As if the European crisis was not a big enough problem for the world economy,
there has now emerged a “second front” – China. The ongoing slowdown in China is
a double challenge. Not only does it it eliminates the possibility that China
will prove to be the savior of the world, as it did so powerfully in 2009, it
also adds the huge Chinese economy to the forces pulling the global economy
down.
In a recent blog, the Daily Telegraph’s acerbic commentator,
Ambrose Evans-Pritchard, noted that “the last thing the world needs now is a
deflationary shock from China” – but then proceeded to illustrate why that
eventuality is not merely likely, but already happening. He provided a list of
indicators that support his contention, quoting in the process an interesting
site called Zarathustra (with a daily newsletter called “Also Sprach Analyst” –
you gotta love it), which presented its own “ten signs of economic trouble that
China’s official data won’t tell.”
One of these, to which both
Zarathustra and Evans- Pritchard attribute particular significance, is the sharp
fall in revenue growth reported by casinos in Macau. Zarathustra notes
that casino revenues are closely linked to the rate of Chinese GDP growth
because the money gambled by the Chinese high rollers is generated by the
booming Chinese economy, via speculation in real estate, commodities and other
areas. When the pace of activity drops, the impact is felt very quickly in
Macau.
For Israelis, and especially for the Israeli prime minister, this
is not just an interesting anecdote. Sheldon Adelson, who has made Yisrael Hayom
into the most widely read daily in Israel and who is a major contributor to both
the Taglit-Birthright Israel program and to Netanyahu and the Likud, is deeply
invested in Macau. The crash of 2008 had a tremendous impact on the gambling
industry, in the Far East as in the US, and Adelson’s companies and casinos –
and hence his personal fortune – were hammered. The massive stimulus
programs launched by the Chinese government in late 2008, which played a key
role in reversing the downward spiral in the global economy, fed directly and
swiftly through to the gambling halls of Macau, saving the casinos and their
owners from disaster.
That’s a very specific example of how the
globalized economy works: Chinese contractors get cheap loans from state-run
banks and make fortunes in their domestic real-estate market. They blow some of
their money in Macau casinos, generating profits for the American businessmen
who made the island into a bigger and gaudier version of Las Vegas – and some of
these profits are in turn invested in Israeli media or contributed to Israeli
and American politicians.
Switching back from the micro to the macro, the
slowdown in the Chinese economy is a game changer for the entire world. It’s
pretty clear that the rate of growth in China has slipped below 8 percent per
annum for the first time in many years. That sounds very high, and indeed it is
for any developed economy. But when you are coming off double-digit rates of
growth, 8% is a significant change for the worse and everyone has to adjust
downward.
That is the immediate issue: the “cyclical” aspect of going
through a slow patch, which, in a normal economy, would be considered a
recession. But the real problem is that this downward adjustment is likely to
prove permanent. The era of growth rates in excess of 10% per annum is
over for China for many reasons, but in part because the model of growth used by
China for the last 20 years, of massive investment in new plant and equipment in
export-oriented industries, is no longer viable. The slump in Europe and
the sluggishness of the American economy has destroyed demand growth in China’s
biggest markets and exposed the vulnerability of a growth strategy based on
exports to developed economies.
The pessimists with regard to China
believe that overinvestment has left the Chinese with massive over-capacity in
virtually every area of manufacturing. This must result in deflation, and they
cite the recent run of declines in the monthly price indices at both the retail
and wholesale level as evidence of precisely this phenomenon.
The Chinese
authorities are responding to the signs of deflation by cutting interest rates
and removing restrictions on banks to increase their lending, which is the
textbook response and is what the Japanese did when they faced the same threat
and what the Americans are doing now.
If this effort fails and the
Chinese economy continues to slow down, to growth rates of perhaps 5%-6%, the
deflationary impact will spread around the world because the Chinese will cut
the prices of everything they manufacture – as well as of their currency,
despite the screams this devaluation will trigger in Washington – and flood
global markets in an effort to generate income. Were Ambrose Evans-Pritchard
Yiddish-speaking (which seems unlikely), he might have said that this the world
needs like a hole in the head.
landaup@netvision.net.il
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