Some Yuan Is Getting Me Down
China is on my mind—and it seems to be on everybody else’s mind as well. You’ve heard it all summer, and the headache is now continuing into autumn: China’s economy is slowing down drastically. Analysts have been predicting that China’s unprecedented 10 percent growth rate would eventually start to atrophy for the last three decades, and it seems that their conjectures are finally starting to be realized. When one of the world’s economic titans starts to come to a halt, so too does the rest of the world, given the interconnectedness of the global economy. The economic state of China right now, especially if it continues to deteriorate, will have implications on the rest of the world for years to come. By some economic measurements, you could claim that China is the largest economy in the world. The international economy is not unlike a spiderweb, with its strands comprised of economic relationships between nations; China, along with the United States, is at the dead center of the web. Human beings are notoriously inept at conceptualizing large numbers, and so the metrics alone belie how truly gigantic the Chinese economy is. The state-centric economic system initiated by Mao Zedong and pushed into overdrive by the policies of Deng Xiaoping accounts for an approximate 17 percent of all economic activity in the world. It has a purchasing power parity GDP of 17.63 trillion USD, and employs nearly 788 million workers. China has long since overtaken the United States as the primary manufacturing economy in the world; no nation exports more goods than China does, nor does any nation have as many trading relationships. The world’s largest population combined with lofty ambitions has transformed China into a powerful regional leader in Asia, and a formidable global force in the trade and transaction of goods and services. When a traditionally strong central component of a spiderweb starts to go slack, the weight of its failure reverberates throughout the entire web, all the way to the very fringes of its architecture. Within the architecture of the global economy, when China’s strong foundation starts to weaken, the entire structure gets weaker as a result.
The slowdown in China began as industrial processes and firms started to halt production; demand failed to meet an abundance of supply. Customers and investments dried up in industrial cities as the dangers of the intense growth of the Chinese economy began to catch up with the nation in the new decade. This phenomenon has transformed once promising firms into skeletal remnants of past economic aspirations, taking form in empty factories and unused roads. Chinese consumption simply cannot keep up with previous Chinese investment, and the overabundance of its current investment infrastructure is halting technological improvements in the industrial sector, which accounts for a major part of the Chinese economy. Workers are stuck in menial labor roles in an effort to keep the Chinese national unemployment rate low. Though the rate hovers at 4 percent, insight into the daily life of Chinese workers—the majority of whom are from the peasant class—shows a lack of job security as firms slowly cut workers due to declining industrial demand. Wages aren’t coming to workers fast enough to counter the rate of inflation, and as a result, everything drops: consumer consumption, additional investment, imports, exports, and nearly every other economic indicator. This decline effect stemming from industrial capacity has combined with excess borrowing and fluctuations in the nation’s financial systems to form the main components of the Chinese economic slowdown.
The slackening of the Chinese components of the web are now being felt in reverberations all over the world. Financial firms and economists are constantly analyzing market trends, searching for the faults that might burgeon into regional or global recessions. The Chinese growth rate is expected to hover around 6 percent next year, and the economic threshold for China’s yearly benchmark would be a bottom-line 2.5 percent growth rate. If China enters into a recession, it would join a growing list of emerging economies entering recession, like Brazil and Russia, and would almost certainly drive the global economy into at best a recession, and at worse, an unprecedented financial crisis.
All the usual suspects (and some unusual ones) are taking their shots on how to deal with the Chinese slowdown, from Barack Obama and Janet Yellen to Donald Trump. These pages add two academic voices to that chorus. Professor Andrew Nathan, Class of 1919 Professor of Political Science, will lend his expertise on Chinese markets and foreign policy to assess the current causes of the troubles in the Chinese stock market, and whether or not the entire Chinese market is heading for some sort of correction. We will also hear from Professor Carl Riskin, economics professor, who approaches the problem from a different angle, suggesting that the Chinese slowdown should be less of a cause for anxiety. While we cannot yet foresee with perfect clarity the broader implications of the Chinese nosedive from this summer, the following intellectual exploration will allow us some clarity for the world ahead. •
Hailing from New Jersey, Ankeet Ball, a senior in Columbia College, is majoring in Economics-Political Science with a concentration in American Studies. He is an aspiring lawyer and wishes to eventually enter into a life of politics and public service. If you’re looking for Ankeet, he can be found on a stage, performing for a Columbia theatrical production, watching a Barclays Premier League Game, or crying in a fetal position because he can never physically meet Abraham Lincoln. It might be easier to reach him at: firstname.lastname@example.org
CPR interviewed Professsors Carl Riskin and Andrew Nathan regarding the Chinese economic slowdown, and it is with pride and pleasure that we introduce them here.
Professor Riskin is a Senior Research Scholar at the Weatherhead East Asian Institute at Columbia University, and a Distinguished Professor of Economics at Queens College. He is the author of China‘s Political Economy: The Quest for Development since 1949; co-author with A. R. Kahn of Inequality and Poverty in China in the Age of Globalization; and co-author with R. Zhao and S. Li of China’s Retreat from Equality, among others. His most recent research deals with income distribution and patterns of income inequality in China.
Professor Nathan is currently the Class of 1919 Professor of Political Science at Columbia University, chair of the steering committee of the Center for the Study of Human Rights, co-chair of the board Human Rights in China, and a board member of Freedom House, among many other distinguished positions past and present. His publications are too numerous to recite here but his mosr recent book, co-authored with A. Scobell, is China’s Search for Security.
These distinguished experts’ responses are presented below.
CPR: What exactly led to the stock market crash in China this summer? I know there are probably lots of different causes and it’s hard to pinpoint any precise one, but could you give me an overview please of what happened?
AN: Any stock market that goes up this far and this fast is going to come down at some point. What triggers it is some kind of mass psychology where everybody suddenly decides that this is the moment it’s going down, so they sell, so it goes down. It is widely thought that the signal that started this rush to the exists was the currency devaluation. But that was just the signal; the underlying cause was that many/most/all investors thought/knew that the market was overvalued.
CR: I’m not a student of China’s stock markets and don’t follow them closely, so bear that in mind in what I say here. The market there is and has been from the beginning been a casino and its volatility is much greater than that of more mature markets. It has been a place where many people frustrated with very low government-controlled interest rates have gone to try to get higher returns. Everyone knows that it has been in bubble mode for some time, with ridiculously high price/earnings ratios.
CPR: Candidate Donald Trump used the Chinese stock market crash to justify his position that the United States should “decouple” from China. Setting aside whether or not his analysis is right, would it even be possible for the United States to “decouple” from China? Does what he’s advocating for make any sense?
AN: It doesn’t make any sense. The US cannot decouple from China, we have too much trade with them, too much investment there, too much mutual dependence on global markets that both of us influence.
CR: As for Donald Trump, I wouldn’t waste time parsing his comments. The US-China relationship has been a distorted one, in some ways, in that it has helped enable China’s past strategy of depending on expanding exports to drive growth of GDP and employment, which was a flawed strategy that they are now trying to move away from. It also enabled the US to run big trade deficits and to lose manufacturing jobs faster than we otherwise would have. If China rebalances its economy to rely more on domestic consumption and less on investment and exports – all of which it is trying to do – and the US were to rebalance our own economy by ending the dysfunctional circus in Congress, adopting a tax code that promotes a less lopsided distribution of income and a budget that restores and expands our badly eroded infrastructure, improves education and promotes innovation, then the two countries could enjoy a less unbalanced kind of trade relationship, which would be good for us both. I’m not holding my breath.
CPR: The Economist at the end of August argued that the “crash” in the Chinese stock market was no more serious than a daily fluctuation in a relatively new stock market, even if it was a “three sigma” event. Would you agree with that?
Conversely, Forbes at the end of September warned that another big dip is coming in the Chinese stock market. Colombo argues that a wedge patterning has been forming in the SSEC, similar to one that formed in the days leading up to the crash happening over the summer. Is it possible to predict it this accurately? Is it likely that another similar crash in the Chinese stock market is approaching imminently?
AN: Right, I don’t think it should be called a crash. A similar decline here would be called a correction. It would be a crash if it continued for a much longer time, went lower, and did not recover. Of course nobody can predict the timing or magnitude of market moves. We can predict the market will go up and down but not when and how much. However, for what it’s worth, I do not consider it “likely” that the Chinese stock market will undergo another major correction until some future time when it has again gone up a great deal. Here my reasoning is partly political - the government won’t let that happen (and the fact that it won’t, encourages investors to stay in and prevents the market from falling). My second reason is, I suppose, economic or political-economic. That is to say that the Chinese stock market has a lot of flaws - information is not transparent, a lot of investors are short term gamblers, there is probably still too much leverage — AND the Chinese economy is certainly slowing down and has structural problems of its own, BUT all that said, that economy remains very strong whether its growth rate is the announced 7 percent or a more modest 5 percent. There is a lot of money there. Savings rates are low. People are going to continue to invest in stocks.
CR: Both the Shanghai and the Shenzhen markets more than doubled in value from the middle of 2014 to the middle of this year. Even after the sharp fall in August the market remains over-priced and so, yes, at some point it will correct. But the stock market is not the economy and one shouldn’t use those terms interchangeably. China’s economic growth rate has been falling for long-term reasons, especially the gradual exhaustion of their previously huge pool of surplus labor, as well as the narrowing of the technological gap between China and the most advanced countries. Although there is debate about how fast China is actually growing at present, my reading of those who are most in touch with the situation leads me to believe that their growth rate is not much lower than the 7% claimed. Wages, jobs, disposable income and consumption spending all continue to rise. Nor is the stock market an important source of capital for Chinese industry, which gets most of its capital from retained earnings and bank loans.