The Trouble With China

The AEI Outlook Series takes a look at China and sees a few bumps in the road. Here are the main points:

China is facing destabilizing inflation; capital has flowed into China must faster than it has flowed out, in part because Chinese residents are prohibited from investing abroad.

China's reported inflation rate on consumer goods rose to 5.4 percent in March, but its implied inflation rate is 8.4 percent--a large discrepancy suggesting that China is underreporting its inflation rate.

Chinese authorities have taken some steps to lower inflation, but they may be delaying more drastic measures to avoid instability before the 2012 transfer of leadership.

China has the second-largest economy in the world--accounting for one-third of global growth in 2010--so a Chinese hard landing would be very damaging to the global economy.

Yes. Trouble in China would be very damaging to the world economy. But it would also damage China.

The problems for China are similar to those of Japan. An economic model that works in an economy that needs rapid development no longer works in an economy that needs a broad development of internal services.

On a more fundamental level, China is tracking what one might call the Asian "work, save, and invest" model that proved so unsuccessful for Japan after its economic boom period in the 1970s and 1980s. During those decades, its financial sector failed to develop, and Japanese citizens were discouraged from investing abroad. Inside Japan, investment-allocation decisions were made largely by government agencies that recycled household savings deposited in Japan's Postal Saving System and its sheltered banks. As a result, Japan's financial sector developed far more slowly than its production sector. Saving was very high, as in China today, so there was a huge supply of funds for the government to allocate inside Japan. The government agencies favored investment in Japanese manufacturing facilities, especially those in the export sector.

As Japanese citizens grew wealthier, by the 1980s they looked for ways to store and enhance the wealth they were accumulating as a result of their hard work. They invested in the Japanese stock market and even more vigorously in Japanese real estate. In the late 1980s, the Japanese real estate bubble grew so large that the emperor's palace in central Tokyo was said to be worth more than the state of California. Of course, the bubble burst a year later, and Japan entered a lost decade that included wealth losses equal to nearly three years of national income followed by persistent deflation and generally stagnant growth. These are problems that persist to this day in Japan, which sadly has a whole new set of problems from its recent tragic earthquake and related nuclear disaster.

And Japan's current problems are huge.

Japan Posts Second Biggest Trade Deficit In History

For those who may not have noticed it, the headline says "deficit" and pertains to Japan: once upon a time a booming export economy. The reason: the ongoing collapse in export trade, after May exports dropped by 10.3% from a year ago, and just better than April severe economic contraction of 12.4%. Consensus was for an 8.4% decline. The net result was a monthly deficit of 853.7 billion yen, or $10.7 billion, the second biggest inverse surplus ever. And just like in Europe, where things are going to go from insolvent to perfectly solvent any minute now... just not yet... so in Japan the economic renaissance which will cause the economy to surge (unclear how: no new monetary stimulus, and the recently announced fiscal stimulus of Y500 billion in new loans will do precisely nothing to boost anything except for some corrupt bureaucrats Swiss bank accounts) is coming any minute.... just not yet. Bloomberg says: "Shortages of power and parts have disrupted production and slowed overseas sales, prompting Japanese companies including Honda Motor Co. to forecast weaker earnings. Higher unemployment in the U.S. and weakening demand in Asia indicate Japan won’t be able to rely on global demand to pull itself out of a slump caused by the quake." And the understatement of the weekend comes from BNP economist Azusa Kato: "The state of the global economy is a little worrying. Both the U.S. and Europe aren’t doing that great and emerging economies are also tightening at an incredible pace, increasing uncertainty."

"Increasing uncertainty", is econo speak for: "Things are going from bad to worse."

There is the little problem of radiation safety in agricultural exports.

#Radioactive Tea in France: Shizuoka Governor Tells France Tea Is Safe, "No Problem"

Besides, the tea leaves may not be from Shizuoka anyway, says his government.

The Oxford PhD (in comparative economic history) governor of Shizuoka strikes again, responding to the news that the French authorities confiscated the radioactive tea from Shizuoka Prefecture at the Charles De Gaulle Airport in Paris for the high radioactive cesium count (1038 becquerels per kilogram), more than twice the safety limit for the EU. (I'm rather surprised that it's that high in the EU.)

The follies going on in the treatment of the nuclear disaster in Japan are so numerous, depressing, and foreseeable that I have done nothing for over a month in cataloging them.

Here are two blogs that will help a LOT if you want to keep up:

ex-SKF

Radiation Safety Philippines

Cross Posted at Classical Values