STAFF NEWS & ANALYSIS
Official Figures Obscure China's Decline
By - February 09, 2009

Plunging exports. Factory closures. More than 20 million people thrown out of work. Official data showing that China's economy is cooling but still growing strongly obscure what economists say is a sharp recent decline that has inflicted obvious pain. What is happening matters far beyond China. Whether the third-largest economy is stalling or still growing could affect how quickly the world recovers. A stagnant China would mean less demand for industrial materials and consumer goods from the United States and others. The difference lies in the way growth is measured. Beijing uses a method that compares growth in one quarter with a full year earlier and says its economy expanded by a healthy 6.8 percent in the final quarter of 2008. – AP

Dominant Social Theme: China needs to snap back.

Free-Market Analysis: What does China need to do now? The answer apparently is that it will provide goods and services at a faster rate to its own population. Whether this is feasible is yet another question, but China's aging leaders have decided to try. They need to do something after all to continue to provide better, urban jobs for approximately 400 million rural farmers.

China's economy is aimed at supplying the rest of the world with various products. But that's not working so well since the rest of the world is having trouble affording the things that China is building. But it does not necessarily follow that the Chinese themselves are going to turn into promiscuous consumers, even if China's leaders want them to.

There are several reasons for this. First of all, China's industrialization and now its Westernization, economically anyway, is coming at a very fast clip. There are still plenty of Chinese, no doubt, who remember the Great Leap Forward and subsequent mass slaughter, starvation, etc. Whether such folks and their children and grandchildren can be nudged along into a Western-style consumerist society is an open question. The Chinese savings rate is high for a reason. It may be glorious to be rich, but a lot of the burgeoning Chinese middle class may also have an affection for solvency.

Then there is the issue of how to build a consumerist society, including the leveraging of Chinese savings. To generate enough spending, China will probably have to develop the infrastructure of Western-style spending including credit card companies, increased banking leverage and central banking monetization. The result might stimulate Chinese internal industry and spending – if China can get that far.

There are more problems. The Chinese have an affinity for asset-based money, gold and silver. Given the history that the Chinese have had with unstable fiat money regimes, this is not surprising. The Chinese culture, like the Indian culture, is ancient, and it makes sense that you find an abiding respect for gold and silver in both these cultures.

After Thoughts

The difficulty with the kind of internal industrial consumerism that China is contemplating – as a way to continue to provide employment and avoid a larger and more violent revolution – is that it may end in tears, if it ever gets off the ground. China's financial infrastructure mimics that of the West, but the chances are that it is even less solid and disciplined than Western banks have proven to be. The Chinese system after all has been assembled under a Marxist government – without much in the way of private market controls or infrastructure. Banking in the West under a fiat-money system has broken down. If the Chinese leadership does manage to create a Western-style credit culture, imagine the size of the bust when it finally falls apart.

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