China Officially Number 2 Economy

Loughton_Monkey

No surprises there, then.

China has overtaken Japan as the world's second-biggest economy, figures out of Tokyo have shown.

Japan's economy was worth $5.474 trillion (£3.414 trillion) at the end of 2010. China's economy was closer to $5.8 trillion in the same period.

http://www.bbc.co.uk/news/business-12427321

However, my motive for posting it is to speculate that "Most Economists" could have grasped the wrong end of the stick? Just look at the last paragraph or two:

Most economists agree that while China as a whole is growing, and the average person is getting wealthier, comparing only the size of its economy to Japan's does not paint an accurate enough picture.

"GDP per head in China is about $4,500, but in Japan it's about $40,000 per head," said Mr Miller of GK Dragonomics.

"Most people in China are still poor, more people live in the countryside than in cities. The average Japanese person is much much richer than the average Chinese person."

In today's 'globalised' world, isn't the above one hell of a wake-up call? I mean what chance is there of US, UK, Europe, Japan etc. of increasing GDP per head by any realistic amount in the next 10/20 years? But just look at the 'headroom' available in China. Do a few calulations and work out just how much GDP remains to be 'stolen' from the West.

julieq

The interesting thing with China is what will happen there when it crashes and burns, which it inevitably will soon. There is an excellent article linked to from the main one at

http://www.bbc.co.uk/news/business-12428661

I think the main observations on risk factors for the rest of the world are:

1) Massive property bubble is forming with the backdrop of unrestrained building and massive off plan investment. There is nothing to restrict supply, and if anything it's accelerating. If there is anything that is a classic case of tulip style bubbles it's Chinese property.
2) Considerable quantities of US debt owned by China, currently being used to finance a dash for raw materials and commodities
3) Western companies engaged in a mad pell mell to subsidise Chinese industry on the basis they want to "develop the market" by offering locally competitive prices. Think of it as something very similar to the internet boom pre 2000, there may be some big winners, but most will lose. Most companies take paper thin margins if anything at all when dealing with China, and many are spending a great deal setting up manufacturing there which in turn is feeding a proportion of existing Western growth. There is a massive flow of cash West to East.
4) A very different social model in China. Virtually no social provision but a higher risk of popular revolution, and those who come out on top have nuclear weapons.

It really is a lethally dangerous looking cocktail. I think that when it goes, must of the capital that has been invested by the West in China will essentially go with it, leaving nothing but our debts to them which will fall in value as desperate Chinese attempt to access liquid cash. We'll also see rapid deflation as raw material costs collapse (and don't think that gold will be a safe haven, it won't help). Our ability to borrow will all but disappear, another reason why we have to kill the structural deficit as quickly as we can.

They say that when the US sneezes the rest of the world catches a cold. We're now so in thrall to China that when China sneezes, the rest of the world falls to an economic flu pandemic. I'm not one for apocalyptic forecasts, but this situation looks diabolically bad.

vivatifosi

Interesting points julieq. I do wonder though whether the four would actually come together in a doomsday scenario though. My thought is that the Chinese economy may have a couple of safety valves: 1) the one child policy may mean that China will be able to grow more slowly and steadily as - unlike other developing countries - the population isn't growing apace at the same time meaning that they don't need GDP to grow fast to stand still. 2) if the economy slows and economies overseas offer greater promise the diaspora may travel. 3) Poorer Chinese people have had their houses ripped down in the name of progress for years and lost everything without there being more than a few voices of dissent. If the majority of the country is still very poor, will there be mass sympathy for the rich people on the coast if the property bubble bursts?

I'm purely an observer in this and know that there are people on here who are far more informed on the subject, but I do find this a very interesting subject. And finally something that we can talk about that's not done to death, like house prices.

I have to go to work now, but I'll catch up this evening to see how the debate has progressed on all 3 China threads.

julieq

It doesn't really matter if there is a one child policy in China. There are 1.5 billion of them already, and there is a lot of slack to take up.

The problem is that I don't think you get a slowdown. At some point the property bubble implodes, and the nascent middle classes get wiped out. That means that local industry gets destroyed and there is massive urban unemployment. The rest of the country can sit and watch, but there is enough social mass in the cities to create the conditions for revolution - in fact the most likely outcome is probably a retrenchment of the militarist communist old guard I would say, it's difficult to see an Eastern European style "people's revolution.

I pretty much always argue against worst case scenarios, but in the case of China, I really can't see much that mitigates the worst effects of what I think is an inevitable property crash. If I was scoring this for likelihood and impact it would be maximums for both.

Generali

julieq wrote: »

At some point the property bubble implodes, and the nascent middle classes get wiped out. That means that local industry gets destroyed and there is massive urban unemployment.

If the property bubble bursts then what happens?

Banks get into trouble but so what? The Government can just print money to bail them out. The companies that are in trouble from a bursting of the Chinese property bubble are more likely to be Western luxury goods manufacturers than local firms. Most of what China produces she exports. Over a quarter of nominal GDP is exports and exports = over half of industrial output.

The thing that'll bite the Chinese economy on the tail IMO is in about 20 years when the one child policy means that parents retire en masse with few children to support them in a country with little or no pension provision.

Loughton_Monkey

Generali wrote: »

The thing that'll bite the Chinese economy on the tail IMO is in about 20 years when the one child policy means that parents retire en masse with few children to support them in a country with little or no pension provision.

Not sure on this one.

Firstly, two children have been allowed for a number of years now (4 or 5) provided both parents were 'singles', so this is not a problem for today's 30-somethings. Possibly it's the next 20 years itself that will cause an issue since it is these 60-somethings getting old with only one child.

Secondly, you need to understand that saving money is inbuilt into their culture. When there has never been any 'the state will take care of me...' culture, they realise that they have to look after themselves. Show me any 'slip of a 25 year old girl call centre operative' and I'll show you someone with between 50% and 200% of her annual salary 'in the bank'.

Yes, there is a small degree of concern - as in 'I am anxious that my child does well, in case I need to rely on him/her in later life...' But any concern about 'state' or 'taxpayer' support is alien to their thinking.

Thirdly, the most 'interesting' or possibly dangerous impact of the single child policy is greed. I have seen this personally in the 'young 30's', and this tranche of people - when aged 30-60 - will become the bosses and leaders. This will create a 'ruling class' in which any concept of 'give an take... for the sake of humanity... caring and sharing.... compromise.....' is just as 'absent' in their thinking as 'communism' is absent in the US Government. It is this I personally fear the most.

julieq

You've got to realise that the property bubble in China is based on speculative lending, and that "Western" banks are heavily exposed. Also Western investors of all kinds are massively exposed to China because of outflow of capital. If that capital becomes devalued overnight - or worst case there is a retrenchment of hard line communism and the capital is confiscated - then everyone loses. If there is then a risk of sovereign default for any reason - banking crisis for example - then I think there's a reasonable case to be made for a flight from the holding of western government debt in China.

I don't personally believe the loss of China as an export market is a big deal in the great scheme of things. Very few Western companies make money there and in truth many will be making a loss and not really knowing why they're there. It's interesting to note that my own company has changed strategy recently and is making more absolute profit targeting niches than it did attempting to grow market share, not least because the entire West is looking to undercut each other on price - the Chinese will smile and take the free gift. But the loss of the second biggest world economy and the economy which is holding very large quantities of our debt is a very significant danger indeed.

It's one thing not to notice irresponsible lending in the US when it first happened. But having seen that, it's crazy not to notice it when it's happening in China.