Recession in China?

OK, that may be a bit of a stretch. But there’s little doubt that the global recession will take its toll on China’s double-digit growth rates.

One (emailed) response to our recent Washington Post op-ed criticized us for overlooking the role of China (although we did discuss China in the following Forbes article). In particular, the reader said, “it is my opinion that China holds all of the cards and I believe they will likely play some of them early in the next U.S. administration” – this because of China’s role in financing the U.S. deficits by investing in Treasuries. This may be true in the long run, although of course China cannot try to damage the U.S. economy without also crippling its own export-dependent economy. More immediately, though, China is facing an old-fashioned slowdown of its own.

All Things Considered did a story this past week on the impact of the global slowdown on Chinese exporters. One figure jumped out at me: 80% of the toy factories in Guangdong province have closed.

Also, the Baltic Dry Index, a measure of bulk cargo shipping costs and hence of global demand for heavy stuff (largely commodities) has fallen off a cliff this year (see the second chart in that post) – one reason why the Shanghai Composite Index is down more than 60% this year.

China is a place I won’t claim to understand. But as we all know, the Chinese government relies on an unsteady equilibrium in which it uses economic growth to legitimize the political system and convince the growing middle classes not to question the political order. Tocqueville’s observation (which I alluded to in my previous post) about the tendency of political strife to arise not out of prolonged abject misery, but when increasing expectations are dashed, could turn out to be particularly appropriate for China.

Update: Thanks to Randy for his comment (below). I fixed the error regarding the Baltic Dry Index.

Update: The Economist has a post with almost the same title as this post – but no question mark.

4 thoughts on “Recession in China?

  1. I would agree that the coming global recession is likely to effect poligical change in many countries around the globe. On the economic side, we are witnessing historic changes in the financial system and it’s hard to imagine that large changes on the political side won’t also be in the cards.

    When it comes to China, I have a lot of doubt that they would intentionally initiate some kind of financial war against the US. Their economy is too linked in with ours and their leaders have shown more and partiality towards economic issues over political dogma. If anything, political change coming for China will likely affect their internal politics. It will be interesting to see how well the ruling party has managed to control the country’s growth trajectory. If China avoids some systemic economic issue associated with overexpansion, I’d have to give the Communist party some props, albeit begrudgingly.

    I see now the tie in from economic crisis to political strife a la Tocqueville although I’m curious to know whether anyone has given thought to what that chain of events may look like. For example, the case of Iceland pursuing an emergency loan from Russia is interesting as Russia needs a military base and is likely to make that a condition for the emergency loan to Iceland, a NATO country. I would have to guess that this is the reason for Russia’s delay in approving the loan, i.e., the details of the military arrangement.

    I would agree with the writers of this blog that we need to be concerned with the ripple effects of this economic tsunami that has hit the global economy. In some ways, those “ripple” waves may be even larger than the original – if that is even imaginable. So rather than navel-gaze our way through our own economic recession, it behooves us to be aware of the changes going on in the emerging economies. That is a very large category that does need to be broken down further but the Iceland situation shows us that political/military changes can come in unexpected places.

  2. Baltic Dry does not count things that go into containers. It is only for Bulk related cargo (commodities – iron ore, grain, coal, etc.). The index is defnitely suffering from the same kind of widespread correction that all asset classes are undergoing due to the deleveraging of the investor positions. Cargo has slowed down to the U.S. and to Europe but that was already happening in the 3rd quarter of last year.

    Guangzhou and other South China related factory closures were due more to changes in the labor laws and the reduction in the export tax rebates. But the factories were moved further inland or up to central China, where labor costs were cheaper.

    However, I do agree that China has not had to face this kind of global recession since its recent rise to global prominence in the world economy. If this downturn undergoes a sustained period of time, and China is not able to boost its domestic consumption to keep pace with economic growth, then the same forces at play throughout the rest of East Asia will arrive at its doorstep.

  3. It is true that China may see a reduction in international trade, but then again with people trying to save money the appeal of cheap goods (not toys, but for example household goods, clothes and appliances) is likely to give China a new outlet for its production.

    Of far greater concern is that China holds U.S. debt notes worth trillions of dollars. It is true that just as a real war is expensive to all sides, so is an economic war. The financial expense however has rarely in and of itself precluded a war.

    However China does not want an actual war (economic or otherwise.) Rather, China has a long history of probing incoming U.S. administrations by creating incidents to gauge the response (i.e. the Taiwan straights standoff and the Hainan plane incident that tested Clinton and Bush respectively.) In the past these kinds of probes have been military, but my guess is that this time around they may try to exert some form of economic pressure. China’s goal right now is not to take down the U.S. economy (for a number of reasons) but rather to see how hard they can push and how much they can make us squirm for use in future discussions about human rights, trade with regimes we don’t like, Taiwan, etc.

    For this reason, I expect that sometime in the early to mid part of next year there will be a crisis ‘scheduled’ by China in which they try to test the new President (especially if it is Obama.)

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