- Blog Post
- Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.
is hard, but James McGregor gave it a go in the Sunday Washington Post:
It is difficult to overstate the transformation that has swept China in the past 15 years. To frame it in terms of comparable historical changes in the United States, China has been simultaneously experiencing the raw capitalism of the robber baron era of the late 1800s; the speculative financial mania of the 1920s; the rural-to-urban migration of the 1930s; the emergence of the first-car, first-home, first-fashionable-clothes, first-college-education, first-family-vacation middle-class consumer boom of the 1950s; and even aspects of social upheaval similar to the 1960s.
Hat tip to Stormy for the link.
I tend to be a bit more cautious than some when it comes to forecasting China's inexorable rise. China's enormous dependence on exports strikes me as more of a weakness than a strength; it is indicative of an economy that has failed to generate enough organic consumption growth to match the explosive growth in its productive potential. At some point - relatively soon I would guess - that becomes a problem.
External demand for Chinese goods is not unlimited. Sustained 30% growth off an export base that is now over $600 billion (end 2004) is rather hard - though China is on track to do it this year. But that just increases China's exposure to the global economic cycle.
Moreover, the Chinese equivalent of the "speculative financial mania of the 1920s" is not quite the same as the speculative 20s in the US. China's stock market has not exactly boomed recently. The speculative financial mania has very much been a bank-financed speculative financial mania. That too is risky.
Michael Mandel and I do not see eye to eye on the US trade deficit, but I too believe there is a real risk of a financial crisis in China. One note of caution though: what is bad for China is not necessarily good for the US. A crisis in the Chinese banking system would almost certainly lead China's current account surplus to soar, as investment collapsed. See Nick Lardy. That would really bring a lot of simmering tensions to the forefront.
Plus, a crisis in China might not reduce the risk of financial trouble in the US. Less hot money might flow into China. That would reduce China's capacity to finance the US. A rising current account surplus would be more than offset by reduced hot money inflows. China reserves would still go up, but not quite at their current pace - even as its current account surplus exploded.