May 22, 2012


Why China Won't Rule (Robert Skidelsky, May. 21, 2012, Project Syndicate)

The sensible question, then, is not whether China will replace the US, but whether it will start to acquire some of the attributes of a world power, particularly a sense of responsibility for global order.

Even posed in this more modest way, the question does not admit of a clear answer. The first problem is China's economy, so dynamic on the surface, but so rickety underneath.

The analyst Chi Lo lucidly presents a picture of macro success alongside micro failure. The huge stimulus of RMB4 trillion ($586 billion) in November 2008, mostly poured into loss-making state-owned enterprises via directed bank lending, sustained China's growth in the face of global recession. But the price was an increasingly serious misallocation of capital, resulting in growing portfolios of bad loans, while excessive Chinese household savings have inflated real-estate bubbles. Moreover, Chi argues that the crisis of 2008 shattered China's export-led growth model, owing to prolonged impairment of demand in the advanced countries.

China now urgently needs to rebalance its economy by shifting from public investment and exports towards public and private consumption. In the short run, some of its savings need to be invested in real assets abroad, and not just parked in US Treasuries. But, in the longer term, Chinese households' excessive propensity to save must be reduced by developing a social safety net and consumer credit instruments.

Moreover, to be a world economic power, China requires a currency in which foreigners want to invest. That means introducing full convertibility and creating a deep and liquid financial system, a stock market for raising capital, and a market rate of interest for loans. And, while China has talked of "internationalizing" the renminbi, it has done little so far. "Meanwhile," writes Chi, "the dollar is still supported by the strong US political relations with most of the world's largest foreign-reserve-holding countries." Japan, South Korea, Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates all shelter under the US military umbrella.

The second problem is one of political values. China's further "ascent" will depend on dismantling such classic communist policy icons as public-asset ownership, population control, and financial repression. The question remains how far these reforms will be allowed to go before they challenge the Communist Party's political monopoly, guaranteed by the 1978 constitution.

The only things China exports are products that we design but allow them to assemble cheaply.  Most significantly, it has no culture to export and its future depends on importing ever more of our culture.

Posted by at May 22, 2012 6:26 PM

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