Morbo Patrick Chovanec has been growing gloomier and doomier over the past couple of years. His recent Foreign Affairs article tries to end with a silver lining, but readers of his blog know it’s a farce. Distortions in the Chinese economy go far beyond an overheated real estate market, and those other bubbles (from precious stones and art to financial assets) are likely to be the prime destinations for panicky investors retreating from a housing disaster. Manufacturing activity is in a downturn, not for lack of financing but because of laggard consumption, domestic and external. The negative wealth effect of falling house prices will almost certainly hurt consumption further; and the promise of affordable public housing is way behind schedule and is likely to take some time to materialize – and even then could be too little too late.
Despite all of this, I’m still relatively bullish on China in the short term. I don’t think China is heading for immediate collapse or even a sharp deceleration. The Chinese economy has some strong fundamentals – including a relatively vibrant private sector – and can probably grow out of some of its problems, but it will be digging some deep holes that might sink it later on. To take Adam Smith woefully out of context, “there is a lot of ruin in a nation”, and China has proved that it has more than your average nation.
At least two wildcards are potential game-changers here. The first has to do with the massive investments the Chinese government and companies have been making in new technologies. These investments could pay off big, catapulting China into the technical-scientific frontier, but they could also fail miserably and leave the Chinese citizen to foot the bill. The second has to do with the political climate in China. With “mass incidents” (protests and manifestations, to the uninitiated) on the rise in number and scope the Chinese government is trying to put a cap on growing “inner-party democracy” spats (factional disputes within the CCP, in plain English) for the sake of regime survival, and intensify crack-downs (not even Batman gets a pass!) and attempts at control of social media and culture. It’s increasingly unclear how much longer this can hold, and a significant economic downturn in the medium term can severely limit the government’s means of appeasing its selectorate and quelling its discontents.
I know this is supposed to be a blog about international security and all, and I promise to post something about the impending war with Iran (cue the dramatic chipmunk) or my contrarian prediction on the future of the Korean Peninsula really soon, and how this situation in China has a direct bearing on both of those imminent crises. Stay tuned for more doom.