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More Dark Clouds In The Far East?

George Magnus, a senior economic advisor at UBS, has an article in Foreign Policy that connects the Arab Spring, the global financial crisis, and China’s coming economic troubles in an enlightening article. Where his argument is most interesting is in his outlook for China. Magnus writes:

China’s capitalist model has delivered unprecedented economic success over the last quarter-century. But it is a model that is now flawed. The slump in Western demand caused China’s export industries to shudder in 2008 and 2009, with exports declining by over a third in the year to the first quarter of 2009. Thousands of factories in the Pearl River Delta shut down, and 20 million migrant workers were reportedly forced to return to rural areas for lack of work…

In some ways, this July’s high-speed rail tragedy on the newly opened Beijing-Shanghai line serves as a metaphor for China: It’s a high-speed economy with (capitalist) design faults that, sooner or later, will result in an accident. There are already strong signs that the quality of investment, and of investment financing, is deteriorating. Left unaddressed, these trends might well validate Marx’s prediction that investment booms, endemic in capitalism, end up in overproduction and underconsumption, and then social conflict.

China has limited time to effect a radical political and economic shift. It has to take power and privilege away from state-owned companies, coastal regions, and regional party elites. It must also de-emphasize capital investment, which currently accounts for an unprecedented 50 percent of GDP. And it has to prioritize a bigger economic weight for household consumption, which accounts for a mere 35 percent of GDP, a fairer income distribution, better employment for China’s annual flow of 6 million graduates, the rights of rural migrants, and the neglected countryside.

If this shift doesn’t start in earnest soon, the Chinese economy will succumb to a credit and investment bust from which significantly slower growth would follow. This will be especially sensitive in a China where incidents of social unrest are increasing significantly in number, intensity, and breadth. In the absence of the rule of law and other critical social institutions, the state’s assurance of steady and persistent annual growth of 8 to 10 percent represents a social contract. If it is broken, China could suffer significant political repercussions.

We’ve mentioned many of these points before.  From the Via Meadia perspective, American grand strategy has the greatest chance of success when Asia is firing on all cylinders.  If India, China and Japan are all doing well, the balance of power in Asia should be reasonably secure, and Asia’s great powers will have more to gain from cooperation than from war.  But history almost never turns out to work as people expect it to; the future of China in particular and Asia as a whole is hard to see clearly.

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  • Jacksonian Libertarian

    The Chinese capitalist export model economy was always flawed, it was built on manipulating their currency to cheat the US and give their businesses a price advantage, and this resulted in their paying too much for the Dollar.
    With the Dollar supply outside the US having become as massive as it has ($4.5+ Trillion) those Dollars have become worth even less than what they overpaid for them. As the Chinese who are by far the biggest cheaters, wake up to the fact that they have really just cheated themselves, they squeal with rage that they are going stop using the Dollar as a reserve currency. LOL what are they going to do? Burn the money? Give it away? They are stuck with those Dollars, although they can stop cheating, it would kill their export model economy, but they could stop.

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