The Hard Landing in China's Future
02/15/2011 10:13 am EST
Recent attempts to shift from an export-driven growth model to one based on domestic consumption are bound to cause a major slowdown, writes Gary Shilling in INSIGHT.
China is highly unlikely to continue her double-digit economic growth for many more years.
It’s relatively easy for developing countries to grow rapidly by emulating the technology of the leaders, or in China’s case, forcing them to share it as the price of doing business in China. Of course, many Chinese have no qualms about stealing Western technology and intellectual property. But as those lands approach developed status, rapid productivity growth falters and they must develop cutting-edge technology themselves.
China’s reliance on exports and a controlled currency for growth will no longer work if US consumers are engaged in a chronic saving spree, as we forecast. Average Chinese export growth of 21% per year on average in the last decade is bound to suffer.
Chinese leaders seem well aware that the 2007-2009 global recession and financial crisis was a wake-up call and that they need to change their economic orientation. Last October, the Communist Party leadership conference called for “accelerating the transformation of the nation’s economic development pattern” and “putting more emphasis on securing and improving people’s livelihood to promote social equality and justice.”|pagebreak|
Stepping on Too Many Toes
Shifting China’s economic model won’t be easy. Local government officials have historically been promoted for producing growth at the expense of other goals such as a more domestically oriented economy. Those with vested interests in continuing the previous export/capital spending/infrastructure-oriented economic model include Communist Party officials, property developers, banks and state-owned enterprises that hoard their earnings rather than pay dividends to the government.
The moves to cool off the Chinese economy have thus far proved inadequate. China will probably continue to tighten economic policy until it gets decisive results—a hard landing, in our judgment.
This will be the shot heard ‘round the world, especially by those who have the same shock and awe over China that they had for Japan in the late 1980s, right before its real estate and stock bubbles broke and it entered two decades of deflationary depression that still persists.
China’s hard landing will also again end the decoupling myth that says developing countries can grow rapidly, independent of advanced lands to which they export. That concept flourished up until the Great Recession, died with it but has subsequently been resurrected.
We’re not suggesting that the long-run growth story for China isn't valid. It's just that her stop-go economic policy will make the ride upward volatile, and that current enthusiasm over China is way overdone.
[Far from forecasting a Chinese slowdown, Shanghai’s lagging stock market may be about to play catch-up to strong growth, suggests John Bollinger. It’s been behaving better of late, notes David Fuller. James Trippon recently described China’s economic policy shift in greater detail.—Editor]