China: Boom or Bust?

In recent weeks we’ve seen a flurry of articles about China’s slowdown and whether the country has the ability to keep social order intact as things slow down. I am not an economist, but I’ve followed these stories with great interest. I have many friends working in China, and the last thing I want to see is a US-style financial meltdown that could wipe out opportunities for millions of Chinese.

That China is slowing down dramatically is a matter of fact, not debate. Even those who are the most optimistic about China’s future say there is no denying that in the foreseeable future we won’t see the 9 percent growth rates we’ve so gotten used to. The difference of opinion deals with how China deals with the slowdown and whether it can avoid a hard landing. Another thing I believe all parties agree with is that no matter how things end up, China will remain an economic engine of huge global influence. China won’t go away, and its importance as an economic superpower will remain largely intact.

I want to look at a link from several weeks ago that caught my eye, a piece in Forbes by the founder and CEO of the highly respected Straford think tank. If you look through their archives you’ll see they have no bias against China. The article is decidedly pessimistic about China’s economic prospects in the near future, the country being caught between the rock and the hard place of needing to keep the economy growing and needing to rein in uncontrolled borrowing.

Beijing was terrified of unemployment and the social consequences that flow from it. This was a rational fear, but one that contradicted China’s main strength, its wage advantage. Because the Chinese feared unemployment, Chinese policy, manifested in bank lending policies, stressed preventing unemployment by keeping businesses going even when they were inefficient. China also used bank lending to build massive infrastructure and commercial and residential property. Over time, this policy created huge inefficiencies in the Chinese economy. Without recessions, inefficiencies develop. Growing the economy is possible, but not growing profitability. Eventually, the economy will be dragged down by its inefficiency.

As businesses become inefficient, production costs rise. And that leads to inflation. As money is lent to keep inefficient businesses going, inflation increases even more markedly. The increase in inefficiency is compounded by the growth of the money supply prompted by aggressive lending to keep the economy going. As this persisted over many years, the inefficiencies built into the Chinese economy have become staggering.

The second thing to bear in mind is the overwhelming poverty of China, where 900 million people have an annual per capita income around the same level as Guatemala, Georgia, Indonesia or Mongolia ($3,000-$3,500 a year), while around 500 million of those have an annual per capita income around the same level as India, Nicaragua, Ghana, Uzbekistan or Nigeria ($1,500-$1,700)… Stimulating an economy where more than a billion people live in deep poverty is impossible. Economic stimulus makes sense when products can be sold to the public. But the vast majority of Chinese cannot afford the products produced in China, and therefore, stimulus will not increase consumption of those products. As important, stimulating demand so that inefficient factories can sell products is not only inflationary, it is suicidal. The task is to increase consumption, not to subsidize inefficiency.

We’ve all heard about the necessary shift in China from relying on exports to adopting a more domestic consumption-based model. But that’s not realistic. Chinese people still save more than they consume, and the market to buy all the goods China produces simply isn’t there. I highly recommend reading this entire fascinating article. It’s scary as hell.

China has recently tried to cool off its real estate buying and selling frenzy and has tried to rein in the banks, something they have been schizophrenic about, as the more they try to cool things off the greater the possibilities of greater unrest. That’s why they’ve tolerated over-production and endless construction. Some Chinese argue that all that new housing in urban areas is necessary to fulfill the government’s strategy of moving millions of Chinese from the countryside to cities to improve their lives. but so much of what is being built is middle-class and even luxury housing. Can migrant workers possibly be expected to afford living there? (No.)

There is no easy way out. The best China can do is try to forestall the inevitable for as long as they can, and try to take measures now that will soften the impact.

They continue to have a command economy; they are still communist, after all. But they cannot avoid the consequences of their economic reality, and the longer they put off the day of reckoning, the harder it will become to recover from it. They have already postponed the reckoning far longer than they should have. They would postpone it further if they could by continuing to support failing businesses with loans. They can do that for a very long time — provided they are prepared to emulate the Soviet model’s demise. The Chinese don’t want that, but what they do want is a miraculous resolution to their problem. There are no solutions that don’t involve agony, so they put off the day of reckoning and slowly decline.

Around the same time, Paul Krugman, whose economic predictions tends to always be right, wrote that China has hit a wall. An economic crisis isn’t coming, it’s already here.

Wages are rising; finally, ordinary Chinese are starting to share in the fruits of growth. But it also means that the Chinese economy is suddenly faced with the need for drastic “rebalancing” — the jargon phrase of the moment. Investment is now running into sharply diminishing returns and is going to drop drastically no matter what the government does; consumer spending must rise dramatically to take its place. The question is whether this can happen fast enough to avoid a nasty slump.

And the answer, increasingly, seems to be no. The need for rebalancing has been obvious for years, but China just kept putting off the necessary changes, instead boosting the economy by keeping the currency undervalued and flooding it with cheap credit. (Since someone is going to raise this issue: no, this bears very little resemblance to the Federal Reserve’s policies here.) These measures postponed the day of reckoning, but also ensured that this day would be even harder when it finally came. And now it has arrived.

China’s slowdown, he argues, would create or at least greatly contribute to a global slump. He concludes, “No doubt many readers are feeling some intellectual whiplash. Just the other day we were afraid of the Chinese. Now we’re afraid for them.”

My view is that the “day of reckoning” will have to arrive, but this being China it might still be years away. The problem is the longer they put it off the more painful the crash will be. All economies have to go through recessions, and China’s can’t put that off forever. There has to be a time when it reaches a breaking point, where factories can’t keep producing goods no one is buying and developers can’t keep building ghost housing. Yet China never ceases to amaze me with its ability to plod forward and put off the catastrophe many economists have predicted for years, even for decades.

One last article to look at. Michael Pettis, a very well-regarded professor of economics at Beijing Daxue, argues that the slowdown China is now going through doesn’t need to be as awful as some predict, even if it goes down to 4 percent growth a year.

An orderly rebalancing, in which China’s savings rate declines steadily relative to investment, implies a contracting trade surplus that will add net demand to the world. A disorderly rebalancing might imply an explosion in the trade surplus that would weaken an already struggling global economy. Whether slowing Chinese growth is good or bad overall for the world, in other words, depends on how it affects China’s balance of trade, and this depends on how swiftly and forcefully Beijing is able to constrain credit growth and rebalance the economy.

How a Chinese slowdown affects the global economy, in other words, depends crucially on how China rebalances. The seeming determination of Premier Li Keqiang to come to grips with debt and force a rebalancing even if that brings, as it must, a sharp slowdown in economic growth bodes well for an orderly rebalancing which will benefit most of the world.

What about the social impact of slower Chinese growth – can ordinary Chinese tolerate growth rates much below 7 percent? The same process that determines the impact of slower Chinese growth on the rest of the world will also determine how it will affect ordinary Chinese.

Pettis compares China’s slowdown to what we’ve seen in Japan, and argues that maybe, like Japan, the Chinese won’t care so much about the declining GDP as long as their own family’s disposable income is enough to meet their needs. Again, I’m no economist, but it seems to me Japan had a crucially different situation because so much of its population was already very comfortable financially when the decline arrived. They had/have enough to keep on buying goods. In China, most citizens aren’t that lucky and may not be able to deal with the impact of a massive slowdown.

For every theory you may have about China’s economy you can find the data to support it. Ongoing prosperity or a financial catastrophe. I don’t pretend to know which, if any, of these scenarios plays out, but I do know that the current slowdown will have to have gut-wrenching effects at some point in the future. I hope China’s leaders can apply their “scientific” approach to economics and save China from a hard landing. But they have a daunting task, and no matter what they do, somebody’s going to be hurt, eventually.


David Vranicar’s “The Lost Graduation”

Can it really be five years since our Great Recession hit? I was in Beijing at the time the ax fell in the Spring of 2008, first with the sudden death of investment house Bear Stearns and the shocking chain reaction that ensued. I felt distant from it at first, but I was not immune. Within six months I and other Westerners at my firm would find ourselves laid off as the company lost clients. Luckily I got another job very quickly, but many millions of Americans would not have it so easy.

David Vranicar is the brother of this blogger, whose praises I often sing (and I wish he would update his blog more frequently). David is also the author of a book, The Lost Graduation: Stepping Off Campus and into a Crisis, that has been waiting to be written: a page-turning memoir of a college grad in the class of ’08 and his search for employment as things go from bad to worse to unbearable. Along the way, he manages to walk us through the calamity of America’s falling employment numbers and lost opportunities, humanizing what at the time seemed like a bundle of meaningless statistics. The never-ending stream of bad economic news is seamlessly woven into the very personal story of Vranicar’s plight. He writes in a funny, self-deprecating style and there are many long laughs along the way. But the story itself is tragic, heartbreaking. So many young people living in the bedrooms where they grew up, with parents who are as anxious as they are about their future. The shock waves of month after month of worsening economic news, soon to be year after year.

To make matters worse, David is a journalism major whose dream is to work as a sports reporter, just as one newspaper after another folds and more and more unemployed journalists join the competition for scarce jobs in a dying field. He comes so close to landing opportunities, only to watch them disintegrate in front of his eyes.

I’ve read countless articles about the “lost generation” and the difficulties they will face for years to come, if not forever. But Vranicar’s book offers the perspective of an actual victim, his day to day travails and attempts to keep his head above water and his spirits high even when his job search leads to countless dead ends.

Needing to do something, Vranicar is led by fate to Shandong’s capital city of Jinan to teach English. He captures the horrors of teaching young, bored, hyperactive Chinese children and of living in a dorm adorned in front with a stream of sewage, dubbed Shit Creek by the teachers. But life in Jinan isn’t all horrible; the teaching hours are short and there’s plenty of time to travel and explore. This section and other descriptions of his days overseas are a welcome relief from the painful rendering of looking for a job in a jobless America. Improbably, Vranicar ends up studying in both Copenhagen and Amsterdam, where he is amazed at the generosity of socialist countries – scholarships, stipends for their foreign students, summers at the beach, etc.

The book does not have any happy endings. Vranicar has no steady job, but after all he has gone through his spirit has not been defeated. He has learned resiliency and resoluteness. As he says at the end,

[W]hile the recession has altered the fortunes of so many, it has also steeled us against the worst. We have learned how to cope with what’s been lost, and to keep our eyes open for what can be found.

The Lost Graduation is a bittersweet microcosm of the plight of college graduates in the Recession Age. It paints vivid pictures, not just of the author’s hometown of Kansas City but of the cities he visits such as Jinan, Amsterdam and Copenhagen, and brilliantly interlaces history and current events and numbers that are too painful to believe into a very human, poignant and moving story. I was charmed throughout; you will be, too.


My country

I know, the story and the photo and the video are everywhere. But I have to express my horror.

A friend in China tells me CCTV is playing this again and again, and I don’t blame them. They want to make the US look bad, and in this case they don’t have to try very bad; the US hasn’t looked this awful since Abu Ghraib. Heads should roll over this atrocity.


Occupy Phoenix

Best picture I could take at Occupy Phoenix, using my phone; I know, it’s kind of blurry.

I just came from the demonstrations here in downtown Phoenix and was surprised, in a good way, at what I saw. Thousands of polite, civil, friendly protestors had gathered, and I would say that maybe half of them were white collar people in their 40s, 50s and even 60. Lots of youth, but lots of white hair, too. There was no name-calling, no littering, no shoving, not the slightest hint of violence. I bring this up because the new insidious meme from the right is that those participating in the demonstrations constitute a “mob.” Of course, they considered the Tea Party demonstrations a gathering of patriots. The Occupy crowds, in their eyes, are dirty hippies and anarchists. Which, of course, is total nonsense.

There was no leader, just a string of speakers. The message was simple: there is a huge injustice in America, and the criminal bankers are rewarded for their sins at the expense of the working and middle classes. The goals are simple, too: tax reform, with more taxes on the rich and relief for the less fortunate; greater stimulus to create jobs; and transferring power from Wall Street and corporations to the people the government is supposed to represent. (I know, that’s easier said than done.)

There were the expected idiots, but very few. I’m talking about Truthers with their signs about 911 being an inside job, and the Ron Paul kooks with their monolithic call to “end the Fed.” They were few and far between, but it’s always signs like theirs that the right-wing seizes on to show how deranged liberals are. I kind of wished they’d disappear. Free speech has its pluses and minuses.

The police were everywhere, quietly watching. I even chatted with one about a deranged demonstrator who was reading from the bible at the top of his lungs trying to drown the speakers out. The cop said he’d love to do something, but everyone’s allowed their say. From the way he said it, I’m betting he was sympathetic to the demonstrators.

According to the latest poll I saw, 52 percent of Americans now support the Occupy movement, and 27 percent support the Tea Party. Finally, a movement is bringing together groups that have often been at odds: white collars and working-class workers, young people and old, social rebels wearing masks and clearly challenging the status quo, and the status quo itself — ordinary Americans who brought their entire families with them.

The Phoenix event may have been a bit too polite. It needs to be a little more disruptive and in-your-face. That’s a fine line to balance, remaining civil while generating outrage. But it has to shake up the system, like they’re doing in New York. Meanwhile, I’m doing everything I can to support this movement and urge you all to do the same. We’ve never seen anything like it in America in our lifetimes, and it is so long overdue.


China quick to label Egypt uprising as “chaotic”

We all know the line abut Tiananmen Square, that we can only thank God the CCP saved China from chaos by cracking down on the protesters by whatever means necessary. This argument was carried to another extreme in the case of Russia, where the rapid switch to democracy plunged the nation into chaos. Every schoolchild in China knows about that. And now Egypt. Seems like whenever a dictatorship is threatened, the CCP feels the need to desperately convince its citizens that change equals chaos.

Egypt may well be facing chaos. Russia indeed went through a long period of chaos. The protests in Tiananmen Square were nothing if not chaotic. But sometimes chaos is part of a phase toward stability. Often the relatively brief period of chaos ultimately leads to something better than the decades of oppression that preceded it. But that’s not how the CCP sees it, and they were lightening-swift in branding the Egyptian protests as an invitation to chaos.

Censoring the Internet is not the only approach. The Chinese government has also tried to get out ahead of the discussion, framing the Egyptian protests in a few editorials and articles in state-controlled news publications as a chaotic affair that embodies the pitfalls of trying to plant democracy in countries that are not quite ready for it — a line China’s leaders have long held.

The English-language edition of Global Times, a populist newspaper, ran an editorial on Sunday about the Tunisian and Egyptian protests with the headline “Color revolutions will not bring about real democracy.” Though Global Times is not the official mouthpiece of the Communist Party, the message of the editorial was consistent with official thinking, saying bluntly that whether democracy “is applicable in other countries is in question, as more and more unsuccessful examples arise.”

….Some of the news coverage of Egypt that has appeared in People’s Daily, the Communist Party’s main newspaper, and Xinhua, the official news agency, has focused on attempts by China to evacuate its citizens, simply leaving out the political discontent at the root of the unrest.

Of course, if I didn’t know better, I might think the party was nervous about its own people seeing what’s going on in Egypt as a good thing, and getting their own ideas about how it might be time to try the same approach in China. Now, as I said in my last post, this is a pretty groundless fear. There is no reason to believe the Chinese will take to the streets and risk life and limb to tear down a regime that most of them see as a vast improvement over what they had before, or that they at worst see as a necessary evil. But the CCP always gets the jitters when it sees people anywhere rising up to demand democratic reforms.

The “C word” is a very powerful tool for convincing people to shut their pie holes and get back to work and be happy for what they’ve got. For a society taught at birth to prize harmony over nearly everything else, nothing can be more terrifying than the threat of chaos. So it’s hardly a surprise to see the propgandists spinning their wheels to get the chaos meme out there, while censoring like mad to keep awareness of the Egyptian protests at a minimum. They have to worry that a lot of Chinese people are watching Egypt closely, despite the censorship and propaganda:

….Zhao Jing, a liberal Chinese blogger who goes by the name of Michael Anti, said that “it was amazing netizens on Twitter cared about Egypt so much” that they had begun drawing parallels between China and Egypt. President Hosni Mubarak of Egypt was being called Mu Xiaoping, a reference to Deng Xiaoping, who quashed the 1989 popular protests in Beijing, while Tahrir Square in Cairo was being compared to Tiananmen Square.

But that interest isn’t translating into rebellion. The government should be a little more secure. They’ve made it nearly impossible for a challenger to arise and take their place, and despite the buzz on China’s social networks, the Chinese are in no mood for another Tiananmen Square. Conditions would have to be a lot worse, with more people convinced they had nothing to lose. Maybe someday not too far off, but not today.


Why political reform in China is inevitable

Tom Friedman, one of my least favorite columnists, has a worthy enough (if typically simplistic) column today about the need for China to embrace political change. It all boils down to economics. The country simply can’t prosper until it’s instituted meaningful political reform.

Can China continue to prosper, while censoring the Internet, controlling its news media and insisting on a monopoly of political power by the Chinese Communist Party?

I don’t think so. To be sure, China has thrived up to now — impressively — by permitting its people only economic liberty. This may have been the sole way to quickly take a vast country of 1.3 billion people from massive poverty to much-improved standards of living, basic education for all, modernized infrastructure and even riches for some urbanites.

But the Nobel committee did China a favor in sending the tacit message with its peace prize: Don’t get too cocky and think that you have rewritten the laws of gravity. The “Beijing Consensus,” of economic liberty without political liberty, may have been a great strategy for takeoff, but it won’t get you to the next level. So this might actually be a good time for Beijing to engage peaceful democracy advocates like Liu [Xiaobo], who is now serving an 11-year sentence, or the 23 retired Chinese Communist Party officials who last week published an open letter challenging the government to improve speech and press freedoms.

As China ages, Friedman contends, it has to move from low-wage manufacturing jobs to more “knowledge- and service-based jobs.” Has to. So you have the usual conflict: a government that wants to control everything and shape its people’s thinking, countered by market forces – China’s growth can only go so far without a problem-solving, innovative workforce.

Dovetailing with this column today is this new piece by my friend and fellow blogger Paul Denlinger on why Wen Jiaobao is thinking along the same lines, and why he will push for more political reform. Denlinger argues that you can’t balance so much social change with so little political change. I’ll just snip two of his seven reasons as to why this is so.

4. China’s president, Hu Jintao, is obsessed with social harmony and stability as his legacy, but Wen thinks that this is a pipe dream. Wen thinks that social change is happening faster than the party, government leadership understand.

5. Wen feels that the current leadership continues to think that economic growth is the answer to China’s problems when past growth rates are no longer possible.

This topic seems to be taking on a life of its own. I think that Liu Xiaobo’s winning the Nobel Peace Prize will continue to fan the flames, and that those who said Oslo’s choice would have no ramifications in China are dead wrong. China’s fate depends on more liberty. Wen knows it, Liu knows it, I know it. Manufacturing can’t and won’t soar forever. What’s next? China has to prepare for the inevitable.


It’s a sign of the times


“Even the dead are now homeless.” Via JSMineset.

Don’t get me wrong; I love America, just as much as I love China. But things over here seem so FUBAR, and there is absolutely nothing that can be done. These are structural issues that run deep into the heart of how the US is “managed.” It will take generations to undo the damage caused by the bankster elites, who dine on lobster, truffles and caviar as the Americans they’ve screwed eat dirt. In between, we’ll mainly see stagflation and eventual inflation that will erase much of what’s left of the American Dream. It was fun while it lasted. Enjoy life’s simple pleasures while ye may.

Sorry if I’m not beaming with optimism tonight.


“How are we so different from China?”

Ben Bernanke made a stir today with a speech indicating (if you read between the lines) more quantitative easing via increased economic stimulus. There are two violently different schools of thought about this; some see it as the road to Armageddon, others see it as the only way to save us from a Japan-style deflationary malaise. I won’t argue about that, except to say that I think Bernanke had no choice. He is so damned if you do, damned if you don’t, and there’s literally no way out. And so we will continue flooding the system with money and propping it up with IOUs, and we will eventually see some serious inflation (that could still be some months off). There really are no good choices under the current situation.

Which brings me to a very interesting post from Zero Hedge, in which the pundit reads Ben’s mind.

You can really see into his head from reading this speech. He is an academic who thinks he is smarter than everyone else which is why he is in the position he is in. He thinks the key to monetary policy is to trick people into doing things that will hurt them in the end. He believes the mal-investments he intends to push people and institutions into equals economic growth. What surprises me so much about the investment community and the American public in general is that so many fail to understand that we live in a top down centralized economic system much more similar to China in more ways than people want to admit. We look at how the government steers the economy in China and sneer. How are we so different right now?

Well, I still see plenty of differences; we don’t have the outrageous waste and unaccountability of China’s state-owned enterprises, for example. But on the other hand, we are witnessing an unprecedented top-down intervention, for better or for worse. And I don’t see that we have any choice. The only thing that would be worse would be turning off the spigot and risking a complete collapse. Either way, we’re in trouble. You can’t keep printing money and devaluing the currency without eventually seeing some serious inflation. And that seems to be the path we’re heading down. Inflation has some advantages (it makes it easier to pay our debts), and the Fed will do everything in its power to hold off a deflationary depression, though some say we’re already in one.

Bottom line: Be careful with your money, and buy gold (and silver, at least for now – it’s on a tear). Either way, hyperinflation or deflationary depression, gold does well during times of economic uncertainty and doubts about the efficacy of fiat currencies. I am no gold bug (they can be quite scary), I’m just a pragmatist. Printing money may be necessary, but it will have to have consequences that will hurt the dollar. Dollar goes down, gold goes up. Period, full stop.

For the record, I hate economics and know very little about it. but that said, I recommended to all of you back in 2006 that you load up on gold, which I did. Gold was about $680 an ounce back then. Today it’s around $1,240. It may have it’s shaky, scary days, with huge ups and downs. But the trend is upward. The current economic dilemma, the box that poor Ben Bernanke is in, makes its rise all but inevitable.

Read the entire article and its delicious comments.

Update: While you’re at it, definitely check out this article.


China and US debt


For anyone who has the time and fortitude, there’s a very long, detailed and brutal post up on Zero Hedge about China’s insane (in the author’s eye) purchase of US debt and its long term implications, all of which, he says, are terrible.

Not being an economist or a prophet, I can’t say whether he’s onto something or not, but it sure makes for some interesting reading. I’m just going to quote the opening and closing grafs for their sheer evocativeness:

Some people in Asia burn joss paper, also called ghost money, on the Lunar New Year, to give their deceased ancestors something to spend in the afterlife. Because ghost money doesn’t represent a claim on any actual goods or services in this world, there is no reason for its issuers to exercise any particular restraint, and in Singapore it is possible to find notes issued by the First Bank of Hell, with the mythical Jade Emperor’s picture on the front, in denominations ranging into the millions and billions of dollars. Perhaps we’re counting on this charming tradition to make Asian investors comfortable with the prospect of continuing to add to their holdings of European and American sovereign debt, despite the obvious fact that the money they’ve already lent us is money they’ll never get a chance to spend in this life….

In fact, despite its façade of capitalism and modernity, the Party is still making Mao’s mistake of acting first and thinking later. Lending a lot of money to people who will never pay you back is only a symptom of the underlying folly – you have to believe in something that isn’t true to believe that such an insane project is going to work out in the way you want it to, and any fixed untrue belief will eventually injure you somehow….

So modern China is a sort of suicide machine, a train to nowhere with no emergency brake. It is deliberately designed to prevent the passengers from being able to avoid a crash. Not only does the Party espouse false beliefs, it seeks to prevent Chinese people from forming their own, true beliefs in the light of all the available information. Now it turns out it has had them all working long days these last many years just to pile up credit with the Jade Emperor. And who’s down there in Hell, spending it all, no doubt on dancing girls and lavish banquets, and laughing uproariously at your present difficulties? Perhaps the Great Helmsman himself, with Jiang Qing pouring out the wine

In order to see how/why he arrives at this extreme conclusion you need to wade through the whole thing.

Let me say straightaway that I have serious issues with this article, which has a decidedly ethnocentric anti-China slant (though it’s none too kind to the US either). Despite the author’s being a post-doctoral fellow at Princeton, the piece is riddled with ridiculous assertions (anyone who disagrees with the CCP’s policies gets sent off to work camps) and asinine references to Tiananmen Square and Chinese history. But his core point about the danger of China’s strategy-free purchase of US debt and where it might lead is quite interesting, and it’s definitely a fun read (as are the comments).


China’s century? Niall Ferguson says yes.

I’ve always had mixed feelings about Niall Ferguson, the bad-boy of world history, always trying (often successfully) to pull the rug out from under our conventional belief systems and shatter our sacred illusions. His great history of WWI, The Pity of War, was a wonderful if infuriating read; infuriating because he constantly speculated about “what if,” and even arrived at the conclusion that Germany was meant to have won the war and the world would have been better off if it had. (Who knows? But he certainly makes an elegant argument.) He has especially ruffled feathers for praising colonialism and empire.

At the end of his 2006 history of 20th century wars, Wars of the World, Ferguson states matter-of-factly that the age of Western ascendancy has ended, and that of Eastern ascendancy begun. I read the book in Beijing when it came out during the Bush administration and it made perfect sense – America was caught in an impossible place, bleeding money, choked by debt and snagged in two seemingly endless wars. And I was seeing with my own eyes what China was capable of. Now, nearly three years later, things look considerably worse for America, something that didn’t seem possible in early 2007.

The article by Ferguson that I’m looking at today is absolutely a must-read. I know already who it will infuriate and who it will delight. I hear all the praise and all the objections. Allow me to offer a longer-than-usual snip. (I’m tempted to simply paste the entire thing it’s so interesting.)

Back in 2004 I warned that the US had imperceptibly come to rely on east Asian capital to stabilise its unbalanced current and fiscal accounts. The decline and fall of America’s undeclared empire might therefore be due not to terrorists at the gates nor to the rogue regimes that sponsor them, but to a fiscal crisis at home.

The realisation that the yawning US current account deficit was increasingly being financed by Asian central banks, with the Chinese moving into pole position, was, for me at least, the eureka moment of the decade.

When, in late 2006, Moritz Schularick and I coined the word “Chimerica” to describe what we saw as the dangerously unsustainable relationship between parsimonious China and profligate America, we had identified one of the keys to the coming global financial crisis.

The illusion of American hyperpuissance was shattered not once but twice in the past decade. Nemesis came first in the backstreets of Sadr City and the valleys of Helmand, which revealed not only the limits of American military might but also, more importantly, the naivety of neoconservative visions of a democratic wave in the greater Middle East. And it struck a second time with the escalation of the subprime crisis of 2007 into the credit crunch of 2008 and finally the “great recession” of 2009. After the bankruptcy of Lehman Brothers, the sham verities of the “Washington Consensus” and the “Great Moderation” were consigned forever to oblivion.

And what remained? By the end of the decade the western world could only look admiringly at the speed with which the Chinese government had responded to the breathtaking collapse in exports caused by the US credit crunch, a collapse which might have been expected to devastate Asia.

While the developed world teetered on the verge of a second Great Depression, China suffered little more than a minor growth slow-down, thanks to a highly effective government stimulus programme and massive credit expansion.

It would of course be ingenuous to assume that the next decade will not bring problems for China, too. Running a society of 1.3bn people with the kind of authoritarian planned capitalism hitherto associated with the city-state Singapore (population 4.5m) is fraught with difficulties. But the fact remains that Asia’s latest and biggest industrial revolution scarcely paused to draw breath during the 2007-09 financial crisis.

And what a revolution! Compare a tenfold growth of gross domestic product in the space of 26 years with a fourfold increase in the space of 70. The former has been China’s achievement between 1978 and 2004; the latter was Britain’s between 1830 and 1900. Or consider the fact that US GDP was more than eight times that of China’s at the beginning of this decade. Now it is barely four times larger – and if the projections from Jim O’Neill, Goldman Sachs’ chief economist, prove to be correct, China will overtake America as soon as 2027: in less than two decades.

I am not convinced it’s true that China “scarcely paused to draw breath during the 2007-09 financial crisis.” I think the crisis dealt China a severe blow from which it’s still reeling. But…. I still think Ferguson is essentially right, that the pendulum is swinging in anew direction and the balance of power is shifting faster than anyone would have believed just a decade ago.

China is going to have to deal with unbelievable problems. (And yes, so is America.) China’s key cities are in the middle of a property bubble; its environment is so fragile whole swathes of the ecology may be doomed; corruption is so rampant even the central government recognizes it can undo much of the progress of the past three decades; and there are still some 650 million living in deep poverty.

Predictions of China’s collapse appear in the news every day, as do prediction of America’s. I don’t pay these predictions much heed. Things happen far too slowly, with far too much lethargy, for either China or the US to go down in a blaze. Recessions, unrest, turmoil, misery, strife, bankruptcies, economic upheaval – we may see all those things, but I don’t believe we’re going to see either system collapse. What we will see and are seeing, as Ferguson says, is a tipping of the scale, with China gaining influence as US influence wanes. Where the scales will stop is anyone’s guess. I still can’t imagine China as an economic equal – it simply has too much poverty and lack of spending power – but I do see it creeping upwards, at times imperceptibly. It has been better than the US in making sure it gets what it needs to keep the engines roaring, even if it means coddling some of the world’s most unsavory dictators and rogue regimes. And somehow, for all its impossible headaches, it keeps on going.

Ferguson, after making the case for China’s ascendancy, ends on an ambiguous note.

What gave the west the edge over the east over the past 500 years? My answer is six “killer apps”: the capitalist enterprise, the scientific method, a legal and political system based on private property rights and individual freedom, traditional imperialism, the consumer society and what Weber probably misnamed the “Protestant” ethic of work and capital accumulation as ends in themselves.

Some of those things (numbers one and two) China has clearly replicated. Others it may be in the process of adopting with some “Confucian” modifications (imperialism, consumption and the work ethic). Only number three – the Western way of law and politics – shows little sign of emerging in the one-party state that is the People’s Republic.

But does China need dear old democracy to achieve enduring prosperity?

The next decade may well answer that question. Then again, it may take another 500 years to be certain that there really is a viable alternative to western ascendancy.

I think China has already shown it doesn’t need “dear old democracy,” no matter how apoplectic that may make some of its critics. It will lean more and more in that direction, especially as incomes rise and people realize they are not as dependent on the government as it would like them to believe. But democracy as we know it and rule of law – well, despite many encouraging stories of reform, I’m not going to recommend anyone hold their breath.

All in all, I think Fergie gets it right. Looking at China’s history and its staying power, and at its sheer industriousness and optimism, I have to discount the reports of China’s imminent demise. And America’s too. I just think America will keep drifting lower as China edges higher, with lots of painful stumbles along the way.