Tuesday, August 25, 2015

About the current turmoil in China (storm in a teacup or a harbinger of things to come?)

Back home after a wonderful three week vacation I´ve used to reload and recharge (not that I was either unloaded or discharged), plus putting the finishing touches on my dissertation, time for the Vintage Rocker to get back behind the keyboard and dispense more internet wisdom and thoughtful content for the thought starved masses (yep, all three or four of you guys).

And what better moment to put back the thinking cap than the current market meltdown, apparently driven by the fear that the much awaited GCS (“Great China Slowdown”, never heard of it? Come on! There probably isn’t a single self-respecting pundit  that hasn’t predicted it at least once in the last decade… hell, some of us have been predicting it almost monthly for all of that time) has finally arrived. It may have and it may have not, I’m not yet fully convinced. If I had to give a probability spread, I’d say there is a 70% chance this will end up being a minor bump in the road (meaning that China still manages to grow around or slightly above 5% this year, and that their stock market recovers so in two to three months is no lower than  60-70% its previous maximum in July), a 20% it is a significant bump (China’s grow comes to a halt, and may even enter into a mild recession, and the main index for its stocks is still less than half of what it was in July three months from now –which, given it had more than doubled in the first half of the year, would simply mean that it finishes 2015 roughly where it started) and a 10% it is a crash for the history books (with contraction of GDP above 30%, shares below 10% of their July value, massive unemployment, major social unrest, and eventual toppling of the Chinese Communist Party, or at a minimum of their current leadership, to be substituted by a new strongman followed by the imposition of much harsher and stricter emergency laws).

I’m following the events with great interest (understatement of the week!), as China for the last decade seems to be a fine scale model (1:10 scale to be precise) of the whole capitalist world-economy, based on monopoly rent extraction by those well connected with a nominally independent government (in their case it is not democratically elected, but see what happened with supposedly democratic ones in Greece and Italy, and what percentage of the eligible population votes in the American elections that end up deciding the sign of both Congress and the Senate). In no particular order, these are some of the most salient features of the situation that are catching my attention:

·         China accounts for 90% of the World’s poverty reduction for the last 20 years (neither Africa, nor India, have managed to reduce much their absolute number of destitute people, although at least they’ve managed to make all the population they added “not desperately poor”, which is already a substantial improvement over their historical trend). The whole capacity of “free markets” (the highly bastardized version we call by that name) is put into question if China becomes unable to keep playing catch-up to the Western democracies (as they have been doing those same twenty years)

·         We may be exploring the limits of such catch-up development. China has been importing technology (in a wide sense that includes not only machinery and power plant designs, but also management techniques and software to run ever more complex, more sophisticated corporations) and leveraging their cheap labor force to attract capital (either in the form of direct investment –over which it has always exercised a high degree of control, and by selling huge quantities of low-quality goods to the rest of the world, which created an enormous trade surplus). That has enabled the country to invest at a staggering pace, moving from an average GDP per capita of roughly 1,000 $ in 1980 to 12,700 $ in 2014 (in PPP, in nominal dollars it’s closer to 7,000), which has required a phenomenal rate of growth of almost 10% per year for more than three decades. Impressive? Let’s not forget the GDP per capita of the USA in 2014 was roughly 55,000 $ (again in PPP, which obviously in this case coincides with the amount in nominal dollars). So the average Chinese has gone, after three decades of breakneck enrichment, from being dirt poor to being only moderately poor (the poverty threshold in the USA for a single adult is 11,700 $ a year).  It may sound discouraging that just copying other people’s innovations can only take you a tad above being on average 20% as wealthy as them, but for India (or any sub-Saharan country) it’s a great piece of news, as they still have spare room to quadruple their current wealth before getting there

·         Keynesianism can only take you so far (the state can step in and spend instead of the private sector up to a point, but finally there is no way to keep building infrastructure nobody will use or houses nobody will live in, as we Spaniards know all too well). We will probably have ample opportunity to explore not only the limits of catch-up (see previous point), but of Keynesianism as a whole and of state investment and its ability to reinvigorate a sagging economy, as my hunch is that the central committee is about to go bananas with the former, but is going to barely improve the latter. Why? Think about it, the reason China is finding it difficult to keep growing at previous speed is not for lack of machinery or infrastructure (they have unused capacity galore) that may give them additional productivity gains to outprice their competitors (they have almost none), but for lack of people that can buy their trinkets, not only in China, but in the rest of the world. China has been saying it was shifting from an export oriented growth model to an internal consumption dominated one for almost twenty years, but they haven’t been able to do It, and I’m ultra skeptical they will be able to do it now

·         That leaves internal consumer spending as the only component of aggregate demand that may offer a way to resume the growth path. When the rest of the world is stagnant, it stands to reason that you can not grow an economy without growing the consumer spending, BUT you can not grow the consumer spending when a) there are less consumers every passing year (only Africa is growing its population at this point, but they have no money to consume) and b) salaries are stagnant or decreasing (except the top 1%, with very low marginal propensity to consume). The most astute observers are already linking the secular stagnation with the (equally secular) reversal of demographic trends and slowdown in technological innovation. Of course, less people means less consumers of everything. It is very difficult to grow the total output of an economy with less producers, although via productivity gains it could be done. But why would you pursue those productivity gains if the additional production will sit forever in your warehouses for lack of consumers? (well, you could make your products perishable in a shorter time span, so the dwindling number of consumers would still need to buy more of them… it has been tried, it is called programmed obsolescence and in the consumer electronics and automotive markets it has worked wonders, but more and more people seem to be wising up to it and it doesn’t seem to be working so well any more).

·         China is a fascinating social experiment of the psychological consequences of extreme materialism, after sixty years of state propaganda relentlessly denying the possibility of any transcendent reality, and the kind of familial structures associated with such mentality (Russia would be another shining example, and you can easily spot some troubling similarities regarding the shape of familial structures). You can find there the most extreme version of the most corroding tendencies affecting most capitalist nations: every man for himself (don’t sell me Confucian values and collectivism in a society without siblings, which constitute the first and paradigmatic schooling in living and working within a collective), hyper competitiveness, crony capitalism and corrupt allocation of resources... The party cadres reaching the upper echelons of the Country are the product of the one child policy (officially started in 1979, but being followed in practice by the educated urban classes that formed the top tier of the CCP since at least a decade before), what the Chinese press dubbed “little emperors”, and thus one of the most spoiled children ever to be granted government responsibilities…

So whatever happens in the following weeks it is going to teach us a lot about the shape of things to come. I’ll leave you with a final thought: In the nineties Giovanni Arrighi thought that the latest accumulation cycle of capitalism (dominated by the USA) was coming to an end, the stagflation of the 70’s being what he called the “signal crisis”, and waiting only for the termination crisis that would confirm the demise of the old hegemon and the rise to dominance of a new one. He was always cautious about who that successor superpower would be, but he strongly hinted that China was one strong candidate. For the last decade we have been hearing (from left and right, with admiration and distrust) about the rise of China as one of the most significant geopolitical developments of our times, and the question widely posed was always if China would rise to the level of the USA (both in terms of economic power and of military might, as it is well understood that both variables cannot be decoupled) or if it would effectively surpass it. For many, given its sheer size and population, it was a question of when, not if. We may have an inkling of the answer to both questions in the next days. 

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