging dramatically. Employment problem is still here, but this is usually the last thing to recover.

May 25, 2009 @ 2:09 pm | Comment

Serve, the stock market is never a reliable indicator – it can soar up when companies announce massive layoffs (great news for shareholders, bad for the workers), and it doesn’t necessarily reflect what’s happening in the real world. But that aside…. The mood here is that the crisis is now over and recovery is in full swing. This may be true. China’s trade right now in some part of the world is booming, and some sectors are doing quite well. But I can’t believe the trauma of such a steep drop in exports will be so easy to recover from. Only time will tell. I expect more pain along the way, and then I expect China to rebound relatively quickly, and with more leverage than it ever had in the past. But I don’t think they’re out of the woods yet, even if their woods are a lot nicer than America’s.

May 25, 2009 @ 2:36 pm | Comment

If we take out CH’s need to export its overcapacity and supply of cheap credit would the current financial crisis be less severe or occurred at all?

Some pointed that the relation was similar to that of a drug dealer and a drug addict.

But yes, the main player was the financial banking sector…… and the rating agencies. The real bubble was the financial banking bubble. And the rating agencies? They failed miserably. A blatant conflict of interest? Who is going to trust a rating any longer?

And the regulators? Where were they?

China, purposefully or not, just provided the fuel (drug?). About their mantra like statements, when one repeat itself constantly, it may reveal a subconsciously, Freudian like, hidden repression. Maybe they know (subconsciusly?) the part they played in this mess…. or trying to convince themselves they had none…. or trying to convince others they had none… or everything at once.

It will be interesting to see how the final result of the situation. US cannot continue with its credit based overcomsuption (american way of life?), CH cannot continue increasing its overcapacity, nor keep maintaining the RMB value lower with respect to the dollar to favor exports.

It is doubtful that CH internal consumption would be able to substitute US consumption. Without a consumer of last resort like the US, where is CH overcapacity going to go? How are existing jobs go to be maintained, and where will be much needed new ones be created?

Don’t count with the EU, they would put tariffs in place faster than the US in case of trouble.

May 25, 2009 @ 2:56 pm | Comment

There has been some of talk recently about how China’s stimulus may not be doing exactly what it had intended to do as they are now starting to audit the results…especially all the easy credit made available to SOE’s who instead of bolstering employment, took the money and invested it in the stock market. Exports are still not great and the real estate bubble, rather than having a longer healthy contraction, is being artificially blown up again. I’m thinking China may be falling into some of the same traps that the US did at the turn of the century during that recession. I think Richard points out the basic flaw in Chinese economic policy in his debate with Dror, namely it is at times short-sighted. This stimulus package was thrown together in a rush, almost as much a PR campaign as it was an economic strategy…it will be interesting to see the results, but ultimately I think it will only help to keep the government out of criticism’s reach during this downturn, and ultimately end up being a big investment for little long-term benefit. But then again, this might be all that it was meant for…

May 25, 2009 @ 3:06 pm | Comment

Thanks for the plug, Richard.

@serve: China is in a crisis due to over-investment in certain sectors (manufacturing, real estate). The government is now pouring additional money into these sectors (directly or via state owned banks). This brings to an apparent growth in the short term, but also means that not only the bubble is not being deflated, but it grows bigger. Hence, the next crash will be more dramatic and painful. It’s only a matter of time. Chinese people save money because they have little faith in the system and because most of China’s growth does not trickle down to the right places where most people are. Pouring more money into real estate and manufacturing can do little to change that.

China should have spent the good years investing in human capital, healthcare, and education. Even if it start doing so now, it will be half a generation before a real difference is felt.

On top of that, there a basic question of whether or not you believe that a totalitarian market economy model is viable. I think it isn’t. During the last 6 months China has taken big steps towards a more centralized economy and regained ownership of various assets that were previously privatized.

@ecodelta: To my knowledge, being a drug dealer is considered a worse offense than being a drug user. Apart from that, the situation here is not as clear cut since the American public “received” the products and low interest rates form the government without knowing that they were drugs (i.e. – not valued according to real market forces). So, it is more like a drug producer (China) selling drugs to a struggling doctor (the US govt/Central bank) who then delivers these drugs to its clients (US public/industry) and tells them it is safe to use. Sure, once the addict is hooked he will keep coming back for more, and pressure (lobby) the doctor to make sure the supply never ends.

@AndyR: “This stimulus package was thrown together in a rush, almost as much a PR campaign as it was an economic strategy” – Exactly. China is buying time. The model is not viable and the more they push into it, the bigger their fall will eventually be (unless their policy changes dramatically very soon).

May 25, 2009 @ 3:55 pm | Comment


I think I should refine the analogy.

The drug dealer part, active promotion and distribution of the addictive substance, was really play by the financial banking system, with the leniency of rating agencies and regulation institutions.

Most of the blame should fall on them. But CH should also be aware of the consequences of that dynamic for their own long term interest.

I agree that CH played more the drug provider part, knowingly or not, but to put all the blame in CH would be like blaming Bolivian Coca growers for the distribution and addictiveness to the substance in the US/EU.

May 25, 2009 @ 5:15 pm | Comment

Conspiracy mode ON

If this is the reply to the Opium war “incident” from the 19th century, it is a very sophisticated reply indeed. Confucian like sophisticated!

Conspiracy mode OFF


May 25, 2009 @ 5:20 pm | Comment

@ecodelta: I am not trying to assign blame, only responsibility. I am looking at factual causes and try to avoid value judgments as much as I can. China and the US are both responsible and on that we all agree. The motivations and attitudes of each of these two countries is secondary.

As for the financial industry:
1. They were not the ones who created the excess liquidity. They just used it in creative and destructive way, which is more than enough. (you can also ask yourself where all this liquidity would go to if it weren’t for them. I’m sure other industries who have made uses that are not less destructive with it)

2. The financial industry should indeed pay for it’s mistakes. Again, it is Obama who is bailing them out now, not “The Market” and not the Chinese.

The point of my post was that the crisis cannot be blamed on the “Free Market” since the free market was not allowed to operate (due to currency manipulators in China and interest rate manipulators, encouraged by excess liquidity traders, in the US).

May 25, 2009 @ 5:33 pm | Comment

by the way, today’s Financial Times reports that China is still “buying record amounts of US government bonds”.

As I have noted elsewhere, the USD is relatively safe since it is protected by the Chinese, who have no choice but make sure it remains strong. This is why the US can afford to print more and more bills with (so far) limited consequences. In this way, they are, in effect, appreciating the value of the RMB.

It might not be the “Opium Wars”, but it’s definitely a calculated financial war that has been going on for some time. Two months ago, I wrote:

“we’re in the midst of a full scale Financial World War. China and the US are in a tangle, and each one of them will have to hurt the other in order to get out of it. The US currently owes trillions of dollars to China. However, the US also has the capacity to determine the actual value of this debt by printing more dollar bills.

Quantitative easing (printing more money) causes inflation and ‘punishes’ the people who saved money by reducing the value of their cash. However, unlike previous cases were this method was used (Japan comes to mind), in this case, the savers who will be punished by America’s latest moves are the Chinese.

In fact, its safe to say that America’s latest moves are a calculated and conscious response to China’s own currency manipulation during the past decade. China is starting to realize this, and so it seeks to undermine the dollar’s global status by trying to supplant it with a “global currency” that will help it protect the value of its investment. Sadly for China, this is not very likely to happen any time soon.

So, both countries are going to get hurt. The question is which one of them has the agility and pragmatism needed to come out of this crisis stronger (IN THE LONG TERM!). My bet is on the US.”

May 25, 2009 @ 5:42 pm | Comment

Dror, Richard, Respectfully disagree with both your views. The guy to blame is Joe Public. Nobody forced him to go head over heels in debt. He took insane risks of his own free will. Will you take a million dollar mortgage just because somebody is willing to give it to you. You cannot ask for freedom and at the same time run to mama when the shit hits the ceiling. I don’t recall a single cry for more regulation when the boom time was on. Its easy to scapegoat banks, governments, regulators, whoever. The real culprit is Joe Public.

May 25, 2009 @ 6:02 pm | Comment

Ramesh, respectfully fuck off to Galt’s Gulch and take your teabags with you.

You won’t be missed.

May 25, 2009 @ 6:22 pm | Comment


I usually equate blame and reponsability. It must be my Judean-Christian cultural background…. Get sometimes in the way, even being agnostic.

“..cannot be blamed on the “Free Market” since the free market was not allowed to operate (due to currency manipulators in China and interest rate manipulators, encouraged by excess liquidity traders, in the US).”
Good enough explanation form for me. Only that “Free Market” seem to be easily tweaked with the resulting distortions. How to control that?

May 25, 2009 @ 6:26 pm | Comment

@Ramesh: Did you read the original article?

“Businesses and individuals must learn to take responsibility for their choices. Failed companies and executives should pay a full price for their mistakes. Consumers should make buying decisions based on moral and ethical principles, or at least recognize that failing to do so has consequences. Workers should fight for their rights or at least recognize that failing to do so has consequences (and no, by fighting for their rights I am not talking about lobbying for bigger government. More on this next time). Giving more power to the government won’t help.

The market did not fail. We did. We failed and we are still failing at defining our priorities and understanding the consequences of our actions. We failed to understand that how we spend our money and our time is not less important than who we voted for (or twitter about…). It’s never too late to start.”

Still, it is important to note that the free market has mechanisms that regulate consumer demand. They are called prices. If prices of certain goods would go up together with consumer demand, consumers would have buy less of these products. If money debt would gradually become more expensive, people would take on less debt. The problem is that both prices and interests rates were not valued at their market price due to market manipulation. So, consumers are not the only ones to blame. They only did what they were programmed to do. The fact that consumer culture is rotten is a different story, but this is an issue for another discussion.

@ecodelta: In general, I think that making sure that no one has too much power is a good start. This is not easy to achieve since the global economy is not managed by a single entity, so even if you limit the intervention of one government, the impact of another government (China, in this case) can still have a major impact. In general, I think the government should work to protect the market and to take care of basic things like education and healthcare. It should do so in line with the market, and not by trying to manipulate. By that, I mean that the government should do certain things (like investing in education) as a moral and ethical decision, and not judge them as financial investments per se (although its probably a good investments).

May 25, 2009 @ 7:05 pm | Comment

I won’t go as far as Twisted Colour (who I have to respectfully ask to tone it down), but I will say that Ramesh’s Ayn Rand, every man for himself philosophy doesn’t hold much sway with me. When we are dealing with major institutions like Countrywide Mortgage, a fool like me who knows nothing about the technicalities of mortgage financing assumes the company isn’t lying its ass off and selling me something that will destroy my life while he promises me the moon and the stars. Regulation is absolutely essential to keep big business from rampantly fucking us all over. What Twisted Colour says isn’t far from what I think of Ramesh’s comment, though it can be said a bit more sweetly. Joe Public pays taxes in part to be protected from predatory lying institutions. That’s what anti-trust and anti-fraud legislation is all about. Under Ramesh;s philosophy, it’s okay for Exxon and Countrywide and AIG to run roughshod over all of us. Totally, completely and vehemently disagree.

And Dror, I disagree with you about one new point you raised: I believe the government will indeed have to print lots of new money, and that China will incrementally reduce its purchases. It already has, quietly shifting to gold and other safer currencies. You cannot go so heavily into debt and print money to pay it and not end up with inflation, if not hyper-inflation. We are headed there, though it could be another year off. Watch oil and agriculture in the weeks and months ahead and you’ll see a steady upward arc as the dollar loses value. As I’ve said before, it’s a splendid time to get paid i RMB.

May 25, 2009 @ 8:43 pm | Comment

Sorry Richard – I expected better from you than to second Twisted colour. I don’t believe the three organisations you have named “fucked everybody” or “ran roughshod” over the whole world. You can’t lend money on false premises – your pants will be sued off you. Sure they were guilty of marketing excess and hyperbole, and not emphasising every risk but every fact would be there in the fine print. Fine print is there incidentally to be read.

Any case we can agree to disagree. Perhaps civilly.

May 25, 2009 @ 9:37 pm | Comment

Ramesh, looking back at Twisted’s comment, I think you’re right, I shouldn’t have endorsed any part of it and probably should have deleted it for rudeness. It’s been a long day. So apologies.

I do take serious issue with your comment however, and that notion in your second comment, Well, they can always sue, is just as objectionable. Most working people cannot so easily stop what they are doing and file lawsuits. Most don’t know where to begin. I hope you’re not endorsing the Bush-style cowboy free market where rich people can make as much money as they possibly can and to hell with the little people who were stupid enough not to realize they were being ripped off. And most people can’t read fine print, that’s why they hire someone they think they can trust to navigate them through it. I did it with my own mortgage, where there were like 40 pages of 8-point type mumbo-jumbo. I am lucky I didn’t get ripped off, but then, this was back in 1990 when there was still a semblance of morality in the business and I did great. Your comment, I must say, reeks of To hell with the little people, if they can’t figure out they’re being ripped off they’re fair game. Let them sue, let them eat cake.

May 25, 2009 @ 9:52 pm | Comment

@Richard: My point is that it is in China and the US are in a tangle, and the fact that China happens to have lots of USDs does not make it as powerful as most people believe. I have no idea what will happen with the USD/RMB down the line. Prophecy was given to (other) fools.

As for Rajesh’s comment, Ayn Rand, etc. I think that the government’s role, as you noted, is to protect people from fraud etc. Still, I think that the initial instinct of each person should be to check himself whenever something bad happens and take responsibility for it. AIG and Countrywide are companies that aim to make money. As long as they don’t break the law while doing so, there’s little you can accuse them of. I think that one of the main problems in western society is that people no longer take any responsibility for their own fate and have no moral or ethical convictions. They wait for the government to take care of all the problems and/or make decisions based on economic ‘fairness’, without taking anything else into consideration. When people refuse to take responsibility for their own actions, thing go pear shaped.

May 25, 2009 @ 10:25 pm | Comment

Countrywide gave bonuses to staff who could sucker as many people as possible into loans they knew full well would destroy them. Maybe it wasn’t illegal in our de-regulated society, but it should have been. And there’s no question it was plain immoral. Anyway, not much sense in arguing that, because we aren’t going to swing the other around. It’s all about how you see the world, I suppose. And I’m not saying people shouldn’t be responsible. But again, when a highly rated company associated with the biggest banks in America gets into the business of knowingly duping customers into deadly loans and convincing them it’s the right thing to do – well, that goes beyond being naive and listening to snake oil salesman. To look at all the people who signed mortgages with the exact same attitude that I did – trying to understand the jargon as best i could but assuming that my real estate agent and mortgage lender were helping me and not out to set me up for disaster – and say they should have been more responsible is an argument I totally reject. America has never seen a deception this massive in its history, because in the past we wouldn’t have allowed sub-prime loans. This is what responsible regulation is all about. But please let’s not belabor this point, because on this issue I will always be right, at least on my own blog. 🙂

Sorry, I’m siding firmy with the little people and against

May 25, 2009 @ 10:40 pm | Comment

And I disagree about China not being as powerful as a lot of people think. I may not want it to be so powerful but because of the economic mess it is more powerful for one simple reason: they have leverage. With $7 trillion in surplus assets China has leverage. With trillions of dollars in debt, the US has lost much of its leverage, China is now considerably more powerful than it was just two years ago in large part because the US is so much weaker. That doesn’t mean the mass of its population isn’t still dirt poor and living in relative squalor. But in terms of international clout, China is moving up fast. Last month it surpassed the US as the Middle East’s No. 1 trading partner, and that is just a sign of more to come. No matter what our personal feelings may be about China, it is now well poised to assume a leading role in global affairs as we move into the age of “G2.”

May 25, 2009 @ 10:45 pm | Comment

With all the fun and games in the US, it seems everyone has conveniently forgotten that the Chinese financial scene has been a complete fucking wild west mess for years. The Chinese government just has less qualms about its de facto permanent bailout of any/all lending by Chinese banks- usual because that lending is the result of state arm-twisting in the first place. Your average Chinese town on rural route 5 in Henan now has more high-end condos than Monaco, for Christ’s sake. And I’m sure demand for them is just bursting at the seams. Sometimes I choke on my cereal when I read comments in my morning Canadian paper like “Increased lending in China shows signs of economy recovery”. Really? Maybe “Increased lending in China show signs that government has ordered more lending” is more apt.

The average Chinese person might have a high savings rate, but your average Chinese OFFICIAL has no problem spending those savings like a drunken sailor on all sorts of speculative projects with dubious purpose. And I think that is the disconnect I’m really struggling with here- the Chinese state at many levels makes as much a mockery of financial prudence as an American investment bank. Any attempt at moral high roading in this one is laughable, really- the word “excess” applies to China as equally as Wall Street. And I’m pretty sure that in the name of economic “recovery”, the “excess” pedal is being put to the metal in the Middle Kingdom. Any bets on how much stimulus money made a direct bee-line for the stock market?

May 25, 2009 @ 11:51 pm | Comment

No arguments there, PB. I think we’re going to find a big chunk of the stimulus package went into the pockets of the corrupt bureaucrats (surprise surprise), But China – and prepare for a cliche – really is a developing country and has nothing like the bedrock of laws, checks and balances the US does. So making moral comparisons with the US, which has had more than 200 years of democracy and prosperity, may not be too useful. No one would argue that the corruption and bald-faced criminality of the plunderers in China is in a class by itself, with nothing quite comparable in the US simply because of lack of rule of law. Bernie Madoff and Ken Lay and America’s white collar criminals, but in America we can put these people in jail.

May 26, 2009 @ 12:05 am | Comment

That’s how you guys treat Jun 4th. over.

May 26, 2009 @ 12:59 am | Comment

Sorry Richard, the vulgar Australian is strong in this one.

Let me rephrase – Ramesh, just past Brigadoon and straight on till tea-time, there is compound named Galt’s Gulch. It is a wonderful, sun-shiney place full of unicorns and heroes of legend like Cecil Rhodes, William Randolph Hearst and Kenneth Lay. Around it is built a mighty wall to keep out ogres, nagas and, most evil of all, Joe Public. Please go there and don’t forget to take a packet of Lipton, it’s always tea-time in Galt’s Gulch. XX

May 26, 2009 @ 3:47 am | Comment

@Richard: “I’m siding firmy with the little people”. So am I. Please, tell the little people not to invest their money in things they don’t understand.

I never said China is not powerful. I said it is not strong. What I meant was that it is fragile and on the right track for destruction. The fact that it currently has leverage is undisputed, but even that is temporary. In any case, looking at macro indicators reveal very little. Yes, China is a “rich” country, but it is made of poor people and it has development model that is not viable.

@PB: True true true. I think that most comparisons of China and the US in the western media are ridiculous. People look at China’s macro indicators without asking any further questions and assume that the growth is spread and managed effectively. It isn’t.

May 26, 2009 @ 6:39 am | Comment

You are absolutely right. That’s not journalism, it’s propoganda.

May 26, 2009 @ 9:30 am | Comment

Dan, you lost me there – what’s the propaganda you’re referring to? The way China presents its statistics to the world?

Dror, we all agree I think that there is more than one China, and that while the government is cash-rich it’s still a “third, fourth and fifth-world country” in many ways, as John Pomfret has put it. Very fragile, very troubled, in an almost impossible situation in terms of environment and keeping its people working and fed. All of that. But they also have enough clout to walk over to a partner who is of use to them and offer an irresistible quid pro quo, like modernizing their school buildings if the country opens up its oil fields for them. That’ leverage. And they can do this on a massive scale, in ways most of us know nothing about. Temporary? Maybe, but I’ve been hearing that since 2001, and they’ve kept getting richer and applying yet more leverage.

About its “development model that is not viable” – I’ll have to wait and see. They are crowing about it at the top of their lungs, and the propaganda indicates it’s already a success. Pardon me while I reserve judgment.

May 26, 2009 @ 10:16 am | Comment

Richard, it could go on for 5,10,15 more years as well, but if it doesn’t change, it will implode. The USSR was around for many years. It sent people to space. It won Olympic medals. It had some of the world’s best scientists and academics (China still doesn’t, btw). It’s influence spread from the Pacific to the Atlantic. One morning, it was gone.

The Russians are still here. Russian history is still here. Russian culture is still here. But the Party is no more.

May 26, 2009 @ 10:45 am | Comment

Richard, I know why the CCP does it (because fosters a sense of insecurity and victimhood in the Chinese) but why do you keep insisting that the US takes the lion’s share of the blame?

The fact is that China has benefited massively from a relatively free trade environment that the US (and others) built after WWII. But China never played by the rules of the free trade game (currency manipulation) and instead sought to INTERVENE and CONTROL capital flows and support its export industries (I wonder if the people making these decisions and those benefiting are the same….if so is this greed?) and SUPPRESSING the economic livelihoods of its rural population (this has changed now I acknowledge). To put it another way: Dror has already explained that the market has one natural regulatory mechanism – price. If China manipulates its currency, it manipulates the price of its exports – this was done with full knowledge and intent. China now finds itself holding a heck of a lot of USD debt. If blame is to be apportioned, why does the US get it in the neck?

Another question – why is great play made by some here of the need for an alternative ‘global reserve currency’? It’s an economic red herring, which only leaves the political motivation. I have to laugh when China 1) insists on making its own currency un-convertable 2) complains that the US trashed the free trade system 3) then complains that they themselves and other people use the dollar as the means of exchange, and then 4) keeps complaining but keeps buying Treasuries!

May 26, 2009 @ 2:18 pm | Comment

@Moules: Just to add – China’s currency manipulation hurt the poor people of China in a major way:

1. The first and obvious one is by investing their savings in USD, which will soon drop in value.

2. The second and more important “pain” is the fact that China’s artificially weak RMB gave the local economy an incentive to focus on developing more and more low-end manufacturing jobs. It was so bad that some kids left school and went to work in a factory since this was the “industry of the future”!. If the RMB would have appreciated in line with global demand, the local industry would have shifted towards manufacturing of more knowledge-intensive, thus creating better-paying jobs and requiring businesses and government officials to invest more in human capital (education, training, etc.). So, more than anything else, the CCPs manipulations hurt the long-term prospects of the Chinese people.

May 26, 2009 @ 3:00 pm | Comment

I think the US is hugely effed up, to a large degree because our political system is bought and paid for by the same interests that have effed up the economy. About 75% of what the Obama Administration is doing to deal with the crisis is the same stuff that Bush would have done to deal with it, and I don’t know if the 25% of smart is enough to counteract the stoopid.

On the other hand, I do believe that the US has sounder fundamentals than China, in many ways. Smaller population, stronger legal system, a political system that at least contains self-regulating mechanisms to correct its worse failings, the ability to feed its population without imports, etc. etc. etc. I would never rule out the possibility that our political system has become so rotten and corrupt that it will manage to flush all of this down the toilet, however.

China has a lot going for it, but I think that its problems of huge population, environmental degradation and a legal system that is still a work in progress should signal caution.

May 26, 2009 @ 3:00 pm | Comment

Recently, there is a proliferation of news story about China continue to stuck in “dollar trap”, citing so-and-so from certain big name Chinese institutions. The authors of the articles goes on to conclude that the dollar is “safe.”

I just want to point out that if China is really making the move against the dollar, they wouldn’t be running about yelling their intentions for the rest of the world to know. They’d certainly be moving and at the same time putting out the sob story about their misfortune about being stuck in the “dollar trap” while calming the world to facilitate their “first out the door” goal.

Point is, these “dollar trap” stories are absolutely pointless, because you wouldn’t know either way what’s China’s real intention.

May 26, 2009 @ 3:06 pm | Comment

Falen, China is extremely secretive of where they are investing, and is hardly screaming about it. When we find out, it’s not because they put out a press release, but because they make a large investment that can’t be done in secret, like the recent expansion of its gold supply.

Moules, I don’t necessarily disagree with what you are saying. China stacked the deck very unfairly, as everybody knows, making it next to impossible for years to sell stuff here but incredibly easy to buy their exports. No disagreement. I’ve written about that lots of times.

No matter what your beef may be with China, the US takes the lion’s share of the blame, as ground zero for the global financial crisis. This is hardly an original theory on my part. Those gems like subprime loans, collateralized debt obligations and endlessly creative lending and credit card schemes – all born right there in the good old US of A, chopped up and redistributed by banks around the world like UBS, all getting Triple-A ratings from America’s finest rating houses, all in a spectacular orgy of mutual back-scratching, winks and nods. And suddenly overnight we awake to a $3 or $4 trillion deficit while China has a $7 trillion surplus. The crisis had many players, including China. America was ground zero. No America, no global crisis. Maybe your usual cyclical ups and down, but nothing this catastrophic.

No one, but literally no one says the global crisis was mainly caused by China. Krugman gives them a share of the blame and so do I. But this is America’s baby, born and raised there, and because of America’s importance in the world economy, it’s like a wrecking ball, shattering economies that were based on the assumption of a perpetual and endless stream of dollars and the jobs and construction and subsidiary industries that come with them. Bad mistakes were made everywhere and there’s blame to go around. But don’t forget, at the heart of the disaster are our subprime loans, which are what caused Bear Stearns and Lehmann’s to go under and pushed AIG and Merrill to nearly collapse and resulted in the credit crunch that’s suffocating the world. Our banking system imploded because of our bad loans and the lack of regulation that permitted it all to happen. China’s dollars may have helped facilitate this, making money cheap, but they are a mere accessory and one of many.

Blame chart, official and inarguable: US, 85 percent; China 5 percent; rest of world combined 10 percent.

And I love America and can be quite defensive of it. But this calamity was one of our own making, one about which the likes of Krugman and Roubini had been warning us years in advance. No one but America could have prevented it. No one else but America caused it, except as relatively minor accessories.

Lisa, no arguments. China’s fundamentals don’t, of course, compare to America’s. What China now has, however, is leverage. America can longer tell the world what to do the way it once did – well, it can, but not as effectively and not with any guarantee the world will listen. Because there’s now another power with greater leverage, more immediate cash to offer, that’s sneaking up and disrupting things. Is this good? Do I like it? Not necessarily, but that’s not relevant. It’s just what’s happening as we continue our march toward being a relative banana republic. We’ve still got a lot of those wonderful things that make America great. But we will be in steady decline for years, if not generations to come, during which time China will be able to reshape the world order as we know it, just because it has the money to do so, as it did in Africa and will soon be doing in most parts of the globe. Get used to it. 🙂

We’ve had this conversation here many, many times and I’ve been proven completely and irrevocably correct, as usual. Do we have to rehash it all again?

May 26, 2009 @ 3:43 pm | Comment

Richard. With time, more and more people will recognize China’s role in creating this crisis. As you remember, when I wrote about this at the end of last year, most people said it’s ridiculous and that it’s all America’s fault (and within the US, it’s all the bankers’ fault). Now, even good old Krugman is starting to catch up.

Same goes for China’s T-Bills. 7 months ago, everyone looked at China’s savings as some sort of magic solution. Today, more and more pundits realize that piling up on all them T-Bills was not such a good idea. On this point, again a few months late, Krugman is starting to catch up as well.

Krugman, in fact, is a great example. A sharp guy, but sees world events as consequences of US policy and underplays. There’s plenty of cultural imperialism in refusing to admit that your troubles might have been cause by the Chinese (just like there’s imperialism in claiming that Americans are greedy but Chiense are dumb).

May 26, 2009 @ 3:53 pm | Comment

Also, see the following comment (and preceding discussion) from December. Those were the days!

Clearly, you feel differently now.

May 26, 2009 @ 3:55 pm | Comment

Dror, “come the revolution” I’m sure we’ll understand a lot better. We always do. But I’m simply not convinced that China played that major a role. Krugman says they’re partially to blame and I agree. But he has never said or implied they deserve equal blame with the US bankers. Maybe 5 percent. Maybe 10. Maybe.

I still stick to my main point in that comment you linked to (a brilliant one, at that), by the way – China will come out relatively unscathed, key word being “relatively.” Let’s hope this thread doesn’t go on as long as that one. We all know where the other stands by now.

May 26, 2009 @ 4:07 pm | Comment

Richard, I was not referring to your “unscathed” theory, I was referring that in the comment you said that the blame lies “squarely” with the US, and now you too agree that that’s not the case. Krugman also blamed everything on the US for 6 months before noticing that China had something to do with it. He will gradually catch up with the whole story.

I mean, seriously, some of these western “experts” still write about “decoupling” and how China and the US don’t really depend on each other. Only people that look at macro data and have no idea of anything else can write such nonsense.

(As for the “unscathed” theory – about 30 million Chinese lost their jobs since you wrote about it. Now you shift the emphasis to “relatively”….)

May 26, 2009 @ 4:23 pm | Comment

HAHAHA…How can you quantify blame, Richard? Have you been studying at the CCP’s “explaining historical legacy with arbitrarily created statistics” school? Mao 70% right/30% wrong, Global Economic Crisis US 85% wrong/China 5% wrong (at least you admit some, Xinhua is of course saying 100% US to blame)…guess it’s an easy way to explain things, but maybe too easy, no? Anyway, at this point the blame game is kind of moot from my perspective…right now it’s all politics, it will take another 10 years before we start getting some real perspective on it. In the meantime, it’s fun to watch the politicians rhetorically mangle the facts for their own benefit…

May 26, 2009 @ 4:32 pm | Comment

Andy, those numbers were totally tongue in cheek, which is why I labeled them jokingly as “official and inarguable” – because there are no official figures, and it can always be argued. Agree, we’ll need another 10 years to verify these figures. But for now they are all we have, and are as close to being accurate as we can get.

May 26, 2009 @ 4:46 pm | Comment

Dror, I always said China would suffer deeply from the crisis. In that very post you cite I wrote, “China is reeling from the shock waves and is getting hit by a sledge hammer.” My point was, at the end it will arise with most of its institutions intact, while the US will be fundamentally transformed and restructured (i.e., fucked beyond all belief; just look sat Detroit). If you search around my posts, you’ll see I have always said China would come out relatively intact after undergoing a lot of trauma.

May 26, 2009 @ 4:51 pm | Comment

Exactly my point: China “will arise with most of its institutions intact, while the US will be fundamentally transformed and restructured”. That’s a good thing for China?!
All the same methods, all the corrupt politicians, all the local banks, and the regulations… all will remain intact and in charge.

Look how much America has changed since September 2008. Different government, whole industries erased, new regulations, etc. This is a sign of America’s strength.

May 26, 2009 @ 4:56 pm | Comment

Dror, time will tell. As Lisa said, in some ways it’s basically the same government, at leastin terms of special interests.

One thing I have to keep clarifying. That I think China will come out relatively intact isn’t to say I want it to be intact. I am just saying what I think will happen, like I think the sun will rise tomorrow. That doesn’t reflect any subjective judgment about whether that’s bad or good. It just is.

May 26, 2009 @ 5:18 pm | Comment

America is still the most incredible country on earth, and the most remarkable and succesful social experiment in history. It needs to change. It will.

May 26, 2009 @ 5:34 pm | Comment

I won’t disagree (though many in the world would). America has worked well, and been extraordinarily lucky and blessed. The damage of this crisis is too deep, however, for the US to just dust itself off and get going again as king og the world. We are going to be extremely restricted by our lack of capital, and as our influence wanes China’s and others’ grows. America will change. But it won’t ever bounce back to what it was. I suggest you read Krugman’s column this week on California and how poorly it is adapting and how little it’s learning. It may be plunged into a total disaster and end up broken beyond all repair. He says the entire nation could go this route and he makes perfect sense.

May 26, 2009 @ 5:43 pm | Comment

@Richard – 🙂 I consider myself proven too.

But isn’t your argument (maybe it’s just tone) something like this – the US (and others) created an opportunity to join a globalised economy that we’ve all benefited from for the last 60 years (check out a chart of ‘global gdp’). All other developed and most developing nations joined in. US/Some EU states allow personal and corporate debt levels to get very high; exporting countries (read China) adopt policies (intervene in the market) to allow (encourage?) this. A couple of banks go under, western consumers get nervous and stop spending. US 85% blameworthy. Yanks go home. 🙂

It’s like joining a game of pickup soccer at the community club, then picking on the organiser when he scores an own goal. Very childish, very CCP. sigh.

@dror – I agree, the US has a major strength in its flexibility. The Chinese people are naturally flexible too, but have to work in a system that binds them. 30m unemployed but still no sign of real social instability – 很辛苦. At least there’s a debate going on as to what China needs to do.

May 26, 2009 @ 6:02 pm | Comment


Interesting article in scmp. Just one minor correction, CH is still 4th economy

GDP table

EU: 16,2
US: 13,7
JP: 4,3
CH: 3,4


May 26, 2009 @ 10:48 pm | Comment

The American Achilles Heel? Taxes.

A lot of the current global economic imbalances can be traced back to the level of political poison the word “tax” elicits in the US.

Being anti-tax works fine when a political entity is a bunch of agriculture-based colonial towns, and the tax-levying entity is a foreign monarch across the ocean.

It works somewhat less when you have a highly urbanized, industrialized and economically complex country of 300 million people and counting. If you listened to Republicans, you’d think this all somehow worked magically due to the pure self-interest of enlightened and profit-seeking individuals.


Cue borrowing from others because the domestic governing bill goes unpaid. Worked for a while, less sure now.

The Chinese Achilles Heel? The belief it can be a US with a population of 1.3 billion without the world going completely off a resource-depleted cliff.

May 26, 2009 @ 11:55 pm | Comment

“The belief it can be a US with a population of 1.3 billion ”

Each time I count I get over 1.6 billions figure…

May 27, 2009 @ 12:47 am | Comment

America is still the most incredible country on earth, and the most remarkable and succesful social experiment in history.

Other than the Hutt River Province Principality and France, of course.

May 27, 2009 @ 12:50 am | Comment

isn’t China always mentioned with words like “dictatorship”, “communist”, “planned economy” in western media?

the ironic part is these are proven to be good things.

May 27, 2009 @ 9:10 am | Comment

Richard: “The damage of this crisis is too deep, however, for the US to just dust itself off and get going again as king of the world”

Sure, America will not be the “king of the world” after this crisis, but was it ever? The fact that Bush thought he was the king of the world, does not mean he really was. I think that America’s relative power today is not very different from what it was 3 years ago. America did have a window of opportunity to become the “king of the world” during the last 15 years or so, but it spent it on starting the wrong wars and pushing the wrong agendas. In terms of ideological hegemony, it differently lost a lot of points, and it can regain them by changing course. In pure economic fundamentals, America is still in a better state than most countries. It might not be as good compared to its former self, but the world too has changed and America still has no rivals in terms of self-sufficiency and economic might.

May 27, 2009 @ 9:34 am | Comment

zhao: isn’t China always mentioned with words like “dictatorship”, “communist”, “planned economy” in western media?

No. In fact it rarely is. Go through google news stories one by one and tally how many of those terms are used on any given day in each article. You’ll find that contrary to your claim that the Western media “always” uses those terms, it actually does so quite rarely.

Dror, my only issue with your analysis is your faith-based belief in America despite evidence that the country is economically hamstrung for years if not generations to come. I am more pessimistic than you, but there’s no way for now to say who is right.

May 27, 2009 @ 1:09 pm | Comment

Richard, please note that I am not saying that America is in great shape. I am only comparing it to alternative world powers. China, with all due respect, is not in the same category. The only thing going for it is that it incorporates a lot of very poor people into a single economic weight that carries substantial geopolitical weight. There’s nothing wrong with that, and I hope that Chinese people will one day enjoy the prosperity and freedoms enjoyed by their fellows in the west. Until that day, it’s important to keep things in perspective.

I am not basing my argument on faith. I am just looking at history as well as on the things I see around me every day. China’s model is not viable. It’s one big bluff, propagated by the CCP and perpetuated by starry-eyed “experts” in the west.

May 27, 2009 @ 1:47 pm | Comment

the ironic part is these are proven to be good things.

Kinda like pre-emptive war, lutefisk and papilloma, ain’t that right, Zhao?

May 27, 2009 @ 1:49 pm | Comment

Yeah, the alleged non-viability of China’s economic model is an interesting topic. So much of it seems built on sand and/or hype. And yet…

That’s a good topic for a massive post of its own if I can summon up the energy. Incredibly complex topic with so many divergent viewpoints by so many intelligent people (like you and me, of course). The “And yet…” argument is key. It’s not all smoke and mirrors.

May 27, 2009 @ 2:11 pm | Comment

“The American Achilles Heel? Taxes.”

PB, your wish for more tax will be granted. VAT is being seriously considered.

US have lived beyond its means for some years, from Fed, to state to individual level. The reality is that US needs to cut its denfense spending and manage its security with China and other countries. US can choose to do it now, or is forced to do it later.

Unfortunately, the reality has not dawned on US people yet. Defense spending is a still a sacred cow that is equated to patriotism. In my view, this is just nationalism run amuck.

May 27, 2009 @ 10:39 pm | Comment

[China] sought to INTERVENE and CONTROL capital flows and support its export industries (I wonder if the people making these decisions and those benefiting are the same….if so is this greed?) and SUPPRESSING the economic livelihoods of its rural population (this has changed now I acknowledge).

I think you get this totally wrong, which is a common misconception. Agricultural products have MUCH higher domestic labor cost built in than export manufacturing products. Artificially keeping RMB down benefits rural agricultural labor force much more than urban manufacturing labor force. If USD:CNY was at 5 in 2005/2006, exporters would performed unevenly with lower-end manufacturing suffered but higher-end manufacturing might actually benefit; domestic farmers, competed with international farmers, would suffer a great deal. A strong RMB actually will be a net positive to the overall goal of Chinese manufacturing — moving up the value ladder. As consumers, they all would benefit. BTW, ecodelta, CH is Switzerland, not China. China is CN, or CHN.

China would be in this so-called “dollar trap” so long as:

1. There is no running bull market of agricultural products, YET. (which is why RMB appreciated largely during a period of agri-bull).
2. Agri-products are priced in USD.
3. An uncomfortably large (to the Chinese decision makers) portion of the Chinese labor force is still in agriculture. Currently it’s at 40%-ish. Their livelihood relies heavily on the equivalent yuan prices of agri-products in the international markets. If the yuan prices are too low, they will suffer.

So for now you watch closely on some agri proxies, when they move up, CNY will move up. In a few years, maybe during the next generation of the leadership, the condition #3 will be gone, then CNY’s ascendant will be fast and furious.

May 27, 2009 @ 11:45 pm | Comment

The USSR was around for many years. It sent people to space. It won Olympic medals. It had some of the world’s best scientists and academics (China still doesn’t, btw). It’s influence spread from the Pacific to the Atlantic. One morning, it was gone.

In USSR, people lined up for hours just to get some low quality bread, and in China today you can enjoy your own personal banquet at 3 am even in a mid-tier city… Gosh how brain dead one needs to be to compare China and USSR? To me the most apt comparason is the USA in 1900 — the energy, the optimism, and even the dirty environment. Yeah, just so that you know, between 1900 and 1930, the US won fewer natural science Nobel Prizes than even Switzerland. You can argue it was a combination of Nobel Prize being a Europe-centric award, and the US being scientifically trailing Europe — which fits well today in China’s case too. Speaking of which, neither did USSR win many Nobel Prizes and they sent a satellite to space first!

May 28, 2009 @ 12:18 am | Comment


You are right- China is certainly not the USSR. But it’s not the US either- and the year isn’t 1900. It’s 2009, and the world has changed quite a bit. Countries develop within a particular historical-geopolitical context for better or worse, not according to some ahistorical “development model”.

To the great dismay of Western elites, China has recently been beating them at their own game in the industrialization/grand projects departments. But unfortunately for China, this game (based on cheap energy and wanton environmental destruction) is about to go out of style. It’s like showing up for a party when the last few beers are being tapped from the keg.

If I were the Chinese leadership, I’d pour all R&D money into a time machine. Then they could send some intrepid people back to the late 1800s and get China’s “modernization” going then. In that case, China would have dominated the 20th century and been as energy inefficient and gluttonous as desired (basically usurping the American role). They could have built an empire of smokestacks and steel tracks. Every family with two Cherys and a garage in the burbs of Zhengzhou. They could have got Mies Van der Rohe to design the CCTV building.

Alas, back here in reality, I just don’t think that’s going to happen. But why waste time with 20th Century envy? China should be trying hard as hell to leapfrog the rest of us, not rebuild Cleveland with a Chinese name. The big question is whether China’s current political constraints will allow that sort of systemic creativity to truly flourish. I have no idea.

May 28, 2009 @ 12:55 am | Comment

@JXie: China is not the USSR (although it is the only living remainder of Stalin’s succesful foreign policy). The point of that post was to give an example of an empire with a non-viable development model that was and then wasn’t. As for people enjoying a ‘personal banquet at 3 am even’… this may be true in MANY places in China, but it is still far from true in MOST of them.

May 28, 2009 @ 3:12 am | Comment

“the only living remainder of Stalin’s succesful foreign policy”

This might be a weird definition of ‘successful’, but North Korea is still very much in existence.

@JXie, Dror – The USSR was an artificial creation of the Tsars masquerading as a state. It was essentially just the Russian empire in communist drag. China is not nearly so much an artificial creation as that, and does not nearly require so much in the way of artificial nation-building (and, by the way, that’s what all that medal-winning and space-exploring were motivated by). This is not to say that China is not a country in which a high level of nation-building is still going on, just not to the extent that it was in the Soviet Union.

Were a catastrophe to strike China tomorrow, well, we already know the answer to this as China has been struck by economic and political catastrophes repeatedly starting in the beginning of the last century if not earlier, what occurred was warlordism followed by civil war followed by dictatorship. However, unlike the USSR the option of forming independent nations does not exist for the vast majority of the Chinese population, living as they do in indistinct provinces of roughly equal size and population. The exceptions to this are geographically distinct areas (Hainan, Manchuria, Mongolia), ethnically distinct areas (Tibet, Xinjiang) and economic/logistical centres (Shanghai). Even were all of these areas to become independent of ‘China proper’ (i.e., the area of the map which you would see marked ‘China’ on a map from WWII) more than 80% of the population would still live in rump China. China therefore cannot disappear from existence, only the flag and the mode of governance would change – as much as CCP-boosters try to claim otherwise, there is nothing ‘Chinese’ about communist dicatatorship, or about red flags with golden stars.

I guess I should add that I do not expect any such thing to happen in the next 20 years, but had a European commenter been asked how he saw the future of that strong, powerful, confident, mercurial state of the last century – Germany – then, looking forward from 1909, he could hardly have foreseen its collapse in the first world war, its re-birth, second collapse, division, and final reunification.

I will put this as plainly as I can: China is not America of 1900, which was already a rich country and politically mature. Instead it is a curious cross between the Russian Empire and Imperial Germany – still poor and backward in many areas, but growing and arming apace, politically immature and given to grandstanding, still seeking its ‘place in the sun’, still complaining of having been historically wronged and exploited. However, unlike Imperial Germany (but like Tsarist Russia), China is still not a nation which produces talent. China is yet to produce chemists to match Haber, engineers to match Daimler, manufacturers to match Krupp, philosophers to match Nietzsche, composers and playwrights to match Wagner, physicists to match Weizsäcker. To be more precise, it has produced such men, but so far they have not had the opportunity to reach their potential in China, and have either had their talents wasted or have gone overseas. However, China most certainly will produce such men in future, and such men will mould the new China.

I will say this once again: whilst it is natural for Chinese people with experience of the United States to compare it to that strong and confident country, China is not America and never will be. In every aspect that China’s future may be similar to the US’s past, it is also greatly different, and equally as similar to other countries the comparison with which many will find less than flattering. China is China, with all the good and bad that will flow from that.

May 28, 2009 @ 6:58 am | Comment

“China most certainly will produce such men in future, and such men will mould the new China.”

I guess I should add, that China will also produce women equal to those men, and those women will hopefully be allowed to play an equal part.

May 28, 2009 @ 7:02 am | Comment

@FOARP: I have to point out that China, in its current borders, is definitely a creation of modern times. A re-creation at best.

True, there seems to be a stronger cultural link between its different parts, but if you take out the areas you mentioned – Hainan, Manchuria, Mongolia, Tibet, Xinjiang, Shanghai – China loses control of more territory than Russia lost after the USSR collapsed, both in absolute terms and in relation to its own size. You can also add Guangdong and Sichuan two that list – two provinces with a distinct language and history – and you’re not left with too much. I agree with you that China is not likely to fall apart, but I do think that the chance of that happening is higher than most people realize. It was never as unified as it is today and it’s not hard to imagine that it won’t be so unified 20 years down the line.

May 28, 2009 @ 9:29 am | Comment

“I agree with you that China is not likely to fall apart, but I do think that the chance of that happening is higher than most people realize.”

Agree. I think more and more chinese also gradually realize that point. Most people who want CCP to be kicked out of power have not really thought through about the consequences.

If China can develop on the current path for another ten to twenty years, China chould become more homogeneized, union have more chance to preserve, and it is more likely to have a peaceful and smooth transition to the eventual democratic society.

May 28, 2009 @ 11:46 am | Comment

From European perspective CH seems like a living fossil. All old empires that existed here, composed of several peoples united more or less by force, ideology, religion or cultural affinity are gone.

Gone is the Roman Empire, the Holy Roman Empire, The Austro-Hungarian Empire, The Turkish Empire, The soviet empire, etc. What remains are national states (more or less national in some cases) Most of them now form part of the EU, joined on their own free will. An unruly and disparate union, but union nonetheless.

What CH is today is more or less what was the territory of the Manchu empire. Whatever the CCP said, not all parts belong to CH on their own will. And the arguments, and methods, that CCP uses to keep them within is not much different from what those old empires here used in its time.

Must recognize that some CCP methods are more sophisticated.. but others are equally physical and/or culturally brutal.

Would the history of CH be better if it where divided in different countries? Hard to said. On one side I consider that the geographic layout tend to favor a dominant entity to control the area. It is almost like an Island delimited not completely by the sea, but also by strong geographical barriers. And isolated from other major cultures. Sometimes even mentally self isolated.

No having a hierarchical/centralized regime could have prevented some of the vagaries of former emperors and in current CCP policies, which had brought a good share of pain and avoided progress in current CH geographical area.
But if it would be better is hard to say. We all know the consequences of the national states war in Europe. The continent practically imploded itself. Europe lost world dominance as result of WWI and practically self destroyed itself in WWII.

The CH perspective of Europe? Maybe a living fossil, a bunch of unruly states unable to form a centralized, effective government structure more bent in promoting common and not particular state interest; and standardized rules, customs and common language.
All former feudal independent states in CH are long gone.
Chu, Han, Zhao, Wei, Qi, Yan and others do not longer exist.
But CH also lost of preeminent position in the world and collapsed from within, with dire consequences for the population.

May 28, 2009 @ 12:23 pm | Comment

@ecodelta: Fantastic point. It is indeed the last standing empire, but the International Left is too busy ‘protecting the weak’ to notice.

May 30, 2009 @ 8:45 am | Comment

Great website here. Check out my China instablog and give me feedback on it:

June 2, 2009 @ 1:10 pm | Comment

Thanks Mike – my friend Dror will totally love that post! I have mixed feelings about the question of whether or not China has a middle class. It definitely has one, but it is not like the middle class we know in the West. But that’s a whole post in itself.

June 2, 2009 @ 1:17 pm | Comment

I’d really like to get to the bottom of this supposed “middle class” in China. How big is it really? Is its size greatly inflated by bogus CCP stats?

“…can the world expect a China that resembles the consumer-driven United States? Unlikely, says Dr. Ming Wan, Director of Global Affairs at George Mason University. He argues that, “The Chinese government says that it wants to boost consumer spending to reduce its dependence on exports and has made some efforts. But fundamentally, the Chinese government still follows an export-led strategy. China will not follow America’s consumption-driven growth model. It is similar to Japan and Germany in that all three are saving countries.”

June 2, 2009 @ 1:43 pm | Comment

@Mike: the fact that Japanese save more than Americans does not mean that their economy does not rely heavily on local consumption. It does.

June 2, 2009 @ 2:07 pm | Comment

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