Monday, November 16, 2009

Economic Illusions : Where the Chinese stimulus went...

Hedge fund manager Hugh Hendry is a very intelligent guy. You can occasionally catch him on Bloomberg when he appears as a guest to share his wisdom on the world economy and financial markets. In today's world, you get to the truth by asking the right questions. While the world applauded China's stimulus for being more effective than Obama's generating 9% growth for the Chinese economy, Hugh Hendry asked himself where the billions in China's stimulus package went to and this is what he found:


From the mainstream media, we get this impression that the Chinese economy is an almighty unstoppable engine that is about to lead and dominate the world. The truth is a large part of the Chinese economy is export dependent and highly dependent on US consumer demand. When the US economy started tanking, Chinese factories closed and workers were laid off in large numbers. In a normal year, there are 600 riots (official figure) so there is enormous fear of social unrest if unemployment goes up. To shore up its economy temporarily they pumped billions into infrastructure projects and encouraged their banks to lend to businesses. They were able to avoid massive unemployment and keep the economy going until now.

While the media become fixated with the 'Chinese miracle', they forget how fragile their system is today. There is little doubt where China will be in long run. Throughout history, there were a few short periods of 100 years where China fell behind for various reasons only to surge ahead of the world. The problem is most of us don't live to 100 and China's resurgence is not a one way street given its current political and economic system in which various excesses can build up. The recent case in Chongqing [Link]shows how things can go very wrong in when you have a mix of centralised power, corruption, capitalism and crime. Chongqing is not a small town - it has a population of 31 million.

MM Lee said the Chinese are not interested in votes and freedom of speech[Link]. Economic growth masks many underlying problems with the Chinese system - we just have to look at Indonesia and S. Korea in 1997 to understand how quickly the illusion of an economic miracle can unravel. ...and when those economies fell apart during the Asian Crisis...what did the people want and demand for? Democracy and freedom. Today these nations are functioning democracies and the people are no worse off than they were under dictators and authoritarian rule.

8 comments:

Anonymous said...

The communist party has ruled China for 60 years and still counting.

The reason they can do it is because they change their system to become capitalist, and now only communist in name.

The PAP has ruled Singapore for 50 years and still counting.

The reason they can do it is because they change their policies to favour more foreign talent and money for economic growth and prosperity.

If China such a big country can do it, of course a tiny Singapore can do it even much easier.

Anonymous said...

'You got your pro-democracy activists, but do the Chinese people worry about their vote and freedom of speech? They want the lives that they see in Hong Kong, in Singapore and before this downturn, in Taiwan,' he said.

Now, how would a multimillionaire octogenarian banana (who by his own admission has never travelled economy since the 50s) know what the ordinary poor Chinese peasant wants? Our friend has been waited on hand and foot for the past half a century, never had to lift a finger to do household chores; lackeys rush to pander to his slightest whim.

He has demonstrated absolutely zero empathy with the common man in his own nation with his hated FT policy. And now he boldly presumes to understand the needs of an ancient land he's only ever visited for a week or so at a time???

No wonder Chinese leaders are dismissive of his offers to help develop China. "If we need advice on how to run a small Chinese city we'll let you know, otherwise don't call us, we'll call you..."

Lee's haughty, elitist mindset that prosperity and democratic freedoms are mutually exclusive for Chinese people but not Westerners is strikingly evident, isn't it? The man has to go; he is the millstone around Singapore's neck.

Anonymous said...

Simply put, if the Chinese can have the living standards of the West, Singapore or Hong Kong, everything like democracy, rights can wait.... till they become as prosperous like us then is another story.

Anonymous said...

Since the beginning of time, the richest societies are always the consumer societies.

The Silk road goes West, not East. Ships and caravans bring spices West, not East. Tea travels to the West.

Needless to say, for the biggest part of history, the West is on the centrestage.


China is no economic powerful as long as it is nearly export driven. Its own domestic market lags far far behind Japan, let alone the EU or the US.

China will not be able to even come close to challenging US, not as long it is so dependent on US consumer markets.

The moment US stops buying, China is f***ed!

Anonymous said...

Yes, there are ills ridden within China with corruption, huge income disparity, environmental pollution etc (but which country doesn't?). At the micro level, if you visit the SME factories, you will be astonished at the lack of welfare at the working level and the exploitation.

But pse remember that this country has gone through worst fates hitherto. The communist regime subjected the country to near bankruptcy during the end of Mao's reign and it was a miracle they pulled through. After that near catastrophe, they had waken up (no more ideology dogma) and pursued pseudo-capitalism, or the so-called socialist economy with China characteristics.

What I am trying to say is that as long as there is no war (civil or global), China will be progressing and the rulers know that they have to grant rights and democracy to faciliate growth, but they will do it on their own terms. So do not harp on using "democracy" to save this country, as it would create turmoil and unrest, and derail the growth.

As for dependancy on US, check the figures. Guangdong province is the biggest exporter and they have been diversifying over the years, not entirely due to US's woes but due to the bottleneck of the manufacturing as they have reached full capacity. So expect a transition from the export-driven to a more balanced approach.

China is certainly dependent on US for export, but US is also dependent on China to provide cheap goods, now that US is hit with financial crisis and everyone has limited spending power. So it is a mutual dependancy.

Anonymous said...

Just another cliche on the "export driven" myth.

A simply review on the economy 101 would help, how is GDP counted?

GDP = C + Inv + G + ( eX - iM )

Check carefully how much iM is before declare terms like "eX-driven"

After all, most "made in China" goods are actually only "assembled in China". If US really stop to consume, the real victim would be Japan/South Korea/Taiwan, who export most of the expensive parts to "made in China".

"r" said...

these "empty buildings" in chinese cities are not a recent phenomena. there were lots of empty buildings around, especially in the SEZs as well back in the boom years, just that perhaps more of the new buildings go empty during the crisis. will this mean that the bubble will burst anytime soon? nobody knows.

that said, china's drive to focus on domestic demand to fuel future economic growth is certainly not smthg to scoff at. the hunger of 1.3bn people cannot be underestimated, i believe the future of world economic growth will be concentrated in populous less developed countries which has lots of way to go to uplift the lives of their billions. even the west will have to start producing for them by creating sustainable technologies.

and dont forget, the us is a very major exporter as well. where do the profits for all your iphones ultimately go to?

Anonymous said...

To anon 08:31,
Human rights are not given by rulers. Human rights are fought for, and won by the masses. Look at the French Revolution, American War of Independance, Magna Carta, Era of Enlightenment.

Rulers will NEVER give human rights to the masses, because it is not in their personal interests to do so.

China, despite its long history, is basically a highly barbaric society. You see how they treat each other, if given power.

Every single beautiful Chinese palace is built using conscripted labour. Chinese government has no concept of paying people proper wages for their work since the beginning of Chinese history.

Most great ancient buildings you see were build with slave labour or conscripted labour, constructed under very harsh conditions.

The beauty of a civilization lies not in its art work or its palaces or architectural wonders. Its real beauty lies in the way the workers are treated.

And China's rulers, from the ancient past to the present, generally don't believe in treating their workers well.

China is synonymous with corruption.