Posts By John Ross

1_a_Chineseind

China is winning the new global industrial contest

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The international financial crisis brought about a radical change in the structure of international industrial competition, and China is winning this new contest. That is the only conclusion that can be drawn from the pattern of industrial expansion and contraction in the major industrial centres in the five years since the beginning of the international financial crisis in 2008.

As taking comparisons only for single years can obscure this fundamental trend, Figure 1 shows the changes in industrial output during the entire last five year period in the world’s four major industrial centres – China, the U.S., the European Union (EU) and Japan. The pattern is clear and striking.

  • U.S. industrial production on the latest data, for February 2013, remained 1.3% below its level five years previously – essentially stagnating over the five year period taken as a whole.
  • Industrial output in the EU remains at 12.2%, i.e., significantly below its level five years ago. EU industrial production has fallen since February 2011.
  • Japan’s industrial production remains at 19.2%, i.e., substantially below its levelof five years ago and has also fallen since February 2011.
  • China’s industrial output is 76.1% above the level five years previously.

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chinaconsumes

Why China Can Maintain 8% Growth

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China’s National People’s Congress (NPC) has set a 7.5% official GDP growth target for this year. Lin Yifu, former Senior Vice-President and Chief Economist of the World Bank, and one of China’s most important economists, predicts that China can maintain 8% annual growth for 20 years. A key question is evidently whether such targets are realistic. Can China maintain this type of growth rate?

The immediate negative factors are evident. The international context for China’s economy this year is bad. The Eurozone economy is shrinking, Japan is stagnant and US growth is anemic. A 16% fall in world commodity prices since their peak has led to slower growth in major developing economies such as Brazil.

China’s policy makers initially underestimated the problems in the advanced economies. Adjusted for inflation, imports by developed economies have not regained pre-financial crisis levels. China therefore did not achieve its 2012 target of a 10% trade increase – the actual rise was 6.2%. The lower 8% trade growth target set for 2013 is more realistic if still challenging. All major motors for growth will therefore have to come from China’s domestic economy.

In terms of strengthening China’s relative international economic position, and maintaining its ranking as the world’s most rapidly growing market, all this makes no difference. China is the world’s most open major economy, so it cannot cut itself off from international trends. China’s growth rate inevitably goes up or down with global economic fluctuations – the constant is that China strongly outperforms these trends.

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China – the World’s Emerging Financial Superpower

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The US magazine Worth published a report with its analysis of who were the 100 most powerful people in global finance. Four were from China – Shang Fulin, Chair of China Banking Regulatory Commission; Zhou Xiaochuan, Governor of the People’s Bank of China; Lou Jiwei, Chair and CEO of China Investment Corporation and Jiang Jianqing, Chair of the Industrial and Commercial Bank of China (ICBC). They were respectively ranked 14th, 15th, 27th and 31st.

That only four of China’s top financial figures were included in the list in fact showed how much understanding of the power of China’s financial and banking system still lags behind its reality. There are exceptions – for example Bloomberg journalists Henry Sanderson and Michael Forsythe in their recent book China’s Superbank simply stated that Chen Yuan, chair of China Development Bank, was ‘the world’s most powerful banker.’ But in banking it would seem Deng Xiaoping’s famous advice that China should ‘hide brilliance, cherish obscurity’ is alive and well.

This is a serious error, as will rapidly become apparent. To grasp the underlying dynamic of the global financial industry it should be grasped that it is a mistake to understand the strength of China’s economy by statistics such as that China produces as much steel as the next 38 countries combined, more cement than the rest of the world put together, that it is the world’s largest market for TVs, refrigerators, mobile phones, cars, or that it has more than twice as many internet users as the US. These figures are impressive but far from illustrating the real core of China’s economic power. The real center of China’s economic strength, which determines both its domestic and global expansion, is unparalleled financial strength.

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China’s Economy Speeds Up

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China’s economy in 2012 was “a tale of two halves”: In the first six months slowdown, even a feeling of developing crisis; in the second half recovery and accelerating growth. The story therefore had a happy ending. But it is worth noting what went wrong in the first half, and how it was corrected in the second, as this contains lessons for the future.

The initial problem in early 2012 was simple. China’s economic policy makers underestimated the problems in the developed economies. China’s official prediction of 10 percent export increase in 2012 could not be achieved without significant growth in developed markets. This did not materialize – the US economy grew slowly while Japan and the EU’s fell into a new decline. Consequently, as is now officially stated, 2012′s export target will not be achieved.

This itself was not an extremely serious error. It is impossible in economics, due to the enormous number of variables involved, to make precisely accurate predictions, only orders of magnitude can be accurately predicted. The undershoot in export growth in 2012 will not be enormous. To compensate for international demand being weaker than predicted China required a domestic economic stimulus. It was here that a much more serious problem initially arose.

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Note to neo-liberals: Earth orbits the sun

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In the next 15 years one of the greatest turning points in world history can occur. In five to seven years China will become the world's largest economy. In about 15 years China will achieve the annual $12,000 GDP per capita qualifying it as a developed economy by World Bank criteria. China is so large that these events will change the world. For example, China's 1.3 billion population is larger than the combined 1.1 billion of all existing developed economies.

But these successes are not inevitable. China has enjoyed tremendous economic achievements since 1978, experiencing in the last decade the fastest per capita GDP growth in any major economy in history, and the fastest growth of consumption in a large country. It achieved this because it followed economic policies laid out by Deng Xiaoping from 1978. But now an attempt is being made by some to divert China onto an economic path, neo-liberalism, which has failed wherever it has been carried out. Examining the factual record of neo-liberal policy shows the scale of what is at stake both for China and internationally.

Neo-Liberal policies were applied in Latin America in the 1980s. The result was that Latin America's per capita GDP fell by an average 0.5 percent a year for 10 years.

In the former Soviet Union neo-liberal shock therapy, based on full privatization, was carried out after 1991. Russia's GDP fell 36 percent, the greatest decline of a major economy in peacetime in modern world history. Russia's male life expectancy fell by four years, to only 58, by 1998 and Russia's population today is 7 million less than it was in 1991.

Neo-liberal policies in the US instigated under Ronald Reagan led to the colossal accumulation of debt that culminated in the international financial crisis of 2008. During the earlier Keynesian period of US economic policy, lasting from the end of the Korean War (1950-53) until 1980, US state debt fell from 70 percent to 37 percent of GDP. During the succeeding neo-liberal period US state debt rose to 88 percent of GDP by last year. Over the same period the 10-year moving average of annual US GDP growth fell from 3.3 percent to 1.6 percent. Under neo-liberal policies US state debt more than doubled, and US economic growth halved.

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Investment Will Boost China’s Economy

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The underlying weakness in the US, European and Japanese economies was underestimated in China’s forecasts for 2012. The US is currently consuming more capital than it creates, while its percentage of investment in GDP is near post-World War II lows. Japan’s investment levels have declined for two decades while its savings rate has fallen. EU investment is the lowest percentage of GDP since World War II and declining. These economies cannot achieve rapid recovery under such conditions.

These structural features dictated the poor short term performance of Western economies during 2012. The EU entered a new recession with GDP still 2.1% below 2008’s peak levels. Japan’s latest GDP data shows tortoise like 0.8% annualized growth with output still 1.9% below its peak. US GDP growth decelerated from 4.1% at the end of 2011 to 1.7% in the last quarter. The US PMI fell for three months to 49.6 in August. US industrial production in the same month only rose 2.8% compared to a year previously – less than a third of China’s growth.

The problems in developed economies directly affected China. China’s 10% projected export increase in 2012 will not be achieved, helping explain why China's economy significantly decelerated in the first part of the year. GDP growth fell to 7.8 percent in the first half of the year, while August’s industrial growth declined to 8.9 percent and the official manufacturing Purchasing Managers Index fell to 49.2.

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