Bubble, Bubble on the Wall

While Europe is mired in a debt crisis and the United States is unable to move needed legislation through its governmental bodies, many often look enviously at the economic tigers in Asia, particularly India and China. But all is not rosy in those markets either.

We’ve recently looked at India’s contraction of projected economic growth rates, plagued with rising local populist sentiments that block the kind of “next generation” economic reform to level the playing field, remove staggeringly complex bureaucratic demands and regulations and begin to come to grips with paralyzing corruption in the ranks. A weak leading coalition seems powerless to shepherd through the kinds of growth-stimulating change that most educated Indians see as necessary to restart this slowing engine. The parliamentary and state-level stalemates seem to mirror the same kinds of legislative “stoppage” we see in our own House of Representatives and a number of state assemblies.

China too is experiencing economic contraction amid a scandal in one provincial government (Dalian) that means to test the high-level cronyism across the land, but unlike India and the United States where democratic process governs economic change, China’s centrally-directed government is able to act more decisively with little concern for dissent and resistance. Nevertheless, the news is not good: “Retail sales growth of the country’s consumer goods declined to 14.1 percent year-on-year from 15.2 percent in March and the accumulated fixed asset investment fell from 20.9 percent to 20.2 percent, with real estate investment dropping from 23.5 percent to 18.7 percent. The growth rate of exports further declined to 4.9 percent from 8.9 percent in the previous month. Such a momentum, if it continues, will likely drag gross domestic product growth down to 7.8 percent in the second quarter from an 8.1 percent in the first quarter.” ChinaDaily.com, May 31^st.

Faced with what seems like a small drop in growth – from an earlier 9+% forecast to an 8.1% actual first quarter GDP growth number – but a fairly significant fall in mostly urban real estate values (as much as half in some cities), China is about to begin a modest stimulus effort to stabilize their economy. With rising labor costs making Chinese “cheap labor” less than a bargain these days, the emphasis is on internal spending and upgrading the general standard of living and less on increasing exports to an economically impaired world with a decreasing ability to afford imports. Chinese stocks are also trembling, and talk of “the big bubble” is everywhere.

But there is another massive difference between China and the struggling economies in the West. While the stimulus plans in the West – where these have been applied – have uniformly come from increasing deficits within excessively debt-laden governments, China has over $3.3 trillion in foreign currency reserves and is capable of using this surplus to change economic direction without borrowing a dime. As austerity programs in Europe are finding increasing resistance, as governments that embraced such austerity measures with a vengeance are being thrown out of office everywhere but Germany and her Nordic allies, the West too is looking at how to manage debt while refocusing on the longer-term growth that is really required to solve these complex debt-directed issues. But there is one small catch: there isn’t a Western equivalent of a massive currency reserve from which to release needed stimulus dollars or Euros.

When the early economic collapse in 2008/2009 hit the world, most Western powers tolerated some significant levels of deficit stimulus – the United States led the way with trillions of dollars of combined bailout funds for Wall Street and the automotive industry, quantitative easing, mortgage support, etc. – China infused her economy with about $585 billion in government stimulus money. Growth restarted.

Today, China is beginning a smaller effort that is directed both at creating jobs, producing a more efficient infrastructure for future growth and to generate internal consumer demand: “Spooked by a sharply slowing economy, China’s leaders have begun opening the financial spigots to build still more roads and airports and subsidize consumer purchases, reprising measures that enabled the nation to sail mostly unscathed through the last great global recession… [F]inancial analysts and others say the evidence of a new round of major investments, worth $150 billion or more, is strong. The National Development and Reform Commission, the state body that executes economic strategy, has approved scores of major new infrastructure projects since the start of April, including clean-energy ventures like hydropower stations, four new airports and three renovations or expansions of big steel mills.

“That follows accelerated approvals this year for at least two other airports and a subway in Nanjing. And that does not count new projects announced by local governments, apparently with Beijing’s blessing, including highways, sewage treatment plants and a 350 billion renminbi, or $55 billion, investment by state corporations in the Chongqing municipality in south-central China.” New York Times, May 30^th. As China’s dependency on the global marketplace has increased, so has her vulnerability to international economic turmoil. But the Chinese economy is very much like the economies of the West during the Industrial Revolution and the post WWII American economy – growing fast with lots of surplus.

Then the West instituted social safety nets, raising standards that benefited average workers, tapping these economic surplus pools. The United States also leveraged itself in building a seemingly out-of-control, deficit-building military and then compounding that deficit disorder by fighting prolonged and seemingly un-winnable wars in distant lands without raising taxes. The “guns and butter” lessons of Econ 101 were lost on our leaders. Will China follow in that path? Will she slowly erode her currency reserves to improve the lives of her people or will raw efficiency win out over humanitarian vectors? Will she scrap her policy of avoiding military intervention except in her own direct border and internal disputes? Time will tell, but her focus on improving the lives of her people suggests that at least part of what took down Western budget surpluses will also be China’s story. It is simply the cycle we call history.

I’m Peter Dekom, and while China grapples with how to combine her commitment to long-term growth with the rising standard of living for her people, our own government is seemingly unable to readjust its priorities to cope with a decline in our own ability to sustain growth.