If you are still bullish on China's growth, please read and re-read Richard Duncan article append below. The known fact now is that US and Europe are broke. Typically, these two region contribute more than 50% of world GDP. See the list below. Should China, the third largest economy slide in slower growth or booming era coming to end, the world may a new "lost decade" faced by Japan. Cautious!
|
Global
Rank
|
G20
Rank
|
Country
|
GDP
(billions of USD)
|
Share
of Global GDP
|
|
71,896.504
|
100.00%
|
|||
|
1
|
17,070.011
|
23.74%
|
||
|
1
|
2
|
15,609.697
|
21.71%
|
|
|
2
|
3
|
7,991.738
|
11.12%
|
|
|
3
|
4
|
5,980.997
|
8.32%
|
|
|
4
|
5
|
3,478.772
|
4.84%
|
|
|
5
|
6
|
2,712.026
|
3.77%
|
|
|
6
|
7
|
2,452.689
|
3.41%
|
|
|
7
|
8
|
2,449.760
|
3.41%
|
|
|
8
|
9
|
2,066.934
|
2.87%
|
|
|
9
|
10
|
2,021.896
|
2.81%
|
|
|
10
|
11
|
1,804.575
|
2.51%
|
China’s Economy Has Stopped Growing
I have just returned from a short trip to Beijing and Shanghai. My
impression is that China’s economy has stopped growing. If I am right,
the consequences for the global economy will be profound.
Since the late 1980s, China has pursued an economic strategy of
export-led growth with extraordinary success. Its trade surplus with
the United States rose from $10 billion in 1990 to $268 billion in
2008. And, with the dollars it earned from that trade surplus, China
bought commodities from South America, Africa and South-East Asia and
precision machine tools from Germany, Japan and Korea. Thus, by
spending the dollars it earned in the US, China became a “new engine of
global economic growth.”
Last month, China’s exports expanded by only 4.9% compared with the
same month last year. Its imports rose by just 0.1%. In other words,
Chinese demand contributed nothing to economic growth outside China last
month. This was a tremendous change from years past when Chinese
imports generally grew by more than 20% every year. No growth may be
the new normal for China. Export-led growth strategies don’t work when
exports don’t grow. The credit-fuelled booms in the United States and
Europe have ended in crisis. The heavily indebted Americans and
Europeans cannot afford to continue buying more from China every year as
they have in the past. I believe this new reality spells the end of
China’s great economic boom.
Having a large population with a low average income is not a sufficient
condition to guarantee rapid economic growth. If it were, China (and
India) would have become wealthy a long time ago. Sustainable economic
development requires income growth, or, in other words, rising wages.
Wages have been rising in China, but roughly 80% of China’s population
still earns less than $10 per day. The minimum wage in Beijing and
Shanghai, China’s two leading cities, was just increased to $13 per
day. Wages are much lower elsewhere around the country.
Wages are determined by the supply and demand for laborers.
Approximately half of China’s 1.3 billion people still live in the
countryside. Urbanization is taking place, but bringing people into the
cities does not cause total consumer demand to rise unless the wages of
those people actually increase. In fact, a growing number of city
dwellers could actually push wages down in the cities if there are not
enough new jobs to absorb the increasing workforce. Thus, China’s huge
population is a curse rather than a blessing unless a way is found to
make average wages increase.
Since 1990, millions – tens of millions – of Chinese have been employed
in factories making things to sell to the Americans. That increased
the demand for labor and allowed wages in China to rise to where they
are today. Now, however, the American households, after increasing
their indebtedness from $4 trillion in 1993 to $14 trillion in 2008, are
incapable of taking on any more debt. Therefore, they will not
continue to buy more from China each year. China’s trade surplus with
the US is not going to continue skyrocketing as it has since 1990.
Consequently, US demand for Chinese goods is no longer going to continue
absorbing more Chinese labor each year. That means it will not
continue to put upward pressure on Chinese wages. And, if demand from
the US ceases to put upward pressure on Chinese wage rates during the
years ahead, then what will?
In 2009, the year after the economic crisis began in the United States,
China’s trade surplus with the US contracted. It fell from $268
billion in 2008 to $227 billion in 2009. This had an appalling impact
on Chinese employment. International newspapers reported that 20
million Chinese factory workers lost their jobs and were forced to
return to the countryside to look for work as agricultural laborers.
China’s leaders responded to this destabilizing crisis by allowing
China’s banks to increase the total outstanding amount of bank loans by
60% over a two-year period. Sixty percent loan growth in 24 months!
Just imagine what impact a 60% increase in outstanding bank loans would
have on the US economy or the Japanese economy or any economy. Property
prices would skyrocket, everyone would have a job and wages would
increase sharply. But then, a couple of years later, the borrowers
would be unable to repay those loans and a banking crisis would ensue.
That 60% increase in total loans, combined with the rebound in the US
economy (brought about by trillion dollar US budget deficits financed
with trillions of dollars of paper money creation) worked miracles for
the Chinese economy. The 20 million displaced factory workers got their
jobs back and China’s economy continued growing by 8% to 9% a year.
But now what? The global economic crisis is intensifying and China’s
export growth is slowing very rapidly. Within China, the newspapers are
reporting that there is no demand for new loans. That is hardly
surprising after the explosion of bank credit since 2009. That new
credit financed an extraordinary expansion of investment and production.
As a result, there are now very few profitable new investment
opportunities left in China.
After two decades of very rapid investment and production growth, China
now has excess capacity across almost every major industry. On this
trip I was shocked by the lack of construction of new high rise
buildings in Beijing and Shanghai. Every other time I have visited
those cities, hundreds of cranes were visible on the skyline. This
time, in Beijing I saw one; and in Shanghai, I saw dozens instead of
hundreds.
As I learned during the six years I did research on Thailand’s economy
in the 1990s, a property construction boom not only employs a very large
number of construction workers, it also affects a wide range of related
industries: steel, cement, glass, carpets and sanitary ware being the
most obvious ones. During the boom, all those industries invest and
expand their production capacity many fold in order to meet the growing
demand for their goods. That investment contributes to the overall
economic boom. When the construction boom ends, all the industries
supplying construction materials are left with massive excess production
capacity. New investment in those industries ceases. Many of those
businesses fail and default on the bank loans they took out to expand
their capacity.
Skyscrapers are easy to see and to count. Either hundreds of new ones
are being built or they are not. The logic of how a boom and bust of
construction affects the related building material industries (as
outlined above) is also easy to follow. However, a boom of capacity
expansion in other, non-building related industries is not so obvious.
In Thailand’s case, it was nevertheless just as great as the building
boom during the bubble years. Almost every industry expanded its
capacity many-fold. And, when the boom ended (due to excess capacity
relative to affordable demand), every industry suffered from excess
capacity and excessive debt. Many businesses failed. The Thai banking
system spiraled into a systemic crisis as a result.
After a two-decade long boom of unsurpassed proportions, China is now
in much the same position that Thailand faced in 1997. It has far more
production capacity than its 1.3 billion people can afford to buy given
the country’s very low wage structure. As long as China could sell more
and more to the United States ever year, its economy could continue to
grow. Now that the US is in crisis, there is no one to absorb China’s
excess industrial capacity. Consequently, there is no reason for China
to invest more to build even more excess capacity. That means China’s
great economic boom is coming to an end . Unless rapid economic growth
soon resumes in the West – and there is no reason to expect that it will
– then China’s leaders will struggle just to prevent a severe
contraction of the economy. China’s “economic miracle” is very close to
following the Japanese miracle, the Asian miracle and America’s NASDAQ
and property bubbles into the history books as just one more credit
induced boom and bust.
Next time I will discuss what the end of China’s great economic boom will mean for the rest of the world.
