Can the Earth support Chinese growth? The coming boom-bust cycle.In the hope of stimulating a lively debate, let us consider four scenarios for the economic performance through 2015-20 of China and Japan, relative to each other, and relative to appropriate growth paths for a developing and an industrialized in·dus·tri·al·ize
v. in·dus·tri·al·ized, in·dus·tri·al·iz·ing, in·dus·tri·al·iz·es
1. To develop industry in (a country or society, for example).
2. economy--say 7 percent for China and 3 percent for Japan. The four scenarios to the left are followed by questions for discussion below.
Question: Which scenario would most seriously undermine the security status quo [Latin, The existing state of things at any given date.] Status quo ante bellum means the state of things before the war. The status quo to be preserved by a preliminary injunction is the last actual, peaceable, uncontested status which preceded the pending controversy. in Asia?
Answer: Scenario One.
Question: Which scenario would be worst from the viewpoint of global economic growth?
Answer: Scenario Two.
Question: Which scenario, by concentrating the world's resources in Asia, would most seriously threaten the U.S. position as the world's sole super power?
Answer: Scenario Four.
Question: Which scenario, therefore, might the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. see as the most desirable of the four?
Answer: Scenario Three.
Question: Which scenario is associated with the greatest country risk for China?
Answer: Scenario Three.
Question: Which scenario runs most contrary to the general prevailing mood of optimism on China and of pessimism pessimism, philosophical opinion or doctrine that evil predominates over good; the opposite of optimism. Systematic forms of pessimism may be found in philosophy and religion. on Japan?
Answer: Scenario Three.
Scenario Three thus emerges as perhaps the most intriguing--if not necessarily the most likely--of the four scenarios.
I have long argued that the first part of Scenario Three--sustained Japanese recovery is not an impossibility Impossibility
See also Unattainability.
belling the cat
mouse’s proposal for warning of cat’s approach; application fatal. [Gk. Lit. . It is becoming more difficult as Japan's population ages and shrinks. Nevertheless, given deregulation Deregulation
The reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry.
Traditional areas that have been deregulated are the telephone and airline industries. and higher interest rates, Japan can still turn things around.
In support of the second part of Scenario Three, I would like--in the role of devil's advocate--to focus on two major downside risks Downside Risk
An estimation of a security's potential to suffer a decline in price if the market conditions turn bad.
You can think of this as an estimate of the amount that you could lose on a stock or other investment. for China; namely
* The risk that the Earth is simply not big enough to sustain rapid Chinese growth;
* The risk that, in the absence of a properly functioning market mechanism, investment-led growth will lead China into one boom-bust cycle after another, with each boom less sustainable than the previous one.
CAN THE EARTH SUPPORT CHINESE GROWTH?
The Chinese economy today is reminiscent of the Japanese economy in 1973, when the first oil crisis drove down Japan's long-term growth rate from 10 percent to 4 percent. But Japan then was a small fish in a big pond. China now is a much bigger fish in a more overcrowded o·ver·crowd
v. o·ver·crowd·ed, o·ver·crowd·ing, o·ver·crowds
To cause to be excessively crowded: a system of consolidation that only overcrowded the classrooms. pond.
China's total population is 1.3 billion (ten times that of Japan), of which around 900 million Chinese may be assumed to be of working age. If we assume a labor participation rate of 65 percent, then given that an industrializing economy normally requires around 20 percent of the working population to be employed in manufacturing, this raises the prospect of manufacturing employment in China amounting to 120 million workers--a staggering total when seen against the 80 million for all OECD OECD: see Organization for Economic Cooperation and Development. countries combined.
An early warning sign of the "big fish in a small pond" problem was briefly seen during 2003 when, at the peak of the boom in Chinese infrastructure investment, the world did not seem to have enough resources of iron ore, copper, nickel, and other raw materials for China to gobble up to capture in a mass or in masses; to capture suddenly.
See also: Gobble .
Even at the peak of its post-war expansion, Japan never came near to creating such a global shortage of resources.
Chinese growth is liable to be constrained con·strain
tr.v. con·strained, con·strain·ing, con·strains
1. To compel by physical, moral, or circumstantial force; oblige: felt constrained to object. See Synonyms at force.
2. not only by such global shortages of industrial commodities, but also by the limits of its own natural and human resources The fancy word for "people." The human resources department within an organization, years ago known as the "personnel department," manages the administrative aspects of the employees. .
Water is one great problem. The Yellow River is already dry for more than half the year. Water contamination, especially around Beijing, is becoming dire.
Agricultural land is another great problem. Farmers working in the city send money home to build houses on what used to be farmland, in the suburbs of big cities, local governments create new industrial developments on what used to be farmland. While the stock of land available for food production is thus reduced, Chinese people The following is a '''list of famous Chinese-speaking/writing people. Note in Chinese names, the family name is typically placed first (for example, the family name of "Xu Feng" is "Xu"). are eating more meat, which, as a means of obtaining nutrition from the land, is many times less efficient than eating rice, grain, and vegetables.
The aging and shrinking of the population is yet another great problem for China--perhaps even more serious for China than for Japan, as the effects of the one-child policy The Planned Birth policy (Simplified Chinese: 计划生育; Pinyin: jìhuà shēngyù) is the birth control policy of the government of the People's Republic of China (PRC). begin to be felt.
CAN CHINA GO BEYOND BOOM AND BUST In economics, the term boom and bust refers to the movement of an economy through economic cycles. The Boom-Bust economic cycle
According to most economists, an economic boom is typically characterized by an increased level of economic output (GDP), a corresponding ?
The Chinese way of economic development so far has been massive investment in infrastructure culminating in two or three years of boom, followed by six to eight years of relative bust, followed by another boom.
Thus, during the boom from 1991 to 1993, surging investment in infrastructure was accompanied by rapid inflation. This necessitated tightening measures, as a consequence of which year-on-year growth of fixed capital investment fell from over 50 percent in 1993 to less than 30 percent in 1994 and from there to just under 8 percent in 1997 (see table).
At the peak of the latest boom, in 2003, an influx of foreign capital and a corollary corollary: see theorem. surge in money supply, compounded by speculative anticipation of a rise in value of the Chinese renminbi
"CNY" and "RMB" redirect here. For other uses, see CNY (disambiguation) and RMB (disambiguation). , caused year-on-year growth of fixed capital investment to climb to 23 percent.
What has been particularly significant during the latest upsurge in investment is the failure of consumption to underpin overall growth. In 1993, when the ratio of fixed capital investment to nominal GDP Nominal GDP
A gross domestic product (GDP) figure that has not been adjusted for inflation.
It can be misleading when inflation is not accounted for in the GDP figure because the GDP will appear higher than it actually is. rose to 41.4 percent, consumption still accounted for 50 percent of GDP GDP (guanosine diphosphate): see guanine. . In 2003 investment and consumption were more or less equal, at just over 44 percent. This is further ground to suspect that the boom of 2003 was not a sustainable resurgence but rather an investment-led bubble.
By type of investment, construction and real estate investment has been the largest contributor to investment growth. This reflects the dominant role that regional governments have played in new infrastructure investment. They have competed with each other to attract foreign companies by constructing large industrial zones with good transport and communication links, and by building new housing developments nearby.
If China's boom-and-bust pattern of economic growth continues in this way--led by investment practices which are often economically irrational and tainted taint
v. taint·ed, taint·ing, taints
1. To affect with or as if with a disease.
2. To affect with decay or putrefaction; spoil. See Synonyms at contaminate.
3. with corruption--then the following nine-point version of Scenario Three may not be too far-fetched.
The peak of each new Chinese boom is lower than, or at best on a par with, the previous peak, first because the Earth does not have enough resources to allow Chinese growth beyond that peak, and second because growth is not underpinned by consumption. China therefore struggles to maintain a long-term growth rate above the 5 7 percent range which, for the developing Chinese economy, represents stagnation Stagnation
A period of little or no growth in the economy. Economic growth of less than 2-3% is considered stagnation. Sometimes used to describe low trading volume or inactive trading in securities.
A good example of stagnation was the U.S. economy in the 1970s. . When growth falls below 7 percent, unemployment leaps up and corporate profitability plummets.
Inflation and Deflation deflation: see inflation.
Contraction in the volume of available money or credit that results in a general decline in prices. A less extreme condition is known as disinflation.
Each boom brings global shortages of raw materials, leading to commodity price inflation, and at the same time each boom adds to excess supply capacity, leading to final goods deflation. Each bust leads to deflation in both commodity and final goods prices. Overall, the inflationary impact of boom-bust growth is progressively outweighed by the deflationary de·fla·tion
1. The act of deflating or the condition of being deflated.
2. A persistent decrease in the level of consumer prices or a persistent increase in the purchasing power of money because of a reduction in available impact.
Low Operating Rates Operating rate
The percentage of total production capacity of a company, industry, or country that is being used.
The portion of capacity at which a business operates. ; Low Profitability
A chronic excess of supply capacity--the result of regional governments competing with each other to attract foreign companies--causes operating rates to remain low in all but the most economically hyperactive hy·per·ac·tive
1. Highly or excessively active, as a gland.
2. Having behavior characterized by constant overactivity.
3. Afflicted with attention deficit disorder. periods. This makes it impossible for firms to make money except when the economy is overheating Overheating
An economy that is growing very quickly, with the risk of high inflation. .
The stage is thus set for political conflict between local governors, bureaucrats, and businessmen, who wish local firms to be profitable, and the central government, which cannot allow inflation to go on accelerating and the trade balance to turn to deficit.
Financial Straits Straits: see Dardanelles; Bosporus.
When the central government moves to end a boom by tightening, bankruptcies of Chinese firms rise and bad loans increase. As a result, any progress by Chinese banks to shore up their balance sheets is erased e·rase
tr.v. e·rased, e·ras·ing, e·ras·es
a. To remove (something written, for example) by rubbing, wiping, or scraping.
For Japanese and U.S. companies and banks, the perceived risk of China-related investment grows. Particularly vulnerable are automakers and other companies that have targeted the Chinese domestic market through direct investment, firms that export their products to China (and have accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying ), and financial institutions that extend loans to China.
As loans to China turn sour, and as foreign operations in China become unprofitable, capital flight from China begins. Foreign companies begin to withdraw. Chinese companies Chinese owned companies can be defined as enterprises within mainland China, Hong Kong, Macau and the Republic of China (Taiwan):
The End of Communism
Conflicts between regional and central government, popular unrest and financial instability associated with the deteriorating economy, and the historical trend towards democracy, combine to make one-party rule untenable.
While China Falters, Japan Recovers
The negative effects on Japan's economy of upheaval in China are far outweighed by the positive effects of deregulation and higher interest rates. Thus, Japan's long-delayed shift to a more services-oriented economy gathers speed. With a new breed of entrepreneurs discovering at last that the true potential for growth lies with new and small service-providing businesses, Japan returns to a sustainable growth path of 3 percent. It thus defies the conventional wisdom and rounds off Scenario Three--Japan turns the tables.
SCENARIO ONE: China Dominates
The Chinese economy maintains rapid growth while the Japanese economy continues to under-perform.
SCENARIO TWO: Both Languish
The economies of both China and Japan under-perform.
SCENARIO THREE: Japan Turns the Tables
Japan recovers. China under-performs.
SCENARIO FOUR: Both Boom
The economies of both China and Japan meet or surpass their respective growth targets.
How China's Boom-Bust Economy Is Reflected in Steel
Following the boom of 1993, China's net imports of steel hovered at one million tons per month until 2001. Net imports of steel took off again in 2002, to meet the demand from booming infrastructure investment. But steel imports are now falling sharply, signaling the end of the investment bubble. The big difference between today's plunge in net imports and the one in 1993-94 is that the current fall in imports is accompanied by a surge in exports. This reflects the fact that overall Chinese production capacity, following massive investment in the steel sector itself, is now bigger than that of Japan and the United States combined.
In the current adjustment phase, it is highly probable that China will be a net exporter of steel. This may be a sign of things to come: if the boom-bust pattern continues, during its bust periods China could turn from a net importer to a net exporter of industrial commodities, and therefore from an inflationary to a deflationary force in the global commodity market.
China GDP Share Fixed Capital Private Nominal GDP Formation Consumption 1987 100.0% 32.9% 52.5% 1988 100.0% 32.9% 54.4% 1989 100.0% 27.1% 53.3% 1990 100.0% 26.8% 51.5% 1991 100.0% 29.4% 51.1% 1992 100.0% 34.5% 51.6% 1993 100.0% 41.4% 50.0% 1994 100.0% 37.5% 46.2% 1995 100.0% 34.7% 46.1% 1996 100.0% 34.0% 46.9% 1997 100.0% 33.8% 46.8% 1998 100.0% 35.3% 47.1% 1999 100.0% 35.9% 47.9% 2000 100.0% 36.5% 47.9% 2001 100.0% 37.8% 47.2% 2002 100.0% 40.1% 46.1% 2003 100.0% 44.5% 44.8% 04/1-6 100.0% 44.4% Year over year Fixed Capital Private Nominal GDP Formation Consumption 1987 1988 23.6% 23.6% 28.0% 1989 14.0% -6.2% 11.7% 1990 10.5% 9.1% 6.9% 1991 14.2% 25.5% 13.2% 1992 19.6% 40.0% 20.8% 1993 30.0% 56.1% 25.9% 1994 43.4% 29.9% 32.7% 1995 29.9% 20.4% 29.5% 1996 17.3% 15.0% 19.3% 1997 8.6% 7.8% 8.4% 1998 5.2% 9.8% 5.9% 1999 4.8% 6.7% 6.5% 2000 9.0% 10.7% 9.1% 2001 8.8% 12.8% 7.0% 2002 8.1% 14.5% 5.7% 2003 11.0% 23.0% 7.7% 04/1-6 16.3% 28.6% Source: Datastream, National Bureau of Statistics of China
Tadashi Nakamae is President of Nakamae International Economic Research in Tokyo.