Ironworks Gaming Forum - China- Is it Next?

Well, one way that the global downturn has affected China is that it has reduced the size of China's annual surpluses, mainly due to declining demand overseas from key markets like the US and Europe. At the same time, domestic Chinese consumption has been steadily increasing and as a result their imports have been on the rise. Chinese median incomes are expected to double in the next few years.

That said, it's actually not a bad thing for the global economy. China's trade surplus, accumulated over years of lopsided trade balances with the rest of the world (high exports, low imports), along with keeping their currency weak in relation to the euro and the USD (again to help exports) contributed to the global downturn because it helped countries like the US and European countries to overinvest both in China and in Chinese goods. Why wouldn't you if as an American company you could build a plant in China and make your products there for a fraction of the cost domestically, because of the currency and the lower wage rate? Those Chinese policies contributed to the huge American trade deficit, as companies and consumers gorged on cheaper Chinese products and services.

So starting to run a deficit is actually a good thing for the rest of the world. It will also make the exchange rate for the yuan less of an issue. The key is the debt. As Z said, China has taken on a lot of debt, mainly to stimulate growth during the economic downturn. A lot of that debt has been invested in infrastructure, real estate, etc. and much of the debt is at the local government level, underwritten by land sales. At the national level China is sitting on over 3 trillion dollars of forex reserves, and the expectation at the local government level is that the national government will bail out these provinces and cities that have engaged in infrastructure spending. The key will be how much of this debt will end up being "bad debt" that needs to be bailed out, as eventually China will run out of land to sell. One good indicator is the underground lending market, which is huge in China (most Chinese get their loans from informal sources rather than banks) - the rates are up to 6+% now. Most of these loans are secured against property, which in the case of a default would go back on the market and flood it, causing drops in value for everyone.

That said, China won't become like Greece. For a start Greece misses out on a huge amount of revenue because the majority of its population (like Italy) are chronic tax evaders. Secondly the Greeks (like the Americans) lived well beyond their means for many years, running up huge deficits mainly to provide their citizens with all kinds of social benefits. Thirdly the Greeks (and Italians) don't have a trillion dollars of forex reserve like the Chinese do because the Chinese deliberately keep their currency weak to help their exports. Certainly there will be an impact on the Chinese economy though, causing it to slow down, which would be bad news for the rest of us, because right now Chinese imports have been increasing which is helping the rest of the world. Chinese consumers getting richer is good for the rest of us, because we can sell more expensive products to them and make money. So a slowdown could be disastrous for a still-fragile global economy.

The other thing is that China obviously does not have a free press and has poor transparency. We can do a best guess at how much its forex reserves and trade balance is as you can back-calculate from international transactions. But who knows how much the debt really is? How do we know that the numbers aren't made up by the Chinese Communist Party? That's the big question - reliability of data.

As Kak said, the bubble will burst eventually. The key is a) how far away it is (it would be decades away) and b) whether it will be a "soft landing" (softened by the state with bailouts etc) or a "hard landing". Hard landing would not be good, for either China or the world economy. Over the next decade or so the "success" of the Chinese capitalist/centrally influenced hybrid economic model will face a rigorous test. One benefit of a one-party system is that the party can make hard but necessary political and economic decisions that might cause pain for the citizens but the citizens just have to suck it up. But the success of any such decision depends on the quality of the decisionmakers of course. Do they know what they need to do? We and the rest of the world hope so!

Just a disclaimer on the Epoch Times btw:

The paper covers general interest issues, China, and human rights.[4][5][6] The newspaper is heavily critical of the Chinese Communist Party (CCP) and policies of the P.R. Chinese government. In 2004, the newspaper published the "Nine Commentaries on the Communist Party", an in-depth critique of China's ruling regime. The newspaper covers causes and groups opposed to the CCP, including Falun Gong, dissidents, activists, and supporters of the Tibetan government-in-exile. The Epoch Times Website also hosts a "CCP Renunciations" service, encouraging Chinese to quit the CCP and related organizations.[7] The PRC government blocks mainland Chinese from accessing the Epoch Times website.[8]

Headquartered in New York City, the newspaper has local bureaus and a network of local reporters throughout the world. It is either sold or distributed free-of-charge in roughly 30 countries worldwide, and maintains editions in English, Chinese, nine other languages in print, and 17 on the internet.