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.
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. 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. 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?
 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.
 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.
 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®ion=opinion-c-col-right-region&WT.nav=opinion-c-col-right-region&_r=0, 8 January 2016.