China is going to have a recession. Not necessarily this year or next year, but it will. That’s just how economies work.
The frantic efforts China made to stop the recent stock market fall do not bode well for the future.
Combine an industrious, educated population with a large influx of foreign capital in a pre-industrial setting and you have the perfect set of ingredients for enormous economic growth.
Further, given China’s size and the massive scale of its illogical Marxist organization, transforming China was guaranteed to take decades.
But the last 35 years was the easy part.
For any nation, the process of industrialization will yield very large gains as people move away from subsistence agriculture to more productive manufacturing and those remaining in the agricultural sector can take advantage of economies of scale to increase their output. The trouble comes at the end of this process where additional growth requires moving into knowledge-intensive industries where the coin of the realm is innovation and intellectual capital.
China now confronts a much more difficult economic future. The country cannot maintain the high growth rates of the past. And the fact is that economic growth in a capitalist system is inherently uneven. There are going to be years of high growth and there will be brief times of economic contraction.
The authoritarian government and its citizens have an unspoken grand bargain: the people get prosperity while the government keeps control. The Chinese government, like many governments, is most concerned about its monopoly on power. The last challenge to that monopoly in 1989 was met with tanks and gunfire.
The recent plunge in Chinese equities and the government’s frantic efforts to prop up the market are a window into the thinking of the country’s leadership: No downturns allowed. But there will be a downturn at some point and China could be a very dangerous actor when that happens.
The typical playbook when faced with domestic problems is to blame outsiders. In a recession, the Chinese government will need to distract the public, blame everyone but themselves and feed the economy. China could do that in several ways.
Go after foreign investments: China is not averse to attacking foreign investment, when politically suitable. In the past, attacks against Japanese companies were quietly encouraged. The government is currently cracking down on travel to the Macau casinos. Taxing, harassing, and even seizing assets owned by foreign investors is a tried and true policy of authoritarian governments. Property rights in China are what the state says they are – making for a potentially unstable future.
Stoke nationalism: China’s leadership has regularly stirred up nationalistic feeling, particularly against Japan. Riots and boycotts of Japanese products have been given unofficial sanction. In the past, the government has clamped down on such anger before it went too far. In a difficult economy, perhaps the government won’t be so quick to discipline its citizens – or even extend protests to western nations guilty of past colonialism.
- China needs 10 million new jobs a year to survive (chinadailymail.com)
- The end of China’s soft power? (chinadailymail.com)
- Xi Jinping’s China is the greatest political experiment on Earth (chinadailymail.com)
- China: The theory behind conservatives power struggle with reformists (chinadailymail.com)
- Xi Jinping’s rise in China threatens human rights and worries neighbours (chinadailymail.com)
- Chinese PM again blasts lazy officials as corrupt (yalibnan.com)
- China economy: Things to know about its latest growth report (usnews.com)
- China’s economy: Things to know about its latest quarterly growth report (canadianbusiness.com)
- The Next Recession Will Be Stamped ‘Made In China’ (davidstockmanscontracorner.com)
- China may tip world into recession: Morgan Stanley (thanhniennews.com)
Categories: Finance & Economy