May 12, 2012
It is now five years since the Great Financial Crisis of 2007–09 began and there is still no substantive sign of a full recovery of the world economy---especially in the US and in Europe. Consequently, concern is increasingly shifting from financial crisis and recession to slow growth or stagnation. Stagnation and financial crisis are now seen as inter-connected judging from what is happening in Spain and Greece.
China is seen to be an exception to this narrative:--the rare ray of sunshine for a global economy in recession. China's massive stimulus package ($585 billion ) enabled it to come out of the Great Financial Crisis period largely unaffected with a double-digit rate of growth and this growth machine is seen to be a counterbalance to the tendency toward stagnation at the global economy level. In Adelaide the local boosters say that everything hinges on BHP going ahead with the expansion of Olympic Dam in South Australia's north. That expansion depends on China continue to boom.
The Chinese exception narrative holds that China's can drive the world economy back into growth, and so keep the developed nations from what appears to be a generation of stagnation and intense political struggles over austerity politics. The complex system of global supply chains that has made China the world’s factory--(think Apple and Foxconn) has also made China increasingly dependent on foreign capital and foreign markets, whilst in turn making these markets vulnerable to any disruption in the Chinese economy.
The disruption in the Chinese economy emerging out of the government’s fixed investment stimulus which worked in part through the encouragement of massive state bank lending, a local borrowing binge and urban expansion that is reliant on the supply of Australia's minerals. What is emerging is serious real estate downturn, a decline in construction and a rise in bad bank loans that is coupled with growing inequality of a factory export machine growth model that is premised on very low wages in the export sector.
The general response to this is that China should transition from export-led growth to domestic demand-led growth. This requires growing the economy’s demand side as well as its supply-side. Fears that the contradictions of the Chinese economy may further imperil the entire world accumulation process—if China is not able to rebalance toward higher consumption, lower debt, and a higher renminbi—are voiced daily in the press of international capital.
In Will China Break? in the New York Times Paul Krugman says in reference to China:
Consider the following picture: Recent growth has relied on a huge construction boom fueled by surging real estate prices, and exhibiting all the classic signs of a bubble. There was rapid growth in credit — with much of that growth taking place not through traditional banking but rather through unregulated “shadow banking” neither subject to government supervision nor backed by government guarantees. Now the bubble is bursting — and there are real reasons to fear financial and economic crisis.
That is not good news for Australia. The RBA , however, reckons that the Chinese state has managed to slow the pace of growth without stalling the fastest-growing major economy. So no worries.