Monday, October 27, 2008

The China Illusion

As those industrial economies sputter, China is now in a position to pick up some of the slack: selling more of its own goods at home and buying more from the rest of the world.

China's growth is an illusion, a figment. Two things combine to create that illusion. First, the peg of the yuan to the dollar. Second, the Chinese penchant to pour concrete.

On one hand, some of the growth of China is undoubtedly real. The middle class is burgeoning. On the other, the peg artificially stimulates the economy even with sterilization. Sure, they're producing stuff. No doubt about it. Toaster ovens and plastic thingummies.

Oh, and they are building skyscrapers and ports and roads. That's what everybody finds so impressive. Those delightful, futuristic buildings. They're tangible and beautiful. But remember property booms are fantastic for making everybody think the economy is gangbusters. The Asian financial crisis started in the Thai real estate market. The current global financial meltdown started in the US housing market.

Furthermore, I believe this global slowdown will put huge pressure on the Chinese economy in a way that reveals the underlying weakness. It is not the dragon everybody believes, and the unwritten contract between the communist regime and the people -- technocratic ability to grow the economy in exchange for power -- might be broken sooner than many think.

For the long-term, Americans will need to start worrying when the Chinese start building stuff that we can't. That's a long, long way off. As I have been saying for a long time, do not take the projections that the Chinese economy will overtake the US by 2020 or even 2050 seriously. Those projections are a combination of dilettantism, fear, and anti-Americanism.
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