Assigning Blame for a Hard Landing

Posted: August 27, 2012 in Economics
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Since Reform & Opening up (and to an even greater extent after the Tiananmen uprising) the Communist Party has used China’s torrid economic growth to justify its absolute unchecked power. By pointing to slower growth in emerging economies like India and the recessions of developed democracies, the CCP can proudly tout the superiority of its system.

But things are changing. Just about every economic indicator for China is headed downward. Mass factory layoffs/closures, sharply declining steel production, a pile up of unsold cars…you name it. Serious questions are being raised over the “superiority” of China’s command and control economy, which pushed down interest rates, forced excessive loans (MANY of which are starting to go bad) and created what could be the biggest real estate bubble in history.

Over the next few months we should start to see an answer to the “hard vs. soft landing” question. Since talk of a possible hard landing began, I’ve often wondered how China’s propaganda apparatus would respond if and when China’s economy takes a sharp turn south.  The party can’t exactly just say, “Oops. I guess our system is deeply flawed and not as superior as we led you to believe.” Its legitimacy lies almost completely in the idea that efficient economic growth is a result of its authoritarian model.

A few weeks ago People’s Daily gave a little clue as to how the party might be planning to address this issue. Unsurprisingly, it looks like it will go with the standard approach of “It’s not that bad; and anyways, it’s the West’s fault.”  The piece said:

The Chinese economy is slowing down due to both international and domestic factors.

Internationally speaking, the weak growth in developed countries caused by the global financial crisis has had a marked negative impact on the Chinese economy. China’s trade surplus rebounded greatly in the second quarter, but not due to the acceleration of export growth or slowing down of imports. In fact, the growth of China’s exports to the United States, Japan, and Europe has slowed down markedly, becoming a major constraint on economic development in the eastern regions.

Domestically speaking, China’s economic slowdown is a legacy of the global financial crisis. In order to resist the crisis, China introduced a large-scale economic stimulus package, which created objective conditions for subsequent inflation and soaring housing prices. The country then adopted a series of macro control measures to curb the inflation and cool the overheated property market, when the contribution of consumption to its GDP growth failed to increase markedly. This countercyclical action has inevitably caused a slowdown in domestic demand.

So whether it’s domestic or international problems, no fault lies with China itself. The rest of the piece downplayed the idea that China’s economy is in serious trouble anyways, with a touch of “look on the bright side” (inflation is falling). It seems a likely double-pronged approach: Pretend that a hard landing isn’t happening and blame foreign countries for the minor economic hiccup that has to be acknowledged.

Many of the points the piece raises are valid. If it wasn’t for the US-created 2008 financial crisis, China wouldn’t have injected its $586 billion stimulus (which has largely gone into fruitless projects) or required banks to give out a ludicrous $2.7 trillion in loans (ditto). So in that sense, a fair amount of blame does belong to the US for setting the stage for China’s potential hard landing. Europe certainly hasn’t done anything to help matters either.

But the mismanagement of the economy by the Chinese government is where the lion’s share of the blame rests for China’s economic woes. When faced with an economic crisis and potential unrest, the government opted (as always) to secure short-term stability at the cost of long-term sustainability by throwing cheap money at the problem and trying to guide the invisible hand of the market too forcefully.  “The debt-ridden western countries are to blame” argument can only stretch so far.

But accepting blame and owning up to deep systematic flaws with its economic model aren’t in the CCP playbook. So it’s likely we’ll see that argument stretched to its very limit.  The question is, will people buy it?

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Comments
  1. Godfree says:

    The Economist magazine has predicted a “hard landing” for China’s economy 56 tmes in the past 35 years. Their enthusiasm for this point of view remains undiminished: they predicted it again in the current issue.
    Their predictions, and yours, are driven by a lack of understanding of China’s political system, and a lack of understanding about its financial system. The understanding on their part is clearly ideological. You migh examine your own motives.
    The former lack gnores the participation of the Chinese people in their government, and their attitude towards it. Briefly, 85%–95% of them trust and support it and its policies, according to decades of surveys by Pew, Edelman, and Harvard’s Kennedy School of Government. There is little excuse for the Western media’s constant refusal to take this information into account, let alone to share it with its readers.
    As to the latter, few economnists, even well-imtentioned ones, have been able to grasp how the Chinese economy works. I suspect that that’s because it functions outside our beliefe system. IT’s UTTERLY unlike ours.
    For an excellent introduction to how it actually DOES work, read this: http://inpraiseofchina.blogspot.com/2012/07/chinas-economic-miracle-how-it-works.html

    For more, go to the source, which is shown in the post.

    • dave says:

      Chinese people are terrified at saying anything against their gov’t so that survey you talk about hasn’t much teeth. The Chinese economy and business practices work on excepted corruption, it’s the Chinese way, yes, functioning outside our belief system. There are many newly built empty buildings here in China and they keep building more. I do believe one day the economy will crash, but when and how hard

  2. FOARP says:

    As soon as I saw the “1” on the comment counter I knew I was in for some Godfree-goodness.

    Again, Godfree, the Pew poll did not survey opinion on the government or the party, but only on the direction of the country (something the censored media makes out to be universally positive), and only for a sample representative of the urban population, not one representative of the population as a whole. Pew freely acknowledges the limitations of their study, limitations forced on it by government restrictions. What would the real figures be for appreciation of the CCP? No one can say for sure, but they would almost certainly be less than the figures given by a portion of the urban population for the direction of the country as a whole.

    What’s more, these figures ARE widely reported in the European/North American news media, so I have no idea why you think they are being hidden.

    For myself, I’ll believe the slow-down when I actually see it happen – too many predictions of a slow-down have been made in the past for me to think it’ll necessarily happen in the near future. Actually, given the problems with the reporting of Chinese GDP stats (e.g., provincial figures not adding up to the figure for the whole country etc.) it’s likely that we will only see it reported a significant time after it happens.

    Finally, I wonder what standing you have to accuse anyone of ignorance of China’s political/financial system. As far as I know, you have never lived long-term in China, and have no academic or professional background that would especially qualify to make that kind of judgement. Am I wrong? If I am, perhaps you would like to explain to us mere mortals where exactly it is that almost all economists, in your view, are falling down.

  3. Webster0105 says:

    Firstly, the idea of the US being the reason for the crisis is folly. Everyone was complicit; it was a Global Crisis

    http://tigerhawk.blogspot.com/2011/02/short-note-on-causes-of-financial.html

    Secondly, China tried to spend it’s way out of it and really just did too things, inflated their bubble even further and created more debt held in infrastructure problems. The Chinese is victim of the same issues plaguing the rest of the Globe as it relies on the same machinations and principles…

  4. […] journalist Eric Fish has a good post about blame and accountability at his Sinostand blog. In Assigning Blame for a Hard Landing Fish writes […]

  5. […] Sinostand: Assigning Blame for a Hard Landing — The domestic political/PR angle of the economic downturn. This is an excellent read on a thoughtful topic that I haven’t seen other folks talk about. […]

  6. Stinky says:

    FOARP: “I’ll believe the slow-down when I actually see it happen.”

    It could happen without any of us “officially” seeing it. We all snicker when Andy Xie writes about propaganda being the only tool left in the Party’s bag of economic tricks. Even so, it’s a powerful tool. Many economists believe that China’s growth bottomed out during the Asian Financial Crisis of the late 1990s, with some suggesting that it may have even dipped into negative growth territory. You’d never know it from reading the Chinese media. Likewise, China’s employment statistics are widely dismissed – indeed, unemployment in China, officially around 4 percent, may very well be significantly higher than U.S. unemployment. So, with the upcoming changing of the guard and the importance of economic growth to the Party’s legitimacy, I’m thinking that we’ll all be left guessing – and debating – about China’s economic health for years to come. The hard landing could hit us all in the face without us ever being the wiser. I think the only way we’ll ever know for sure is if things get so bad (e.g. pollution in Beijing) that a hard landing looks pretty good by comparison.

  7. Don’t forget China’s housing bubble, which seems to have the assumption that wages will continue to rise at a rate that will subsidise the extra prices and building….

  8. becca says says:

    “The question is, will people buy it?”

    Unfortunately, I believe the answer is yes. As others have pointed out in these comments, propaganda in China is still going strong. Despite ‘westerners’ snickering at such a silly cliche 1985 notion, oh, who believes in government propaganda still? It really is strong enough here in China that despite the nation’s actual economy, the vast majority of people still believe the government’s claims. And these people subsequently buoy the economy itself. Probably why the real estate bubble hasn’t quite burst as expected. It would be interesting to see if anyone’s done any studies on the strength of China’s internal soft power and the effects on local economy.

  9. becca says says:

    1984, not 1985. Book reference, not actual time reference.

  10. dan says:

    what choice do they have?

  11. Tony says:

    What a great blog! Having lived in China for years and returned home to Sydney, i am loving the great posts. Keep it up!

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