News Journal: A look at the health of Chinese economics

As the great American philosopher Yogi Berra once said, it is tough to make predictions, especially about the future. I made a couple in 2013. One was that the gridlock in Congress might be coming to an end.

Ouch.

The other may turn out to be more prescient. The conventional wisdom of pundits back then was that the Chinese economy was growing at such a fast pace it would inevitably soon replace the United States as the world’s largest. I disagreed, and pointed out a few structural problems that spelled trouble for China in the near future.

I wasn’t surprised, then, by the recent news about the sudden sharp decline in the Shanghai stock market. In the past couple of years, the government had joined Chinese financial institutions in a gigantic propaganda effort to encourage new and inexperienced investors to get into the stock market, even with borrowed money. In the six months ending on June 14, the Shanghai index more than doubled. But the bubble burst spectacularly, and the market fell by almost 20 percent in the next two weeks.

That happens in market-based economies too, of course, but governments typically don’t get involved. In the past month, the Chinese government has used a heavy hand to suspend trading in half the companies listed on the exchange, banned short selling, and provided government funds to institutions buying stocks. In the short run, its action has steadied the market. In the long run, financial analysts overwhelmingly agree that any government’s effort to fight market forces is ultimately doomed to failure.

China has already paid a big price. The Financial Times reported that the government’s “shock intervention in propping up its once high-flying stock market has cost the country near term-access to more than $11 trillion invested in emerging markets, according to some of the world’s biggest investment groups.”

What is happening in the stock market is just one indication of what is happening in the overall Chinese economy. In an effort to keep the economy from slowing, the government has thrown hundreds of billions of dollars into the real estate market, supporting the massive building of apartments and office buildings. Many of them now stand empty. “China has ordered its banks to prop up insolvent provincial government projects,” the Financial Times also reported, “in the latest effort to support rapidly cooling growth and put off dealing with the mountain of debt that has built up in the last six years.”

Clearly, China is experiencing an economic slowdown and potentially something far worse. In the 1980s, Deng Xiaoping embraced the market economy, opening China up to foreign investment, global markets, and some private industry and commerce. That has raised the standard of living for hundreds of millions of his people, and with it their expectations. This is a huge political problem for the current Chinese government, whose leaders do not share Deng’s belief in a market economy. They continue to intervene at all levels of the economy, but it becomes more and more apparent that they are playing a losing battle of whack-a-mole.

There is some good news for us here. In January 2013, I wrote, “There are positive signs for American competitiveness in the manufacturing sector. Our automobile industry is thriving, and much of its manufacturing is being done in the U.S. Companies like Apple and General Electric are moving some manufacturing back home. China’s manufacturing cost advantage is rapidly shrinking. Boston Consulting believes that within five years, the cost gap between the U.S. and China for many goods we now import will be virtually closed.”

That is happening. A study by the Reshoring Initiative found that, “Sixty thousand manufacturing jobs were added in the U.S. in 2014, versus 12,000 in 2003.” The Wall Street Journal recently reported, “One big catalyst behind the trend: Escalating wages in traditionally lower-cost countries, including China, have pushed companies to reconsider sourcing strategies.”

In fact, among the world’s top 10 export economies, the U.S. last year ranked No. 2 behind only China.

While that news is good, any huge downturn in the Chinese economy would have a major negative impact on the rest of the world. Politically, as we have seen in Russia, blaming the rest of the world for internal economic woes can rally a population around a more aggressive foreign policy. Economically, China is an integral part of the world economy, and a depression there would have repercussions here and everywhere else.

I make no predictions at this point. Except to say that, unless and until its government begins to trust in a true market economy, the prospects for a healthy economy in China will grow dimmer and dimmer.

Ted Kaufman is a former U.S. Senator from Delaware.