The coming China Depression

Wait. That is not my theory, but that of the author of an article written more than four years ago that a reader pointed me to and that I recommend you read. Not because it’s necessarily right, but because it’s fascinating to see where we actually stand four years after the writer’s prediction.

Today, the currency and export policy of China is anchored around its peg to the dollar. The main reason for this is that by artificially undervaluing its own currency, and therefore overvaluing the dollar, China artificially stimulates its manufacturing exports. The second reason is that by buying the excess U.S. dollars and reinvesting them in U.S. government bonds, it acts as a foreign lender to the United States. The third reason is that this foreign lending stimulates American demand for Chinese manufacturing exports and allows the Chinese government to relieve its current unemployment problems… No doubt, most of these loans will turn out to be very expensive because they will be repaid with greatly depreciated dollars, which in turn will exacerbate down the road the growing financial distress of the banking sector in China.

Therefore, it is clear that China travels today the road to Depression. How severe this depression will be, will critically depend on two developments. First, how much longer the Chinese government will pursue the inflationary policy, and second how doggedly it will fight the bust. The longer it expands and the more its fights the bust, the more likely it is that the Chinese Depression will turn into a Great Depression. Also, it is important to realize that just like Americaโ€™s Great Depression in the 1930s triggered a worldwide Depression, similarly a Chinese Depression will trigger a bust in the U.S., and therefore a recession in the rest of the world.

Unless there is an unforeseen banking, currency, or a derivative crisis spreading throughout the world, it is my belief that the Chinese bust will occur sometime in 2008-2009, since the Chinese government will surely pursue expansionary policies until the 2008 Summer Olympic Games in China. By then, inflation will be most likely out of control, probably already in runaway mode, and the government will have no choice but to slam the brakes and induce contraction. In 1929 the expansion stopped in July, the stock market broke in October, and the economy collapsed in early 1930. Thus, providing for a latency period of approximately half a year between credit contraction and economic collapse, based on my Olympic Games timing, I would pinpoint the bust for 2009. Admittedly, this is a pure speculation on my part; naturally, the bust could occur sooner or later.

Of course, macro-economic predictions like this usually prove to be far off the mark (except those made by me), the most (in)famous perhaps being Gordon Chang’s prediction of “The Coming Collapse of China.” In the case of the article above, the story seems to have occurred almost in reverse – a US (and increasingly European) crisis is what is plunging the world into a recesion, not government-generated inflation in China. America’s economic crisis, not China’s, was the catalyst for the tailspin, and if China is be plunged into a depression, it will be for reasons very different from what the author envisaged. (He was shrewd enough to say that his theory might be offset by “an unforeseen banking, currency, or a derivative crisis spreading throughout the world.” And what we are seeing today was certainly unseen by most in 2004.)

However…however… I honestly believe China is going to be one of the few players that emerges from the current crisis relatively unscathed (and “relatively” is a key word.). Simply because of the size of its own domestic markets and the trade it carries out in Africa and Asia. It will suffer, lots of factories will continue to close and lots of dreams will be erased and jobs lost. But it won’t be depression. What it will be, more than anything else, is a test for the CCP. Running a country the size of China with the staggering problems is hard (to say the least), but it sure helps when the economy is roaring year after year.

One of the most frequently repeated motifs is that as long as the economy is kicking, most Chinese don’t give a damn about human rights and censorship and corruption. Once things slow down and people have more time (and more fear), as they see their opportunities dimming, as they realize the joy ride they were counting on was finite while the ruling classes are doing just fine – will they lose some of that Zhongguo jia you spirit and begin to demand their government do better? Will they look at they way America ousted the Republicans, and demand that same freedom? Short answer: probably not; at least not yet. China is better positioned to weather the current storm without enough rampant misery in the cards to get people thinking about revolution. The government can still spend its way out of this mess they way it usually does. One day China will face an economic moment of truth, the way America is facing one now. I’m pretty sure this isn’t it. Yet.

I swore I wouldn’t post anything today, that I’d focus only on my homework. The Internet is such a monumental distraction. And that will be the subject of an upcoming new post.

The Discussion: 39 Comments

@Richard

You are so clever.

Do you work for the CIA?

Your analysis is brilliant.

October 3, 2008 @ 10:21 pm | Comment

Heh. I wish. Let them know I’m available.

October 3, 2008 @ 10:34 pm | Comment

The most probable challenge for China in the foreseeable future won’t be a depression but a sharp, unplanned drop in growth. When that might happen I have no idea. But China is so used to double-digits growth that even 5-6% could be a problem.

October 3, 2008 @ 10:44 pm | Comment

By the way, if you’re in China read this article before you use Skype again:

http://www.timesonline.co.uk/tol/news/world/asia/article4873680.ece

Assuming you haven’t heard about this already.

October 3, 2008 @ 10:48 pm | Comment

By the way, if you’re in China read this article before you use Skype again:

http://tinyurl.com/3wbyaw

Assuming you haven’t heard about this already.

October 3, 2008 @ 10:49 pm | Comment

I can’t even begin to explain the multitude of problems that the world faces today. The global financial collapse is but one element of an enormous pyramid of factors that hold up civilization. Underneath the financial collapse, or the collapse of the imaginary system that kept spewing hundreds of billions of imaginary dollars into circuit every year, there lies something called reality. Whether it’s the world’s dwindling supplies of oil that we’ve wasted on obscene projects such as Dubai, Las Vegas, or China’s endless new shopping malls and skyscrapers, or our exploding populations that will reach 9 billion by 2050, or the clean water that we wasted away, or the agriculture that doesn’t seem to yield as much now that we’ve overcultivated the soil… heck, the collapse of the global financial system is but the curtain of a theatre presentation of what is to come. And once the curtain is lifted, you will see a whole array of characters sing songs of destruction and decay. Let’s face it, it’s contraction time. I know it’s tough to be a pessimist realist, but let’s not delude ourselves in the fantasy of immortality. My doubts of China’s coming depression are quite few. Not only does China’s depression seem to be the next logical step after America’s recession, but it will also provide the nexus of what’s coming next: the reversal of globalization, the rise of resource nationalism, and all the wars and suffering that will come with that. I don’t think we’ll make it to 9 billion.

October 3, 2008 @ 10:55 pm | Comment

I don’t know how China can escape a sharp turndown. Even at lower single digit growth rates of 1-5%, the wheels might come off under the weight of the load.

Not that I know what that means, but it seems intuitive. Less orders in factories, less exports, less jobs. The ride is over, please exit to your left. Economies expand, economies contact. Any idea what China will do in a contraction? What’s that look like? Because it’s coming sooner or later.

October 3, 2008 @ 11:28 pm | Comment

I have to agree with you Juan. It’s coming and it will hit hard, very hard. I think that in our lifetime, we will witness the unthinkable.

Btw Raj, just think about MSN, sending pure non encrypted text over the net. I’ve posted your link in another thread.

About the China depression, 2009, no doubt on this. Might not be a depression as per say, but it will be very turbulent. As mentioned before, the number one thing that it could bring is social instability. The party will be over and the hangover will be brutal.

I continue to think that what is happening right now could all be a big scheme to slow down the “Rise of the Dragon”. Economical warfare is nothing new and a full front physical confrontation with China is too risky. So what best way to hurt them ? Cripple their economy and shut down the money tap (US exports).

As Juan said, the reversal of globalization is probably one of the major goals right now. The domino game is just not a sustainable model (unless we have a world government, but that’s another story, maybe they wish people will beg for it ?).

The thing is, people refuse to think the unthinkable. That leaders can elaborate complex scenarios to achieve higher goals. My thinking is very simple: If a bunch of bozo like us can come up to the same ideas or conclusion, why some of the best brains in the world couldn’t ?

As for the future of China, sadly, it’s not very bright. The north is drying up, water scarcity will become a huge issue in the coming years (mix this with billions of people and you envision the scenario), coastal regions are menaced by rising seas, 70% of the lakes and river are heavily polluted, etc, etc. The list is long.

Every time I look outside my window, I see the sea of building as far as my eye can reach. It’s depressing beyond imagination. If this is the future of human kind, then I won’t bother to come back in my next life… This kind of civilization development is an abomination and it spells DOOM in big neon letter.

Like it or not, China is a threat to the world. It’s not a threat because of the people or even the government. My wife is Chinese and I have a lot of respect for Chinese people.

China is a threat because she’s the unlucky second runner in the industrialization race. And now she’s trying to catch up, but at what price ? Just look at what our western civilization did. We destroyed the planet in 100 years, with few people. Now just picture for one moment, 1.3 billions peoples living the same pace as we do ? It’s just not possible. SO be it the West or China that will fall, somebody will have to. it’s utterly depressing and a very grim possibility, but I think we are sadly reaching this point of no return. And our leaders, do you think they are not aware of that ?

Note: I want to really make it clear that China is not the bad guy, or anybody else. So please read carefully what I’ve stated. It’s a common problem for the world whole right now, nobody is out of the loop.

October 4, 2008 @ 12:05 am | Comment

“This bill does nothing for the Addie Polks of the world,” Kucinich said after telling her story. “This bill fails to address the fact that millions of homeowners are facing foreclosure, are facing the loss of their home. This bill will take care of Wall Street, and the market may go up for a few days, but democracy is going downhill.”

http://www.cnn.com/2008/US/10/03/eviction.suicide.attempt/index.html

Anybody watched American Cyborg on ICS recently ? Are we going there ? So sad… really. I wonder sometimes why is it that anything that humans can envision, becomes reality.

October 4, 2008 @ 1:54 am | Comment

And oh… The bill just passed.

Economy in need of a fix! On your knees people, and thank the lord, you just have been saved… ๐Ÿ˜‰

October 4, 2008 @ 1:57 am | Comment

http://money.cnn.com/video/ft/#/video/fortune/2008/10/02/fortune.mpw.buffett.bailout.fortune

Congrats Buffet, you can now take your 1%, like many others will do.

October 4, 2008 @ 1:58 am | Comment

Big… Huge… Farce…

October 4, 2008 @ 2:04 am | Comment

I agree with juan and bao. It doesn’t make sense to isolate economic issues from the much bigger picture of what is happening around us.

The myth of permanent, unending economic growth is slowly falling apart. The future is different to what we thought.

However, I am not overly pessimistic. The challenges we face offer the chance to learn from our mistakes.

October 4, 2008 @ 2:06 am | Comment

I agree with juan and bao. It doesn’t make sense to isolate economic issues from the much bigger picture of what is happening around us.

The myth of permanent, unending economic growth is slowly falling apart. The future is going to be different to what we believed, but we don’t know how.

However, I am not overly pessimistic. The challenges we face offer the chance to learn from our mistakes.

October 4, 2008 @ 2:08 am | Comment

Learn from what ? The same thing that we already learned 3 times at least previously ? In the last 100 of years ? Now is not the time to learn, now is the time to react and act. The communication era is a blessed gift to our generation, let’s use it wisely, and maybe we can prevail. But I doubt it.

October 4, 2008 @ 2:11 am | Comment

We’re gonna meet the fate that every other animal has met with when they overpopulate in a limited environment: collapse. The end of us? Probably not. But let’s just say that that 9 billion figure will look more like a billion or two by the end of the century. After a momentary high, our addiction to civilization will come crashing down back to nature to face the ultimate realities, and not the deluded fantasies of civilization. Does that mean that there won’t be any more civilization? I doubt it. Just means that a new system of civilization will come in line that does not try to live away from nature, that does not try to deny the fact that man is part of nature, but that admits to it and fuses the two in one.Hopefully, this is what happens. I’d rather live in a world that fuses man and nature than in a world that fuses man and the machine.

October 4, 2008 @ 2:56 am | Comment

Quite happy to finally find an echo here…

October 4, 2008 @ 3:41 am | Comment

Environmental pollution, sustainable development, energy, clean water, and poverty in the third world are still more pressing problems than the housing meltdown and the crises in the US financial market. The US real estate market and financial problems are all man made problems. Not the result of global climate change, a hurricane or other uncontrollable act of nature. The underlying problem was creed, dishonesty and irrational behavior or people. The problem is fixable by people. Unfortunately there will be a broader economic impact, a recession. We have been fighting a recession since before Bush came into office. by trying to avoid it it has only become worse. I’ve lived through many recessions. Sure it sucks if you are a recent graduate looking for a job, but it is not a depression and we will get through it. The annual $100B iraq war supplemental is making a a bad situation worse and limits the ability of the US government to respond to the economic downturn.

The real questions are will we work together to handle the real problems of environmental pollution, terrorism, sustainable development, energy, education, health care, biodiversity, clean water, and poverty in the third world. Those are things that can cause a world depression or worse.

October 4, 2008 @ 5:37 am | Comment

Does it have anything to do with people who just live off the profits of others without contributing any productive actions to the benifit of the economy and society to which they live under. Some things are useless ‘Dead Wood’.

October 4, 2008 @ 2:13 pm | Comment

Speculators are useful beings. Like the predators that weed the old and sick individuals in the nature world. They trim the system…, and may have a “food feast” in the process.

But this time there were too many of them. A plague of greedy speculators with too much money (leveraged) looking for too much profits.

Like in nature, correcting extreme situations can be painful.

Hope the hang over do not last too long.

October 4, 2008 @ 3:34 pm | Comment

About China crash. They may crash one day, but all predictions have fail until now.

Maybe they will crash when nobody expects it. That is the way with crisis, they happen in the lest expected time.

The problem is not when, or how hard it will hit, rather how will China weather it.

It will be a maturity test for the country. Funny speaking about maturity for such an ancient country…

One thing I am sure, when and if it comes there is not much the outside world could do to help out. They will have to weather it on their own.

We shall see…

October 4, 2008 @ 3:40 pm | Comment

I don’t believe we are doomed. We could build huge solar power plants in the
Desert. We understand a lot more about what is happening to our environment and the impact we have upon it.

The trouble is that humans have failed spectaculerly to adapt to what we know is going on. The idea that we could continue on the same trajectory of growth but somehow make it more ‘sustainable’ through legislation and changes in behaviour , has not worked. Instead,we are fated to learn the hard way. A broken dream, chaos, panic, anarchy.

I think that every country in the world is affected by this situation, but some more than others. Countries with food and energy are likely to fare better than others. This is the future.

People that continue to think of this as a cyclical economic drama are going to be proved wrong.

October 4, 2008 @ 6:34 pm | Comment

China may be ancient, but the People’s Republic of China is not.

October 4, 2008 @ 8:18 pm | Comment

gwyn, that’s kind of cryptic. No existing government is ever ancient, is it?

October 4, 2008 @ 9:26 pm | Comment

That was kind of my point, though I was a bit too vague about it. The fact that people have occupied the land mass of modern china for several millennia (and thus can be called an ancient country) should have little or no bearing on whether or not the PRC is mature enough to handle a possible economic crisis.

Indeed, there are governments that some may consider quite mature that are making a bit of a hash of the current situation.

October 5, 2008 @ 12:44 am | Comment

A very good article. I do have one reservation, but perhaps I simply misunderstood. You seem to imply that the American Republican Party is similar to the Communist Party or policies. If that is the implication you are making (and I may be wrong in interpreting what you are saying) this indicates a basic misunderstanding between Communism and Republicanism. Especially in the light of the last 70 or so years (since the days of FDR in America) the Democratic Party as taken on more and more Communist policies each and every year until now it is almost impossible to differentiate it from the Communist Party. Socialist and Communist policies run rampant throughout the American Democratic Party. Examine the policies of their presidential candidate this year, almost completely Marxist in nature!

October 5, 2008 @ 1:58 am | Comment

China has faced economic crisis before and this one will impact her much less than those of domestic origins. China had economic contractions in both 1989 and 1997 and this/next year seems to be in time for the trend to continue. To call China will experience a depression or even a recession is not accurate, not unless you regard anything below 10% growth as going backwards. There have been other global financial panics before in which economies similar to China’s have weathered fairly well. The growth rate of the other Asian tigers were impacted by crisis in America and Europe somewhat but still continued chugging along with growth rates that were still quite good. China is less dependent on Europe and America for growth than South Korea and Taiwan are.

October 5, 2008 @ 2:37 am | Comment

Russell, thanks for visiting, but I have to say, you’re one scary guy.

October 5, 2008 @ 8:34 am | Comment

Russell,

You have made a very good point. Democratic party has strong socialism tendancy and has fought for the poor in housing. It has pushed two GSEs into lending to the poor with worse credit. This policy certainly help the poor in the short term and get the housing they has dreamed of. But in the long run, this policy ruined the poor, just as socialism has done for China in the early years, unfortunately.

I noticed that Saturday night live seems to understand this issue. I am wondering how much Americans will understand this issue.

I watched a video on Youtube that Barney Frank is ranting that two GSEs are fundamentally sound when republican tried to regulate these two GSEs. With Obama’s win, US will have the same people to solve the problem they created. Not bad China.

October 6, 2008 @ 1:05 am | Comment

Russell is right. How does the current bailout looks in you eyes ? If this is not pure socialism, then what is it ?

This bailout has 2 goals: Enrich the richest and give control to the governments. Europe is currently starting to envision talking similar measures… on a smaller scale. Why ?

In my eye, the line between the US parties is blurring everyday.

October 6, 2008 @ 1:07 am | Comment

Where Russell is totally off is his not recognizing that it is under Bush that we have crossed over into true, unmitigated socialism. And his last line is so wrong it hurts. Obama a Marxist? He is totally mainstream.

October 6, 2008 @ 8:06 am | Comment

“Obama a Marxist? He is totally mainstream.”

Obama is very cautious in his public statement. He has rarely taken a position beyond mainstream. That is not surprising because of his profession as a lawyer. However, if you look at his friends, he is really on the far left.

NYT claims that Obama only has sporadic path with the terrorist. Well, that terrorist Ayers help Obama launched his political career. How many politicians have Ayers helped to launch a political career? Obama is certainly much close to Ayers than many other people. It is reasonable to say that Obama and Ayers share similar philosophy and world view.

I do not know whether Ayers is Maxist. But he is certainly much closer to Maxist than to capitalist. Obama’s win can be really called the sweet revenge of 60’s radicals. Richard, you may enjoy that revenge. But remember, many 60’s radicals are the fans of Mao.

October 6, 2008 @ 12:03 pm | Comment

However, if you look at his friends, he is really on the far left. However, if you look at his friends, he is really on the far left.

Yeah, like the former head of Fannie and Freddie? Obama has lots of friends. You don’t know if any are Marxists. There is nothing in his record to even hint at marxism. Yet you think it’s okay to call Obama a Marxist. That is Little Green Footballs and Michelle Malkin logic and I have a low threshold for it. Ayers committed a stupid and inexcusable act of terrorism when Obama was 8 years old. It’s 40 years later. You have no idea how close Obama is to Ayers and not a leg to stand on to back up your dumb claim that, “It is reasonable to say that Obama and Ayers share similar philosophy and world view.” As if Ayers is his mentor.

There is evidence of how close McCain was to financial terrorist Charles Keating who’s actions hurt far more people than anything Ayers ever did. You’ve got less than squat when it comes to Ayers-Obama, but with McCain-Keating you have library, including video and photos and hearings. This guilt by association thing will backfire badly on McCain.

I’ve always given you a lot of latitude commenting here Steve. But this is really over the top. Not a single word you write makes any sense. Literally, go through it sentence by sentence – how dumb can one comment be from start to finish?

Go to that link above and you will see actual evidence about McCain-Keating, and not from left-wing sites. There is nothing anywhere on Obama and Ayers that is damning except on NRO, Washington Times, Boston Herald and the right-wingnut sites. This is when you know the McCain tank is totally empty.

October 6, 2008 @ 1:44 pm | Comment

“There is evidence of how close McCain was to financial terrorist Charles Keating whoโ€™s actions hurt far more people than anything Ayers ever did.”

Richard, that link is discussed in John McCain’s biography in 2002. He made a mistake then and he admitted it. That mistake is one key reason to drive him to become a reformer.

Obama has published two Memoirs and did not discuss this issue at all. Hillary questioned his link, but dare not to dig deeper.

“Iโ€™ve always given you a lot of latitude commenting here Steve. But this is really over the top. Not a single word you write makes any sense. Literally, go through it sentence by sentence – how dumb can one comment be from start to finish?”

Do not get upset. I think Obama will win because of shitty economy. I just want to point out the irony I see amusing. To a great extent, John Kerry’s loss can be traced back to the culture conflict of 60’s. Obama’s Ayers link is to relive that culture conflict. This time 60’s radicals will finally end up winning.

October 6, 2008 @ 2:05 pm | Comment

This time 60โ€™s radicals will finally end up winning.

Yeah, okay. Good analysis. You make a brilliant point.

Anyone who wants to bring up Ayers as a serious issue, as something that makes Obama a person we should not vote for should go to NRO or Michelle Malkin or Frontpage or wherever. Same with that Chinese fellow Norman Hsu who donated all that money to Hillary Clinton. Or even Charles Keating – I hate guilt by association, irrelevant stories that the other side blows out of proportion to make the opponent look bad. If Ayers is fair game, so is Keating. Obama never used the Keating association before to slam McCain, but now that Failin’ Palin is using this desperate tactic Obama has little choice. What a shame, to turn away from the huge crises we face to talk about BS based on who Obama or McCain may or may not have been friends with. This is why I positively hated it when Clinton’s association with Hsu, an indicted swindler, was used earlier this year to slime her. These are diversionary tactics, they are shit. Am really sorry to see that they worked on you, Steve – that since Ayers was once a radical leftist, and since maybe he had some undefined or amorphous relationship with Obama that you don’t know or understand, then the bottom line somehow leads to a conclusion Obama leans toward Marxism. Never mind the irrationality of the argument – the fact that you arrived at that bottom line is exactly what the GOP spinners want. You swallowed the bait. You even fell for the lie that the Keating episode transformed McCain into a reformer. And they all lived happily ever after.

This is red meat for the Malkins of the world, who insisted Hillary C. was “stained” by her association with Hsu. It’s pure horseshit, of course, but it creates the necessary smokescreen and the right is dancing in the streets. It won’t help because there’s nothing there, but it will raise the Keating affair into everyone’s conscience.

Anyway, as I said, anyone who wants to make this an issue against Obama is welcome to leave a comment that will be treasured over at Michelle’s or Chuck’s sites.

October 6, 2008 @ 4:53 pm | Comment

Just a small clarification, although Gordon Chang is often and easily lampooned, his prediction (forecast?) was that China would likely ‘collapse’ within the decade (the book was published in 2001) and so he has until January 1st 2011 to say ‘I told you so’.

October 7, 2008 @ 9:09 pm | Comment

I beg to differ, a persons associations are important. They indicate what kind of decisions they have made in the past and, hence, what kind of decisions they may make in the future. They reflect the individuals character.
Much has been made about the relative difference in the time of Ayers terrorist actions and his association with Obama, I feel this is be irrelevant. Predominantly due to the fact that Ayers himself has said he would repeat his actions and wished he had done more.
The time is of no consequence here, for example, if I say I admire Abraham Lincoln, the 16th President of the United States, that does say something about me. Regardless of the fact that our lives are separated by many, many years. It would indicate something about my thoughts, my values, and hence my decision making process.
The same goes for each and everyone one of us. There is a reason we have the old adage, “You are known by the friends you keep”. We have it because through the ages mankind has found it to be true over and over again. It applies to me, it applies to you, and it also applies to Obama.

October 12, 2008 @ 2:09 am | Comment

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