Andy Xie: China, US focus on exports will cause more economic chaos

Dr Andy Xie, renowned Chinese economist thinks that China, US focus on exports will cause more economic chaos.  Here’s why:

About the US

… The US election offered voters a poor choice. Barack Obama’s policies stopped the economy from crashing, but they cannot reverse the slow and prolonged slide. On the other hand, Romney’s tax-cutting pledge, if implemented, would have been a short cut to bankruptcy for the country. American voters picked the lesser of two evils. With the Republicans still in charge of the House, the US political system is likely to remain in gridlock, which will force the Federal Reserve to maintain or even expand quantitative easing.

Financial markets surge or swoon with every piece of data. Low interest rates make debt easier to carry and lift housing prices. Debt and housing bubbles got the economy into trouble in the first place. Reviving both won’t put the economy on a sustained growth path.

The latest market obsession is whether the US will walk off the fiscal cliff – the automatic tax increase and spending cuts equivalent to 3.5 per cent of gross domestic product, early next year. Doing so may cause a recession, and that prospect is sparking fear in financial markets. But it would actually improve the economy over time by halving the federal budget deficit. Shouldn’t the financial markets be happier about a better future? Unfortunately, everyone – not just politicians – seems obsessed with the short term.

China’s leaders are promoted, not elected, and so do not have an independent mandate for change. Its economic problems are caused by a system that pushes more and more resources into the state sector, and government mandarins or state-owned enterprises allocate them to achieve an internal political balance. Inefficiency and corruption are its inevitable consequences. Overcapacity and empty buildings are the visible signs of the system’s failings. Without fundamental changes, a banking crisis and high inflation are inevitable.

If the global economy is to have another sustained growth cycle, both the US and China must have a stable and balanced growth dynamic. Both have the potential for this. The US has population growth. China’s per capita income is still low and could rise through improved productivity. Europe and Japan have neither and are unlikely to contribute to global growth. The other emerging economies aren’t showing fast productivity growth from either capital accumulation or innovation and can’t pull up the global economy in any meaningful way.

China and the US are the only hope. Unfortunately, both want to emphasise exports as the growth engine, which doesn’t bode well.

Even though China and the US have starkly different political systems, the forces that resist reform in both are quite similar. The vast bubbles in both nations over the past decade has created an elite that has grown rich and powerful from speculative activities like finance, property and deals smoothed with guanxi. The burden of maintaining unproductive elites is weighing down both economies. Shedding that burden will, of course, be resisted by the people who would lose out. And these people are very powerful.

The US needs to raise fiscal revenues and cut health care costs to close its budget deficit, improve education to slowly decrease income inequality, and invest in infrastructure to boost competitiveness. These things are obvious. But the political system is unable to allocate the money to bring about the changes.

As the country drags its feet, the problems will grow. The information revolution has reached the stage that millions of white-collar workers will become obsolete. Income inequality will get worse, and more people will become dependent on the government.

China needs to reduce investment to 30 per cent, from half, of GDP. It requires a dramatic reduction in the size of the state sector. Talk about boosting consumption is, so far, just that. The root cause of weak consumption is the low share of household disposable income in the economy.

To show it is sincere about reform, the government should make a meaningful tax cut to ease the burden on businesses in a trying time and boost consumption to utilise spare capacity. Instead, the main story this year has been how the government is trying all it can to boost revenue; in short, by taking more from the people.


About China 

The global economy is stuck in the doldrums, so how can China’s exports take off? Domestic demand remains weak, as demonstrated by very weak imports. Under the current system, an uptick in domestic demand just means more property projects. But, official statistics aside, the property bubble is bursting: sales in most third-tier cities have crashed, most second-tier cities are not doing much better, and first-tier cities are facing slow sales and price cuts, too. Property is not a path to better domestic demand.

As every nation tries to export its way out of its problems, a rise in trade protectionism is inevitable and this will plunge the world into even worse chaos. The world faces gigantic challenges, yet its leaders think small and focus on short-term stability. It has brought us five years of continuing crisis. The next five could be worse.

from Andy’s article @ South China Morning Post 

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1 thoughts on “Andy Xie: China, US focus on exports will cause more economic chaos

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