50% Chance of Recession — In China
Kurt Brouwer February 6th, 2008
Rising income inequality, labor unrest, accelerating inflation, weak monetary controls and a possible recession. Does this sound familiar? But, it’s not about the U.S. or even Europe. Instead, it is about China. This piece (by Kenneth Rogoff, a Harvard economics professor and former chief economist at the International Monetary Fund) spells out some serious concerns [emphasis added below]:
China may yet be economy to lose sleep over (Financial Times, February 4, 2008, Kenneth Rogoff)
“Given the highly vulnerable state of the US and European economies, what would happen to global growth if the Chinese juggernaut also started sputtering? Few investors or policymakers seem to be seriously contemplating this scenario.
China’s remarkable resilience to both the 2001 global recession and the 1997-98 Asian financial crisis has convinced almost everyone that another year of double-digit growth is all but inevitable. In fact, the odds of a significant growth recession in China – at least one year of sub-6 per cent growth – during the next couple of years are 50:50. With Chinese inflation spiking, notable backpedalling on market reforms and falling export demand, 2008 could be particularly challenging.
…With all due respect to the extraordinary recent performance of China’s managers, the country faces economic, financial, social and political landmines just like any other emerging market, with epic environmental problems to boot. And, throughout history, no emerging market has escaped bouts of crisis indefinitely.
Most Western media have ignored or glossed over problems in China (see Is China’s Economy Smaller Than We Thought? and Can China Dump the Dollar?) , but serious problems exist as Professor Rogoff spells out:
Inflation of more than 6 per cent is the immediate problem. Those who think inflation is caused by too little pork rather than too much money are wrong. China’s relatively pegged exchange rate system has led the authorities to flood the economy with renminbi. Rampant money supply growth is the flipside of the country’s $1,400bn accumulation of foreign currency reserves. The real surprise is that inflation did not sprout earlier.
The authorities must stuff the inflation genie back in the bottle. It is not going to be easy in an economy where highly controlled financial markets render normal instruments of monetary control relatively ineffective.
…Perhaps the greatest threat to China’s expansion, however, comes from pressures created by its own exploding inequality levels. According to World Bank statistics, income inequality in China has leapfrogged that of the US and Russia, which is no small feat. Rising inequality is placing enormous strains on the political system, as is evident from a recent sequence of ill-considered policies that have been aimed at mitigating the problem. The government’s recent attempt to fight food inflation by using price controls is a highly conspicuous example.
…Indeed, the greatest danger to China’s economy is that, after years of market-oriented reform, the country’s leadership seems to be losing faith in markets and adopting policies such as rationing that turn back the clock to old-style communist days. With rising inflation, bloated investment and a soft global economy, now is hardly the time for China to make its system more inflexible…”
I hope the Chinese leaders stick with their policy of opening up and encouraging a market-based economy. If so, they have plenty to work on. However, they have another problem that will be very difficult. And that is, the fact that China is promoting economic freedom and mobility, but not personal liberty for its people.
No doubt the Chinese leaders are well aware that the freedom and mobility that comes with a growing economy is in sharp contrast to the lack of freedoms such as freedom of speech, freedom of assembly that they allow. I believe that they will have to open up their society to more personal liberty very soon or face serious unrest.
Hat Tip: Greg Mankiw
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