Alright bicches, it’s time for the second class of Professor DJS’ economics class 101. We have so many OPs re: China’s economic miracle, and my ongoing frustration with dumbass responses to them (King of the North, overtaking the US, blah blah blah) demands a more proactive response. Full Time Student has eloquently posted data. Kudos to him/her. But some of you bicches haven’t a clue about economics. So listen up.
The 2008-2009 global financial crisis resulted in the % of China's GDP tied to exports plunging from 38% in 2007 to 24% (current) almost overnight. In layman's terms that is roughly a 1.3 TRILLION dolllar hit on the GDP. The recession decimated China's low-end (low tech/low margin) export sector. The crisis halted the decades long low-cost export boom that the Chinese government had kept alive.
Most economists believe the boom was kept alive well beyond its natural life span, through years of systematic wage repression (there is a wage/benefit level which will make Chinese low cost/low tech goods unattractive to spoiled western consumers (Walmart, Always the Low Price. Always. Oh, excuse me, new slogan "Save $. Live Better), which would have stopped the train in its tracks – I have referenced this in previous OPs) and wasteful subsidies (can you say Japan circa 1980 boys and girls), both direct and indirect, to manufacturers.
The Chinese government was propping up the engine that had gotten them firmly on the world economic stage, even though it was past time to retire that engine. Remember a few months ago when I briefly discussed letting aging industries die (and let someone else make the low cost/low profit margin stuff) and moving quickly to a new paradigm??? As painful as it may seem in the moment, letting it die (think the textile industry in the US) is the best long-term strategy to maintain an effective economy (Adam Smith says you are welcome).
If you are the Gang-of-Five (or whatever they are called the ruling body these days), what do you do, both to save face and to keep the engine churning and try to get as many of your 1.6 billion people engaged in the 21 st Century? Well, the leaders did what they could control to keep the economy going (some would say on life support). They enabled massive expansion of state-led investment into housing and infrastructure construction (all hail Full Time Student- now, as Paul Harvey would say -the REST of the story).
The infrastructure was likely a very good thing, as it should position China to play in a very large way on the world economic scene. But infrastructure improvements are typically a long-term strategy with long term payback. Good for them, though. It is also a copy/paste from the very Keynsian approach adopted by the US to get out of the Great Depression in the 1930s. Google it.
The housing boom is showing signs of having finally run its course. The boom was fueled by the 600,000 or so Chinese who had expendable income but with nothing to do with it (the Chinese stock market sucks the big one). Buying housing, and speculating that there would be buyers for it at a large profit, resulted in entire cities being built, many of which are not inhabited. Not houses or subdivisions. Entire freaking Cities. Got that? ENTIRE UNINHABITED CITIES. Got that????
Since nearly 1 billion. Let’s stop right there and say it together, class. A fucking .... BILLION. . . people are under/un-educated agrarian peasants who couldn’t afford the cheap consumer goods China is making, much less houses and condos, the impact on the GDP of the housing 'boom" (not really fair to call it that now is it) kinda sorta stops right there, at least for the time being. I also alluded to the inherent concerns with the ‘if you build it they will come’ philosophy months ago.
Part II soon to come.
