Saturday, February 21, 2009

First Man Standing

As a percentage of GDP, China enacted the biggest fiscal stimulus of any major economy, and it has already started to pay off: some analysts are now describing a V-shaped economic recovery there (unlike the US and Canada, which are still in the lower portion of an L).

As Canada and the US got stuck in political ideology that led us to dick around with programs that are too slow and include too much non-stimulative tax cuts, the autocrats in China were able to act decisively and do exactly what needed to be done.

I can't explain why western media is all about doom and gloom for China, when the opposite seems to be the case. (viz today's Globe article predicting mass political unrest due to unemployment in China, or yesterday's pessimistic Forbes article.) I can just say that there is reason to think that they're wrong, although Chinese economic recovery is not yet a given (they spent $600B on the first stimulus shock, and if their recovery suffers a reversal they may be out of bullets).

That China is poised to lead the world in economic recovery is very significant. As one China analyst notes, "to become a superpower, you really don’t need to have a plan for world domination. You only need to be the last man standing when everyone else has already collapsed." Or more accurately, the first man back on his feet.

Although it's early days, tangible results of China's success may already be starting to show: the economically devastated Taiwan is starting to soften on relations with China; the US, which under George Bush had a policy of isolating China and strengthening ties with India, is now reaching out to China.

But more interesting than the future of superpowerdom (and in any event, as I have argued before, demographics and other factors favor the continued supremacy of the US) are the shorter term effects of China pulling out of the recession first. Increased industrial activity in China will most likely cause an increase in oil prices: the west is currently not in an inflationary period only because of low oil prices, and we could get hit hard if our belated stimulus packages kick in just as there is other inflationary pressure. I would like to think that our governments are planning for this sort of contingency, but there hasn't been much evidence of that so far... they are in reactive mode, and always seem to be reacting to circumstances six months or a year in the past.

UPDATE (October 22, 2009): Chinese economic policy was so successful that China is expected to have 9% growth this year, according to the Financial Times.



Anonymous said...

I have received numerous financial reports on China. All experts of any worth are predicting China first out of this and exploding. They're recommending 3 areas to invest for those eager to put money in the market:-

Natural Resources

It's only the general media dumping on China. Financial analysts are huge on investing in China for the very reasons you stated in this post. Personally, it's all too risky for my taste, but thought I'd share what I've been receiving.

Anonymous said...

"...the west is currently not in an inflationary period only because of low oil prices, and we could get hit hard if our belated stimulus packages kick in just as there is other inflationary pressure." But isn't deflation the larger danger?

Yappa said...

Hi Anonymouses,

Thanks for the comments!

Both inflation and deflation are huge dangers. Inflation carries the extra baggage that central banks will do almost anything to avoid it, including taking action to raise unemployment. Since we no longer back our money with gold, the only real thing backing it is a promise to not let it devalue through inflation.

Anonymous said...

Well, for me inflation is the lesser of the two evils. Hey, Mouse1, what sector of China are they telling you to invest in?


roblaw said...

Hmm.. interesting commentary.. I have some other interesting comments:

a) China currently uses capital punishment for many crimes, from tax evasion and political corruption to racketeering and murder. China executed more people annually than any other nation; in 2007 it executed at least 50 percent more people than Iran, the country with the second-highest number of executions.

I'm not in favor of capital punishment myself, but, I'm certain it would certainly cut down on taxes wasted in the criminal justice system, and would certainly reduce offenses such as fraud and political corruption, all to the added benefit of our economy.

b)Somewhat related to the foregoing, in China, there is no freedom of expression, government dissidents are still subject to arrest and incarceration, or worse.. the judiciary is not at all independan, and is an arm of government will.. there continues to be abuse of women's rights, rights of children and visible minorities.. and there is no transparency or freedom of information regarding government conduct.

All in all, if we, in Canada, could do the same, imagine the reduced tax load on our government administration.. again, a boon to a difficult economy.

c) China's corporate tax rate for companies incorporated before 2008 was 15% - since, it has increased to 25%. Canada's corporate tax rate is 36.1%. If we would advocate a 14% cut in corporate taxes, I'm sure that would also be of assistance to restore corporate earnings;

d) Average wages in urban areas of China - $1,750 yuan per month ($320 Canadian). Looking at specific jobs, for production labor, average $2,199 Can. per YEAR, for an accountant, $8,473.00 Can. per Year.. if we could reduce our wages to that level, I'm sure we would also see a significant boon to business earnings..

e) Chinese environmental laws are weak, and enforcement is almost non-existend - in many cases, it is cheaper to pay fines, even in the infrequent event that they get levied, than to comply with the already weak regulations.. as a result, the damage to China's air and water is severe (and don't bother to even mention CO2 emissions).. again, if we were willing to ignore water and air polution concerns - I'm certain that would also help our economy greatly..

All in all - if we were willing to accomodate these modest changes to our own political and social strutures, yes, I'm sure we would attain the recovery expected in China..

Is that the suggestion?

Yappa said...

Hi Roblaw,

Nope ;-) I'm not advocating an autocratic government here. But I'm sick of the right-wing ideology that has been ruining our economy for decades. As the latest example, our upcoming fiscal stimulus includes way too many tax cuts - even though tax cuts aren't very stimulatory and even though the IMF has been begging countries to not wreck stimulus plans by enacting tax cuts - just because tax cuts are a mindless mantra of the right.

Plus, China gets slagged too much. It's partially a legacy of Bush policy to isolate and demonize what they saw to be their main rival. I'm not supporting their lousy human rights record or the other things you mention, but we should have more respect. It looks like they have done the best job at reacting to this crisis and that should be recognized.

roblaw said...

Yappa - as noted, however, China alrady has a 14% edge in corporate tax rates compared to much of the western world, particularly Canada and the U.S., and also, their labour costs and regulation also put them at significant advantage.. so, difficult to tip my hat to China while they ignore concepts such as freedom of unionized labor, recognition of human rights, decent wages and so forth.

I have no doubt that China would be the first place to consider new investment.. but you would really have to hold you nose as you counted your dividends - for as up in arms as we might be about Syncrude, they pale in comparison to the ravages upon the environment and the people of China committed by their corporate world.

Yappa said...

Hi again Rob -

I'm mostly in agreement with you. Plus, I'm not looking to make money off of China. But... well, here's an example close to home.

Imagine some Europeans who are very critical of Canada's record with aboriginal people, the seal hunt and the tar sands, and characterize Canada as a horrible place with terrible values. Every time Canada is mentioned they repeat the things they dislike about Canada, as if that's all there is to it.

That's sort of what I think you're doing with China. The Chinese government does some things right, and most recently they appear to have done a good job with their stimulus package, unlike just about every other major economy.

Plus, I have to admit that I don't think that autocratic governments are always to be condemned - because sometimes the alternative, such as civil war and a failed state, is even worse.