Thought-Factory.net Philosophical Conversations Public Opinion philosophy.com Junk for code
parliament house.gif
RECENT ENTRIES
SEARCH
ARCHIVES
Commentary
Media
Think Tanks
Oz Blogs
Economic Blogs
Foreign Policy Blogs
International Blogs
Media Blogs
South Australian Weblogs
Economic Resources
Environment Links
Political Resources
Cartoons
South Australian Links
Other
www.thought-factory.net
"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

China: an economic spectre looms? « Previous | |Next »
January 27, 2009

The news out of China these days is bleak. It is bad news for 'the China will save us crowd' in the mainstream media. The signs say that the boom is over and it won't return for many years. That is not good news for Australia where, as Alan Kohler points out in Business Spectator the rise in unemployment is still in its infancy.

Economic growth is slowing. China's export markets have collapsed and its exports are down around 30%. People are saying that these export markets--the US primarily--- will remain depressed for 4-5 years. That leaves China with massive industrial over-capacity. China's domestic demand is not capable of absorbing overproduction. So there will a deep recession in China, with factory closures, bankruptcies, and surging unemployment. Surging unemployment means social unrest in China.

Therein lies the structural imbalance problem--too great a reliance on exports. When the United States gets sick so does China. China's proposed infrastructure stimulus package does not address that imbalance. It will create jobs for unemployed Chinese workers and boost the Chinese construction industry, but it won't replace the fall in export demand with increased domestic demand. Nor will the Government's old policy of boosting the Chinese export sector by making its products cheaper( through tax incentives, subsidies, lower interest rates and using its exchange rate regime as a de facto subsidy) increase consumer demand in the US or Europe for low value Chinese goods.

There is rising unemployment in the US and Europe. Until consumers in the developed Western countries start spending again, China's exports will continue to fall, no matter how heavily subsidized the export sector is.

So the optimistic scenario, that the economic growth in emerging economies (China, India, Brazil, Russia etc) would prevent a deepening global recession/contraction that has been caused by an implosion of Wall Street finance does not look plausible.

There is increasing anti-Chinese rhetoric in Washington. It is in China's national interest to reject the anti-Chinese rhetoric and to criticize the shift to protectionism in industrial economies.

Update
Business Spectator is conducting a national conversation about the financial /economic crisis in Australia. Good on them. Someone has to start talking plainly about what is happening now that 'the China will save us crowd' have been left naked.

| Posted by Gary Sauer-Thompson at 8:05 AM | | Comments (5)
Comments

Comments

Alan Kohler says in Business Spectator that:

Up until about a week ago Australia was sleepwalking towards recession, in denial that the global recession would affect us....actually most people can see what's going on: it's just the politicians who have been asleep, or perhaps pretending to be..Up until just the past few days the general proposition from politicians and many economists has seemed to be that it hasn't affected us so far, so it won't.

The rationale for this denial Kohler says has been that our banks are in good shape, so we'll be okay; or China will save us; or our house prices are not like those in the UK and the US and won't decline because there is a shortage of them here; or there's nothing we can do anyway.

What is going to happen in Oz fortunately mostly isn't anything new. The stock market has crashed.Thats happened before. The real estate prices have slumped. Thats happened before.We will have large numbers of unemployed. Thats happened before.Commodity prices are low and demand is low and the mining companies choose to slow down and leave it in the ground till prices improve. Thats happened before.

The new thing that could get ugly is the number of homeless. That needs to be a main concern.

We are told that the current credit crunch could be resolved by making the credit flow again. Larry Summers, Barack Obama's chief White House economic adviser, acknowledged today that more funds beyond the $US700 billion ($A1070 billion) committed to the Wall Street bail-out may be needed to shore up US banks so that people can buy cars, so that people can get mortgages.

Clearly this financial crisis was not caused by credit crunch or credit flow problem; it was caused by the over-consumption of everything (including credit) in countries like USA, UK and to a lesser extent, Australia (just look at the huge trade deficit and we know why). The other side of the world is, of course, plagued by over-production (or under-consumption if you would) in countries like China.

Hence the Labor Government’s generosity to hand out money to prolong our spending spree is wrong. In my view, money should have been spent on improving infrastructure (such as public transport) or investing in green energy such as solar energy (e.g see the comment of the Norwegian solar cell manufacturer UMOE) that could increase employment, address environmental problem and enhance productivity.

On the other hand, China is also adopting wrong policy by allowing some construction works that were prohibited (because of lavishness, environmental problem, land disputes etc.) before the financial crisis to proceed. We can imagine how desperate China is to boost the economy. In my view, the correct policy is to give voucher to the poor to spend, and to establish a social security system for the lower/middle class. I say this because people in China in fact increase their savings in the bank. Imagine that you have no Medicare cover; you need to set aside money for educating your kids etc, what would you do in a time like this? Save more! That is why the Chinese people refuse to spend and it is unrealistic to rely on the Chinese to increase internal consumption and save our mining industries. They can’t and they won’t. I am aware that China set aside some money for improving the medical services but we don’t know how long it would take them to set up an effective system. In China, people object to an economist’s sensible suggestion to raise the University fees of the rich in order to subsidize the poor, because the Chinese officials are so corrupted that people consider the increased fee will simply benefit the corrupted officials and the poor won’t be benefited from it.

If both Australia and China are taking the wrong approaches to tackle the current problem, I simply don’t know how long the economic downturn would last. If it last sooner than we anticipate, the politicians simply shouldn’t take the credit.

Simon you say:

Hence the Labor Government’s generosity to hand out money to prolong our spending spree is wrong. In my view, money should have been spent on improving infrastructure (such as public transport) or investing in green energy such as solar energy (e.g see the comment of the Norwegian solar cell manufacturer UMOE) that could increase employment, address environmental problem and enhance productivity.

I couldn't agree more. An example

Ken,
This example from Victoria describes what took place in Victoria re feed in tariffs for solar panels. They backed off the gross feed in in favour of a net one with limit on the size of micro-power at the last minute due to pressure from the resources department.

Resources equals coal + coal fired power stations.