20 August 2023
Edward Lotterman
Sometimes a sardonic quip for one era preserves wisdom for a later one.
During World War II, Bill Mauldin, a young soldier and editorial cartoonist, created and published popular cartoons about the war’s realities featuring GI characters Wille and Joe. In an early 1945 panel, one of Mauldin’s two scruffy soldiers reads newspaper reports of popular uprisings in Germany. The other sardonically advises him, “Sure … . Get down so they don’t hit ya wit’ a wild shot.”
That pretty much sums up what the rest of the world can do today about economic tumult in China. There are few, if any, actions that any other country can take to influence events there.
Yes, it is entirely possible, since China’s economy is the second largest in the world, that its problems may affect people and businesses in other countries, including the U.S. But all we can do is “get down.” In other words, just react.
And to be sure, the problems regarding China’s economy are numerous.
Consider:
• Flooding following Typhoon Doksuri caused damaged crops, industry and housing in densely populated eastern and northeastern China.
• Economic recovery from the extreme lockdowns during the COVID-19 pandemic has been slow, particularly compared to the United States.
• Despite a rapidly aging population that should open jobs for new labor force entrants, youth unemployment, ages 16 through 24, is high. The official number had hit 22% when the government recently shut down reporting to “revise” its tabulation methods.
• Prices are falling in China with the most recent release showing a 0.3% drop from a year earlier. This may sound like good news for consumers, but falling prices, or deflation, are a harbinger of recession in a sluggish economy.
• Growth of output is very slow by Chinese standards. Numbers for the April-June quarter were a 0.8% increase. Annual GDP growth above 3.2% would be good for most Western industrial economies, including the United States, but is less than half of what China ticked off year after year for decades, albeit coming off a very low base.
• The exchange value of China’s currency is falling in international foreign exchange markets. Foreign market watchers complain about China’s currency manipulation, but right now the country is selling off tens of billions in U.S. dollars to keep the renminbi from losing even more value.
• Most fundamentally, problems that have been building in Chinese property development for more than a decade are coming to head with its largest residential builder, Country Garden, entering bankruptcy. The company is not an isolated case.
• Unlike in more economically and politically mature industrial economies, a crisis in property development is a crisis in local government since as much as two-thirds of the revenue for many municipalities has been coming from sales of developable land and not from tax revenues. And many local governments have gone as deeply into debt as property developers have.
• Despite developers falling into insolvency, tens of millions of Chinese households have paid life savings into deposits on apartments that remain unfinished or even unstarted. Yet there is no path for their relief from mortgages, much less return of money already paid.
So, is this the beginning of a major meltdown of the Chinese economy or just a few hiccups presenting at the same time? And will events in China affect the rest of the world, especially our nation and even Minnesota?
Again, insights from an earlier era shed light: In this case, the much scoffed-at 1992 book, “The End of History and the Last Man,” by Stanford University political economist Francis Fukuyama. Here he argued that, 13 years after Chairman Deng Xiaoping had moved the Chinese economy away from Maoist central planning, and later after Soviet communism had collapsed, there no longer were other viable alternatives to democratic governments and mixed-market economies.
In other words — we won.
Democratic market-economy nations, where decisions about resource use and product production and consumption are largely left to market forces, with government acting to provide a legal framework, counteract market failures, monopoly power and asymmetric information, had prevailed. All that was left for the command-economy central-planners was to join us.
Many western intellectuals to his political left and right laughed at Fukuyama. And China, with output then growing as much as 10% a year, argued that it showed an alternative path. The problem in the Soviet Union, it was argued, had been Mikhail Gorbachev’s insistence on “glasnost,” or opening of government, and “perestroika,” or restructuring of both economics and politics. Beijing claimed that these were unnecessary — that it could maintain communist control of politics and society as long as it opened the door to market forces in the economy. Tinpot autocrats around the world saluted the idea, each claiming they could do the same in Bolivia or Burundi.
History is proving they were wrong and that Fukuyama’s arguments had strengths. The legal and political institutions of western democracies are complex and vital. The lack of human legal and economic rights in China is coming to the fore. Without a rule of law that is independent of who is in charge, markets have no resiliency. No one has standing — or freedom — to challenge reckless mismanagement by property developers and local governments.
Hundreds of millions of Chinese households have no recourse to recover years of savings that fell into a black hole. And millions of citizens have no power to assemble or even to speak to try to change government. No one outside the high levels of a monolithic communist party can speak for youth or private farmers or shopkeepers or accountants or engineers or anyone else. There is no established mechanism by which the system can change itself.
And that is what separates China from the United States or Japan or Denmark or Australia or other democratic market societies.
Sure we make mistakes. Sure markets fail. The collateralized mortgage derivative bubble that developed almost 20 years ago incorporated as much folly as one sees now in China. But when the bubble burst, there were established legal mechanisms to sort out the mess. Banks failed, people were foreclosed on, bankruptcies were filed. There were many injustices. But values remained — not only the potential monetary values of real property and corporate and human capital, but the values of institutions that were employed to fix it — the Federal Reserve, the U.S. Treasury, and, yes, Wall Street. There were many legal-governmental-political-private sector mechanisms to work out the crisis without imperiling our system of government or the foundations of our economy.
The next chapter in the China story is just beginning. We have important political problems right on our own plates. But don’t expect important news from east Asia to go away. And don’t expect our own lives to be completely insulated from events there.
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St. Paul economist and writer Edward Lotterman can be reached at [email protected].