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China-US: Double bubbles in danger
of colliding
By Ian Williams
What happens when two bubbles collide? Do they
both burst, or do they coalesce and become an even
bigger bubble - which will eventually burst even more
spectacularly? That is the question posed by the growth
figures from both the US and China, whose growth rates
are tied in ways that neither seems to want to admit too
loudly.
Even before this week's figures on
China's explosive 9.1 percent growth in 2003, which many
commentators thought actually understated the reality,
the United Nations' annual economic report had
identified the People's Republic of China as the
locomotive for growth in Asia (with a nod to India), and
added that the US with its 4 percent growth rate will do
the same job for the industrialized world. But once
again, the question must be asked - will these two
Chinese and US engines run in the same direction
indefinitely, or will they begin to diverge? Indeed,
even more scarily, will they have a head-on collision
and involve the world economy in the mother of all
train-wrecks?
The problems have been noted. The
UN report cited "the rapid rising weight of China in the
world economy and its role in the present recovery," but
it also warned that UN economists see a need for the US
to reduce its government deficit. That echoed the very
trenchant International Monetary Fund (IMF) report that
described the deficit as "perilous" in the long run,
posing "significant risks" to the rest of the world. IMF
economists also cautioned that one should add to the
short term a US$500 billion deficit that the US
administration is running, a further US$47 trillion in
unfunded long-term commitments for US Social Security
and the federally funded Medicare health program for the
elderly and indigent. And the IMF pointed out that there
were additional liabilities from cash-strapped local
governments, forced to borrow to compensate for federal
cutbacks.
On the American trade deficit, the IMF
also warned ominously, "The United States is on course
to increase its net external liabilities to around 40
percent of its GDP within the next few years - an
unprecedented level of external debt for a large
industrial country." The report suggested that this
situation would push the dollar even further down.
On the other side of the Pacific, perhaps it
should not be regarded as a token of maturity that the
money managers who poured funds into AOL, MCI, Enron and
Tyco - all with problems, to say the least - are now
pouring millions into Chinese IPOs with the same
enthusiasm. It is difficult to see any more economic
rationale in the 1,600-times oversubscribed China Green
Holdings than the Internet Bubble of the last decade.
And now US investment banks are licking their
chops at the prospects of taking Chinese Banks public.
However, the $45 billion that Beijing has put into two
of the Big Four government-owned banks can be seen as a
mature appreciation of their problems - or as a symptom
of the continuing cronyism and lack of democracy and
transparency in the system and a down payment on what
Standard & Poor's estimates could be up to $600
billion needed to bail out the bad loans. But that
little detail probably won't stop Wall Street from
rushing to buy if the banks are floated, as Beijing
plans.
The China Bubble is expanding
dangerously
At one time, China's autarkic economy
protected it from outside influence. But along with this
week's figures on economic growth came another ominous
big number. From once being nearly self-sufficient in
oil, China is now the second biggest oil importer in the
world - and is on the verge of needing massive coal
imports as well. The China Bubble has expanded to a
point where it will soon reach the sharp edges of
infrastructural capacity and reckless over-investment to
the point of over-production. That is when bubbles
burst.
Most publicized American forecasters tend
to be Panglossianly bullish. They only ever see the
upside, usually of the American economic prospects, but
many of their China watchers seem to be wearing the same
rose-colored glasses, seemingly oblivious to how
co-dependent the two economies are.
For a more
detached viewpoint, to look at the two economies
separately is like looking at the two wheels of a bike
without looking at the frame that connects them. Looking
at the US-China bi-cycle in motion exacerbates the
separate notes of caution that international agencies
have sounded against each country. In fact, there is an
inherent and additional precariousness in this double
bubble act.
Veteran New York money manager
Arnold Schmeidler - who did not invest in dot.com IPOs -
warns, "We are in a period unlike anything since the
1930s when the world is confronting deflationary
forces." The president and founder of A R Schmeidler
& Co Inc asks how sustainable it is that "American
auto companies are selling their production at zero
interest rates, because there is excess capacity. But
China is building auto plants to make hundreds of
thousands of vehicles, so we have extra capacity being
brought into a market where we already have excess
capacity. So the trend is towards 40 cents an hour wages
and top quality competing against the US."
Schmeidler concludes, "The single greatest force
for deflation is when you have open trade between
nations that have the ability to import the most
efficient manufacturing expertise into a low-wage-base
society, and so can produce products of the same quality
as the high wage economy. The price pressure on the
product allows consumers to get more for their money and
they benefit. But it is disinflationary, if not
deflationary."
In fact, of course, China
currently is lending the US the money to buy Chinese
production.
For example, as the "boom" of
President George W Bush takes off, puzzled American
commentators are asking where are all the extra jobs
that the apparently positive indicators should be
creating. In fact, they are being created abroad -
mostly in China.
China recycles trade surplus
into US Treasury bonds
American companies may
have forgotten what Henry Ford propounded when he first
built his Model T: If you do not pay high enough wages
to your workers, they can't afford to buy your product.
One simple basis for that Bush boom is that China is
recycling its US$100 billion-plus trade surplus with the
US back into dollars, and especially into US Treasury
bonds. Almost half of the US Treasury bonds are now
owned in Asia. So China is financing Bush's bold
economic experiment: running two or more wars
simultaneously with a huge budget and trade deficit, and
equally huge tax handouts for the richest Americans.
One has to question the long-term economic
rationale for China of putting its long-term assets into
very low-interest bonds in a currency that has already
dropped recently by a third - and is going to drop even
more. It certainly makes strategic sense: if push came
to shove over, for example, the Taiwan Strait, all
Beijing has to do is to mention the possibility of a
sell order going down the wires. It would devastate the
US economy more than any nuclear strike the Chinese
could manage at the moment.
But far from wanting
to devastate the dollar, China is more concerned to
maintain its currency's parity with the dollar, even as
it devalues massively against the Euro or the Yen.
Indeed, without those Sino-dollars flowing back, the
dollar would have tanked even more.
There is a
big multiplier effect here. China only accounts for 3
percent of the world's GDP, but for from three to five
times as much of the world's growth. And its economy is
disproportionately trade-oriented. So its double act
with the US - both the seller of consumer goods on a
huge scale and the financer for US' purchase makes it
even more important.
It does not help that the
US, which has the experience, certainly shows no signs
of using it to assess longer term dangers, and even if
China had that foresight of perils ahead, Beijing lacks
the experience to act effectively.
Dangerously,
the global economy is faced by an addictive combination
of China - a developing country with many problems of
social instability - and the US - which the recent IMF
report hints is a rapidly undeveloping country - whose
fiscal irresponsibility is compounded by a political
immaturity that tends to ignore geopolitical and
economic reality.
If the US economy sinks and
Americans stop buying Chinese goods, then it will
compound the US slump as China first stops buying US
bonds that have inflated the American bubble and then
moves on to selling them. On the other hand, if the
Chinese economy falters and it stops recycling dollars
into the US economy, then the boom stops anyway. Indeed,
it seems that China increasingly will need more of that
cash to pay for energy imports anyway.
But New
York money manager Schmeidler, and others who remember
that economics is the dismal science, realize that it is
still better science than politicians drumming up votes
and investment bankers drumming up business seem to
understand. The West is in the red, and if it crashes,
the East may join it.
(Copyright 2004 Asia Times
Online Co, Ltd. All rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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