China’s Economic Difficulties

It seems to me….

A lot of people, including business leaders, think the future belongs to China. Globalization is not a zero-sum game, but we need to hone our skills to stay in play.” ~ Jon Meacham[1].

Beijing had been carefully and systematically planning a series of reforms that would have made China the world’s largest economy possibly sometime in 2016 but that now appears less certain[2]. Unfortunately, China’s economy is experiencing some difficulties.

China’s economic model, which involves very high savings and very low consumption, was only sustainable as long as the country could grow extremely rapidly so as to justify high investment[3]. That was possible only when China had vast reserves of underemployed rural labor. But that’s no longer true and China now faces the complicated task of transitioning to much lower growth without stumbling into recession. China needs to maintain at least a 6 percent economic growth rate to provide sufficient employment, income increases, and poverty reductions to prevent social instability.

China’s debt, deeply rooted in their real-estate market, has increased at three times the rate of the U.S.’s real estate market that was responsible for the 2007 recession. China’s debt increase also is burdened by a more dysfunctional financial system and a political system constrained by investors.

The question is what effect this will have on the rest of the world. Some economists are predicting a global crisis; others are concerned but hopeful everyone can manage to avoid any major impact. The basic problem is that global contagion often seems to end up being worse than hard numbers indicate it should.

China is a big economy, accounting in particular for about a quarter of world manufacturing. The global effect could be somewhat limited since it isn’t very open to foreign investors; consequently, there is very little direct spillover from plunging stocks or even domestic debt defaults. One of the reasons America’s subprime crisis turned global in 2008 was that foreigners in general, and European banks in particular, turned out to be badly exposed to losses on U.S. securities.

With interest rates still close to zero and inflation still below target, the Fed would currently have only limited ability to fight an economic downturn and the European Central Bank is already pushing the limits of its political mandate in its own so far unsuccessful effort to raise inflation. While fiscal policy, essentially spending more to offset the effects of China spending less, would surely work, how many people believe that Republicans would be receptive to a new Obama stimulus plan or that German politicians would look kindly on a proposal for bigger deficits in Europe?

Current market corrections in sovereign debt, commodities, and emerging markets such as in China are in part attributable to investors pulling substantial funds from the corporate bond sector following defaults on energy and manufacturing impacted by falling petroleum prices. World market volatility probably will continue throughout 2016 based on investor concerns as to how China’s economy transitions from being state-owned to one consumer-based.

That’s what I think, what about you?

[1] Jon Ellis Meacham is executive editor and executive vice president at Random House, a former editor-in-chief of Newsweek, a contributing editor to Time magazine, editor-at-large of WNET, and a commentator on politics, history, and religious faith in America.

[2] McDonald, Joe. China Tries to Reassure on Economy as It Cuts Growth Target, Time, http://time.com/4248637/china-tries-to-reassure-on-economy-as-it-cuts-growth-target/?xid=newsletter-brief, 5 March 2016.

[3] Krugman, Paul. When China Stumbles, The New York Times, http://www.nytimes.com/2016/01/08/opinion/when-china-stumbles.html?action=click&pgtype=Homepage&clickSource=story-heading&module=opinion-c-col-right-region&region=opinion-c-col-right-region&WT.nav=opinion-c-col-right-region&_r=0, 8 January 2016.

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About lewbornmann

Lewis J. Bornmann has his doctorate in Computer Science. He became a volunteer for the American Red Cross following his retirement from teaching Computer Science, Mathematics, and Information Systems, at Mesa State College in Grand Junction, CO. He previously was on the staff at the University of Wisconsin-Madison campus, Stanford University, and several other universities. Dr. Bornmann has provided emergency assistance in areas devastated by hurricanes, floods, and wildfires. He has responded to emergencies on local Disaster Action Teams (DAT), assisted with Services to Armed Forces (SAF), and taught Disaster Services classes and Health & Safety classes. He and his wife, Barb, are certified operators of the American Red Cross Emergency Communications Response Vehicle (ECRV), a self-contained unit capable of providing satellite-based communications and technology-related assistance at disaster sites. He served on the governing board of a large international professional organization (ACM), was chair of a committee overseeing several hundred worldwide volunteer chapters, helped organize large international conferences, served on numerous technical committees, and presented technical papers at numerous symposiums and conferences. He has numerous Who’s Who citations for his technical and professional contributions and many years of management experience with major corporations including General Electric, Boeing, and as an independent contractor. He was a principal contributor on numerous large technology-related development projects, including having written the Systems Concepts for NASA’s largest supercomputing system at the Ames Research Center in Silicon Valley. With over 40 years of experience in scientific and commercial computer systems management and development, he worked on a wide variety of computer-related systems from small single embedded microprocessor based applications to some of the largest distributed heterogeneous supercomputing systems ever planned.
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2 Responses to China’s Economic Difficulties

  1. Yes, but above all. This world needs to save itself from an even greater disaster; climate change. Compound Economic growth and degradation of this wold seems to have gone hand in hand. It will be a tricky task to have the twain converse and at the same time reverse the trend to the death of this planet which seems to gather speed.
    It is heartening and gives comfort that China is pulling its weight in reversing climate change to a much greater degree than Australia is doing. Australia’s excuse that we are such a small overall polluter gets lauded each time. In fact per capita we are the world’s biggest.

    • lewbornmann says:

      I agree that environmental change is the greatest threat the world as a whole is facing. You also are correct that it is compounded by economic growth. The problem will be to accommodate the valid necessity of improving the standard of living of those currently living in poverty to a level with that of those living in advanced nations while avoiding further degradation. If that need is not addressed, the result will be greater conflict.

      The problem is only made worse by the refusal of politicians to even admit there is a problem. Australia is not the only country facing that problem. If conservatives win the U.S. presidential elections in November, there is a high probability that all environmental gains achieved under President Obama could be reversed.

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