The Coming Chinese Slowdown
The leaders of China have carefully planned an imposing Olympics. They have bought new stadiums, new airports, new facilities of every kind -- in fact, just about everything available to an authoritarian state with a full treasury and low labour costs.
They overlooked only one possibility: that the Olympics would arrive at the same time as China's economy braked to a stop.
To understand what is happening in China, compare two statistics. In the 12 months ending December 31, 2007, the Chinese economy grew (according to the official numbers) at an annual rate of 11.7%. In the 12 months ending June 30, 2008, the Chinese economy grew at an annual rate of 10.1%.
That is, in just six months, the Chinese rate of growth dropped by nearly two points.
Chinese economic statistics always have to be taken with a bag of salt, but the trend seems clear: The Chinese economy is rapidly decelerating.
No mystery why: China depends on international trade for up to 80% of its GDP. The United States is China's largest customer -- and the American consumer economy is freezing up.
As American demand for Chinese products declines, China's costs are rising.
Higher fuel prices have pushed the cost of shipping a standard 40-foot container across the Pacific to $8,000, up from $3,000 at the beginning of the decade. Shippers are adapting by slowing their travel speeds -- bad news for Chinese suppliers in a "just in time" world economy.
Raw-materials costs are rising too: China imports the iron for its steel and the chromium to make it stainless, the fertilizer for its crops, the coal for its electricity.
China is a low-value-added economy. One famous study found that of the $299 cost of an "assembled in China" iPod, only $4 was retained in China. This is not a country with a lot of margin for error.
China now seeks to climb the value-added ladder, as Japan, Taiwan and South Korea did beforehand. It has little choice: Annual wages in China's cities are rising past the $2,000 mark, enough to send the most basic manufacturing industries (toys, apparel) to seek cheaper workers in Vietnam, Cambodia and Sri Lanka.
But it's hard to see how a society that lacks the rule of law -- where no factory owner can be sure who owns the ground under his plant --can execute that climb.
Most China experts -- and almost all world leaders --have long predicted that the country's economic advance would force its leaders to liberalize and democratize. That prediction is looking wrong. Indeed, the opposite seems to have happened: China today is a more politically repressive society than it was in the mid-1980s.
Minxin Pei of the Carnegie Institute offered a powerful explanation of the negative trend in his 2006 book China's Trapped Transition (Harvard University Press).
Pei argued that as China got richer, control of the Chinese state had become more valuable. It's one thing to be a corrupt official in a miserable socialist anthill -- much better to be a corrupt official in a thriving cash economy.
Because of China's vast size, however, opportunities for corruption could not be concentrated at the top (the way they were, for example,
in the old undemocratic South Korea). Every official all the way down to the village level takes his slice, and the slices are getting bigger all the time.
Communist dictatorships use terror to fight corruption. Democracies use transparency and accountability. China has disavowed totalitarian terror, but it flinches from accountability. China's leaders can fix their society's most damaging problem only by abjuring their own power and limiting their own wealth opportunities. And there is no sign that they will ever do that.
If China's rulers insist on holding on to power, then the inherent weaknesses of China's economy must soon slow China's growth. In Pei's telling, the Chinese economic boom of the 2000s looks very like the nearly equally explosive Mexican boom of the 1950s and 1960s -- a one-time adjustment that moved fast until it bumped up against the political limits. Has the bumping begun?
There's a tried and true rule in the business world that the moment a company builds a fancy new headquarters is the moment that the company's growth subsides. In China's case, maybe that new egg-shaped Olympic stadium delivers the same warning.
They overlooked only one possibility: that the Olympics would arrive at the same time as China's economy braked to a stop.
To understand what is happening in China, compare two statistics. In the 12 months ending December 31, 2007, the Chinese economy grew (according to the official numbers) at an annual rate of 11.7%. In the 12 months ending June 30, 2008, the Chinese economy grew at an annual rate of 10.1%.
That is, in just six months, the Chinese rate of growth dropped by nearly two points.
Chinese economic statistics always have to be taken with a bag of salt, but the trend seems clear: The Chinese economy is rapidly decelerating.
No mystery why: China depends on international trade for up to 80% of its GDP. The United States is China's largest customer -- and the American consumer economy is freezing up.
As American demand for Chinese products declines, China's costs are rising.
Higher fuel prices have pushed the cost of shipping a standard 40-foot container across the Pacific to $8,000, up from $3,000 at the beginning of the decade. Shippers are adapting by slowing their travel speeds -- bad news for Chinese suppliers in a "just in time" world economy.
Raw-materials costs are rising too: China imports the iron for its steel and the chromium to make it stainless, the fertilizer for its crops, the coal for its electricity.
China is a low-value-added economy. One famous study found that of the $299 cost of an "assembled in China" iPod, only $4 was retained in China. This is not a country with a lot of margin for error.
China now seeks to climb the value-added ladder, as Japan, Taiwan and South Korea did beforehand. It has little choice: Annual wages in China's cities are rising past the $2,000 mark, enough to send the most basic manufacturing industries (toys, apparel) to seek cheaper workers in Vietnam, Cambodia and Sri Lanka.
But it's hard to see how a society that lacks the rule of law -- where no factory owner can be sure who owns the ground under his plant --can execute that climb.
Most China experts -- and almost all world leaders --have long predicted that the country's economic advance would force its leaders to liberalize and democratize. That prediction is looking wrong. Indeed, the opposite seems to have happened: China today is a more politically repressive society than it was in the mid-1980s.
Minxin Pei of the Carnegie Institute offered a powerful explanation of the negative trend in his 2006 book China's Trapped Transition (Harvard University Press).
Pei argued that as China got richer, control of the Chinese state had become more valuable. It's one thing to be a corrupt official in a miserable socialist anthill -- much better to be a corrupt official in a thriving cash economy.
Because of China's vast size, however, opportunities for corruption could not be concentrated at the top (the way they were, for example,
in the old undemocratic South Korea). Every official all the way down to the village level takes his slice, and the slices are getting bigger all the time.
Communist dictatorships use terror to fight corruption. Democracies use transparency and accountability. China has disavowed totalitarian terror, but it flinches from accountability. China's leaders can fix their society's most damaging problem only by abjuring their own power and limiting their own wealth opportunities. And there is no sign that they will ever do that.
If China's rulers insist on holding on to power, then the inherent weaknesses of China's economy must soon slow China's growth. In Pei's telling, the Chinese economic boom of the 2000s looks very like the nearly equally explosive Mexican boom of the 1950s and 1960s -- a one-time adjustment that moved fast until it bumped up against the political limits. Has the bumping begun?
There's a tried and true rule in the business world that the moment a company builds a fancy new headquarters is the moment that the company's growth subsides. In China's case, maybe that new egg-shaped Olympic stadium delivers the same warning.