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Monday, February 04, 2008

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.

    Posted by on Monday, February 4, 2008 at 02:45 PM in China, Economics, International Trade | Permalink  TrackBack (0)  Comments (13)


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