What Would a Chinese Economic Crash Look Like?
Is the Chinese economic miracle running out of steam? There is increasing reason to wonder, given that the economy shows more and more symptoms of previous financial crashes in other countries. Most obviously, the
To be fair, the stock market is not nearly the presence in the Chinese economy that it is in an advanced economy, or even in other middle-income Asian countries. Relatively few Chinese are stockholders, and so there is no substantial direct effect of this decline on the wealth of the average Zhang San.
But the stock market is interesting not as a cause of trouble but as a symptom. There are numerous anecdotal reports of excessive building of factories for political rather than economic reasons. Every mayor, it seems, has to have his own high-technology center, his own steel mill, etc. The Asia Times reports that computer chip factories in particular are being overbuilt at a ridiculous rate. When you are spending other people’s money, as ambitious politicians are wont to do, you tend to be less concerned about long-term consequences, such as whether opportunity cost and generation of consumer value justify that use of those resources. And whether the Chinese growth rate even now is what it is claimed to be is questionable. The
Many recent financial crashes in developing countries have occurred because economies with tremendous potential because of fundamentals – entrepreneurial drive, natural resources, human capital, etc. – but tremendous waste because of years of corrupt mismanagement of their economies have opened themselves to the merciless competitive probing of foreign investors and domestic entrepreneurs. People can suddenly try new resource combinations and see if they work, in the sense of providing more value to society than the cost of creating that value. Some of those experiments are wise, and some are foolish, but the less transparent and more corrupt the society the more difficult it is to tell which is which. For awhile there is immense excitement when an economy reforms, but eventually the economy’s opacity (both innate opacity because it is young and uncertain and aggravated opacity because of corruption) creates a backlog of mistaken ventures which must eventually break loose. A shakeout financial crash then ensues. This is the story of
But in any event currency attacks are again the symptom and not the disease. If
But lest things sound too pessimistic, it is worth noting that these are short-term issues. That