Western Debt Crises And China9 July, 2011, 4:31. Posted by Zarathustra
Tags: Debt, Economy, United Kingdom, United States
A few days ago, I came across Gideon Rachman of the Financial Times’ view on how the US debt ceiling nonsense and the European debt crisis are essentially the same problem. Of course, they are the same: it’s all about debt.
The bit which really intrigued me, however, is this:
Among Chinese leaders and intellectuals, it is now standard practice to suggest that westerners of all sorts should stop trying to “teach China lessons” – given the depth of their own political and economic problems.
I actually think the issue goes beyond the increasing unwillingness of Chinese authorities to even pretend to listen to Western complaints about human rights. Unless you buy the Nouriel Roubini argument, and I don’t, China is going to be the world’s largest economy within ten or 15 years, bigger than America or the euro-zone. And, in case anyone has failed to notice, it’s a Communist country. Every year China continues to grow, the case that countries need to be democracies in order to become wealthy and developed becomes more tenuous. In fact, what’s happening both in America and in the EU at this point is raising the possibility that democratic governance may in some modern situations be inimical to competent economic stewardship. The incentive structure created by democratic political competition in an internet-era media society may actually be driving countries towards fiscal self-destruction. We’re increasingly getting a polarised, viciously divisive, intellectually bankrupt, wildly irresponsible populism that lives up to every negative caricature of multiparty democracy that a CCP ideological hack could dream up. That’s certainly what the behaviour of the tea-party-driven GOP and the Party for Freedom suggests.
Paul Krugman wrote in 1994 at Foreign Affairs (you can read it here) on Asia’s Miracle. In short, he was not impressed. The opening paragraph includes the following:
The leaders of those [Asian] nations did not share our faith in free markets or unlimited civil liberties. They asserted with increasing self-confidence that their system was superior: societies that accepted strong, even authoritarian governments and were willing to limit individual liberties in the interest of the common good, take charge of their economies, and sacrifice short-run consumer interests for the sake of long-run growth would eventually outperform the increasingly chaotic societies of the West. And a growing minority of Western intellectuals agreed.
And we all know, of course, that there came the 1997 Asian Financial Crisis.
I am quite fascinated by the lack of confidence of the West, questioning whether democracy and free market capitalism, something which have been really the pillars of the Western modern civilisation, are actually bad things. This is quite similar to the kind of sentiment Paul Krugman pointed out in 1994, which was, as he predicted accurately, unnecessary.
And it is interesting to point out that China, as a weird mixture of centrally-planned and free market economy, shows more support for free market capitalism these days. Not quite so on democracy, of course.
I am known here for my pessimistic view on China. As far as the short-term is concerned, I am feeling depressed about what may happen to China (see 10 Reasons to Short China). Whether we will see a hard landing in this or next year will all depend on what the government will do, as I have recently explained.
The original piece by Gideon Rachman of the Financial Times was about debt. So let’s talk about debt. The local governments of China had 20 trillion Yuan of debts, depending on how you count them. Together with central government debt and other debts we know, the debt-to-GDP ratio of China may well approach almost 90%. If you also include the debts of state-owned enterprises, which are ultimately government’s obligations should these companies failed, the ratio will jump to 150% as Professor Victor Shih explained, which is probably not far off from Greece. Yes it’s all about debt, but China has enormous debt too.
The good news is, however, that China is not Greece. Like the United States and the United Kingdom, China has its own currency, and ultimately they can print money to bailout everyone. As Victor Shih further explains why a Lehman-style banking crisis is virtually impossible:
The Central Bank of China has already explicitly said that it would bail out all the distressed financial institutions, so there’s no Lehman Brothers problem, where a big financial institution could get wiped out. But this creates a problem of moral hazard: You’re telling the banks that they’ll always get bailed out, so they never need to improve their performance.
The problem is inflation. Every time you bail out a bank, the Central Bank essentially prints new money and gives it to the banks, so everything remains liquid. If you do this year after year, you drive up prices, by flooding the economy with new money.
This is the reason why I am wary about the prospect of the Renminbi (just as everyone else is bearish on the US dollar) even though the Chinese Yuan seems like a no-brainer one-way upward bet. Not only is the central bank in power to create as much money as they wish, the government can also implement fiscal stimulus to avoid a significant slowdown.
Worse still, unlike the United States and the United Kingdom, there will be no forces to counter that.
In the United Kingdom, we have a Conservative-Liberal Democrats coalition government who are so keen on cuts to a point which threatens growth. In the United States, we have the Republicans using the debt ceiling talks as a weapon to force the government into spending cuts. And even the post-debt ceiling austerity is not yet in place, we have already seen the effect of austerity, as Paul Krugman and others have pointed out in today’s ugly job report that government has been cutting jobs.
In China, if the debt bubble blow up, I can see no forces similar to those the United States or the United Kingdom in opposing government spending and money printing. Instead, in hope not to threaten growth, the government will bail everyone out, increase government spending like it did in late 2008, and print more money which put Ben Bernanke’s quantitative easing to shame. In fact, quantitative easing has done nothing to substantially increase money supply in the United States. The central bank which has increased money supply substantially was the People’s Bank of China, not the Federal Reserve. That’s why I have been controversially bullish on the US dollar.
The West might have lost confidence in its pillars of civilisation, and the Chinese might be getting so confident in itself that there is no need to take any lectures from the West. But looking closely, we are all in it, all together.