Kenneth Rogoff: China May Be The Economy To Lose Sleep Over

What if China's economy goes into a slump, what then? Is there a significant possibility this could happen? Ken Rogoff says there is reason to worry:

China may yet be economy to lose sleep over, by Kenneth Rogoff, Commentary, Financial Times: Given the highly vulnerable state of the US and European economies, what would happen to global growth if the Chinese juggernaut also started sputtering? ...

China’s remarkable resilience to both the 2001 global recession and the 1997-98 Asian financial crisis has convinced almost everyone that another year of double-digit growth is all but inevitable. In fact, the odds of a significant growth recession in China – at least one year of sub-6 per cent growth – during the next couple of years are 50:50. With Chinese inflation spiking, notable backpedalling on market reforms and falling export demand, 2008 could be particularly challenging. ...

China ... faces economic, financial, social and political landmines just like any other emerging market, with epic environmental problems to boot. And, throughout history, no emerging market has escaped bouts of crisis indefinitely.

Inflation of more than 6 per cent is the immediate problem. Those who think inflation is caused by too little pork rather than too much money are wrong. China’s relatively pegged exchange rate system has led the authorities to flood the economy with renminbi. ... The real surprise is that inflation did not sprout earlier. The authorities must stuff the inflation genie back in the bottle. It is not going to be easy...

Protectionism is another growing risk. With income and wealth inequality rising throughout the developed world, politicians may start lashing out at China with trade sanctions... China’s explosive export growth has made it far more vulnerable to a fall in exports than it was during the 2001 global recession.

Perhaps the greatest threat to China’s expansion, however, comes from ... its own exploding inequality levels. According to World Bank statistics, income inequality in China has leapfrogged that of the US and Russia, which is no small feat. Rising inequality is placing enormous strains on the political system, as is evident from a recent sequence of ill-considered policies ... aimed at mitigating the problem. The government’s recent attempt to fight food inflation by using price controls is a highly conspicuous example.

But so, too, is the dubious new labour law which, at least on paper, prevents ... firing workers with 10 years or more experience. It is as if China hopes to transform itself into France. Indeed, the greatest danger to China’s economy is that, after years of market-oriented reform, the country’s leadership seems to be losing faith in markets and adopting policies such as rationing that turn back the clock to old-style communist days. With rising inflation, bloated investment and a soft global economy, now is hardly the time for China to make its system more inflexible. ... Rather than try to deal with inequality by labour market fiat, the government would do better to improve the social safety net through provision of more and better healthcare and pensions.

Rather than deal with inflation through price caps, China should accelerate exchange-rate appreciation, thereby reining in money growth. If China were to slow dramatically, while growth in Europe and the US was still weak, recent low global interest rates, high commodity prices and strong global growth would be history. Global policymakers and investors who are losing sleep over US growth ought to pay more attention to rising risks coming from the other side of the globe.

Comments

[Philip]

World history says China is doomed to a horrible next few years. World history is sometimes not good at predicting the world future, but I wouldn't put too much money against it.

[JMR]

There's a theory, which is based on the Austrian School of economic thought, that reckons that China's epic boom is in for a bust- Can China really ‘de-couple’ from a US recession?

[KSH]

China is due for a popular revolt. Expectations of ever increasing living standards are going to run head long into a slowdown in economic growth and rising inflation. It would be ironic if it were to cancel the Olympics since the leadership has been pumping up economic growth to "ensure" a smooth event.

How such a revolt would play out is anyone's guess. However, it is likely to create massive uncertainty which will be a boon for the dollar. Further down the road whoever takes power may find that the only source of funds is the central bank which would lead to a selling off of vast amounts of US Treasuries they hold.

These things are not to lose sleep over but celebrate. 1+ billion people claiming their freedom is a cause for celebration. OK, maybe I will lose sleep but in a good way.

[calmo]

1+ Billion people claiming their freedom...a cause for celebration.
Nationalist celebration right? Do we ever see this "freedom" thingie linked to anything else? [Ok, besides those hi-end chicken eggs, the "free range" eggs, just so that those sensitive consumers can scramble them knowing that their moms were not putting out in some little cage until they succumbed to the stew hen grade. Anybody ever run into a free range stewing hen? For some reason, I don't think the sensitivities extend to stewing hens...proper free range hens would never stoop to such a low grade.]
So KSH do you feel that 30M Iraqis are getting closer to celebrating...like those free range hens?

[don]

The current global economic setup has to end sometime. The model of Asian prosperity based on trade surpluses cannot last forever. It has been said that China and Japan must build up savings, because they have aging populations. But the U.S. has a tremendous overhang of promised benefits to the elderly that is just beginning to come due as its so-called 'baby-boomers' enter retirement. Its people should be saving for the future, too.

The current U.S. response to its economic slowdown is to encourage greater U.S. borrowing by the private sector and to inrease government borrowing. But the U.S. will have a hard time maintaining demand while simultaneously running huge trade deficits to support demand abroad. Europe is lending some support, as dollar depreciation allows the U.S. to gain some demand at Europe's expense. But I just don't think they have shoulders broad enough to support solid global growth.

[KSH]

Calmo - I don't cook, and I'm not following your comment. Since the age when I was old enough to be informed of the outside world, here are some of the people who claimed their freedom and was a cause for me to celebrate, and I'm doing dates from memory so they maybe a little off.
1986 - Filipino People Power overthrowing Marcos
1989 - East Germany, Poland, Czechoslovakia, Hungary, South Korea, and in a different way black South Africa
1991(?) - Taiwan, Estonia, Latvia, Lithuania, Slovenia
2005 - the Ukraine, Georgia

I'm sure I'm forgetting a few. But the question before us is where goes China. I agree with Rogoff's premise that the world is underestimating the potential for negative shocks to emanate from China. I think that inflation is a concern as is slowing growth possibly exacerbated by heavy handed interference in the economy, but I believe those shocks will cause a more fundamental political shock. The point of the last paragraph of my previous post was to remember that "negative" in this context is a quantitative descriptor (eg. higher prices of goods exported from Chinat) and not a "qualitative" one, as a popular uprising should witness a freer Chinese people. And that is a "positive" no matter how it might whipsaw our investments or pinch our wallets at the store.

I hope that responds to your comment which had a slightly "negative" tone. You will have to further explain to me why you think the citizens of Iraq are free range chickens.

[hari]

China is definitely NOT in store for popular revolt. On the contrary, China is in the process of defining its growth path forward and reigining in rampant +6% inflation.

The NPC meets early March and will lay down macroeconomic framework of policy on economic stabalization including unbridled credits issued by the state controlled banking sector.

Don't visualize mainland mandarins as plutocrats who don't understand global economic factors and their own national interest. Given their monopoly of power, the mandarins can literally argue and find the solution(s) which meet their political masters approval - as the engine of growth continues to move forward (however) with reduced velocity.

Chinese think-tanks are now in over-drive to produce discussion papers for the NPC session from social inequality indecies to galloping inflation, and potential retrenchment of exports.

EU is now the main export market for China - not US. So watch out for EU protectionist (NTBs) policy to control trade flows from mainland.

[hari]

Calmo -

I lost a piece on your free range stewing hens...
Mark didn't retrieve it either...

I'm not a professional cook but enjoy creating delicious stuff from free range hens, Calmo, to go with my wine cellar!

Remember, I'm a decade older than Paine, and enjoy your comments a lot.

[James Kroeger]

China is due for a popular revolt.This kind of fantasy speculation was very popular in the US back during the Reagan Era. The idea was that the suffering masses in the Soviet Union would---with the encouragement and support of the US---rise up and overthrow their evil oppressors. Of course, precisely the opposite occurred. When change came, it was from the top-down, not from the bottom-up.

And so it happened that the heroes of liberty were turned out by the Communist Party itself. You know, that cabal of mean-spirited Evildoers who spent all their free time trying to figure out how to enslave the rest of the free world. Yes, it was the Communist Party's Central Committee that put Gorbechev in power. Did they forget how to perpetuate an evil mind-set from one generation to the next?

Those who entertain similar fantasies re: China are going to have to wait a long, long time for a great moment of rebellion that is never going to happen...

[v]

America is not in a recession, because its economy grew by 0.6% percent last quarter, but china will be in a recession if its growth falls to 6%. What has the world come to.

There will be no revolution in china. There is no competing ideology for a revolution to succeed. chinese is perfectly cool with economy first policy (freedom maybe later). Average chinese will argue against freedom and for stability with Jeffersonian fervor and conviction.
Worst case there may be widespread riots by those left out for a share of economic pie and not for freedom.

[v]

..chinese is are perfectly cool..

[kthomas]

Great, another know-it-all sinophile.

[Meh]

There's some interesting irony in that Rogoff worries about China trying to become France whilst commenters here point to the worry of social revolution (which is what the efforts "to become France") are designed to address...