The Economist published a fascinating article on the current state of China’s economy, and it brings up some things that I should have researched on my own before coming to some of my conclusions. Although, I think the article highlights some inflationary aspects I have been pointing at, and it does not mention inflation occuring in some commodity markets, it nevertheless makes important arguments that even should China face a bubble and a subsequent credit crunch, it won’t nearly be as long as many people project it to be. I generally think that the author of the article is correct, as long as the Chinese government avoids large bailouts, welfare programs and public works. Although it is true that the Chinese government did push through a massive stimulus package (although, not as big as the United States’), they also let 14,000+ factories go bankrupt. Although this led to a massive spurt in unemployment, obviously it allowed malinvestment to liquidate itself and for economic growth to continue. So, while mainstream economists have pointed out the stimulus package, I think what is more important was the government’s decision to allow many industries to fail, and for capital to be reoriented towards more productive means.
The article has really made me interested on the subject, and if I can motivate myself I think I’ll take this weekend (and maybe even the upcoming week) to further investigate the issue and come up with a much more accurate opinion. Some things from the article stood out:
Just as in the late 1980s, when Japan’s economy was tipped to overtake America’s, China’s strong rebound has led many to proclaim that it will become number one sooner than expected. In contrast, a recent flurry of bearish reports warn that China’s economy could soon implode.
So, it’s mainly a compare and contrast between Japan in the late 1980s, and China today. It makes some good points:
Furthermore, Chinese homes carry much less debt than Japanese properties did 20 years ago. One-quarter of Chinese buyers pay cash. The average mortgage covers only about half of a property’s value. Owner-occupiers must make a minimum deposit of 20%, investors one of 40%. Chinese households’ total debt stands at only 35% of their disposable income, compared with 130% in Japan in 1990.
and:
Extraordinarily high saving and an undervalued exchange rate have fuelled rapid export-led growth and the world’s biggest current-account surplus.
Although I am less supportive of the second measure, the first one is very important. Later in the article, the author writes:
A bubble pumped up by saving is much less dangerous than one fuelled by credit.
Obviously, his definition of “bubble” is off and looking at the situation from an Austrian perspective one can definately see what is occuring. But, overall he is right that Chinese savings are stupendously high. At their height, in the late 1980s, Japan’s savings rate was at a little over 15%. Today, China’s personal savings rate is 45%+ (45%<X<50%). Nevertheless, we know that in an economy in which investment is only fueled by accumulated capital prices tend to drop (Jesús Huerta de Soto suggests that prices fall even during the opening phases of production, given the drop in demand [although, there is also a drop in supply[), and so the increase in prices, despite the increase in savings, is indicative of monetary inflation (probably mostly to keep the rmb undervalued, as the usd also falls in value at ever increasing rates).
In any case, my point is that it seems that although China is experiencing the formation of a bubble and malinvestment, the necessary contraction will probably be over quickly and it will not be as bad as it may be in other parts of the world where the government takes on a larger role as a provider of welfare and as a means to return an economy to full employment.
This is just a quickly formed opinion, though. As I said, I think the topic merits a very close analysis.
Hence, “animal spirits”.