Voice

China's hard landing

In my last post I mentioned how China was encountering resistance to its rising power.  Now, via Kindred Winecoff, I see a whole mess of reportage about China's mounting internal difficulties.  In no particular order: 

1)  Nouriel Roubini has focused his Dr. Doom-O-Vision on the Middle Kingdom, and doesn't like what he sees:

China’s economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible – most likely after 2013 – China is poised for a sharp slowdown. Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium....

[N]o country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

Commercial and high-end residential investment has been excessive, automobile capacity has outstripped even the recent surge in sales, and overcapacity in steel, cement, and other manufacturing sectors is increasing further. In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors.

Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment – including East Asia in the 1990’s – have ended with a financial crisis and/or a long period of slow growth. To avoid this fate, China needs to save less, reduce fixed investment, cut net exports as a share of GDP, and boost the share of consumption.

The trouble is that the reasons the Chinese save so much and consume so little are structural. It will take two decades of reforms to change the incentive to overinvest.

Now, Roubini is enough of a persistent doomsayer that it would be easy to discount this argument -- if it wasn't for the fact that this jibes with the opinion  of other China economy-watchers.  This coming-bust prophesizing comes on top of arguments made by Barry Eichengreen, Donghyun Park and Kwanho Shin that as China hits middle-income status, it will hit a "middle income trap" of slower growth.  (One interesting question is whether, as China encounters rampant inflation, its eventual decision to let the RMB appreciate will help ease some of these pressures). 

2)  Meanwhile, China's political leadership appears to be engaged in a full-fledged freakout over the Arab revolutions and any whisper of a similar phenomenon happening in China.  Rising food prices are leading to price controls and an anxious government monitoring if/when more expensive staple goods lead to political unrest.   That said, Chinese authorities seem to be on top of the whole crushing dissent thing

According to Chinese Human Rights Defenders, an NGO, by April 4th some 30 people had been detained and faced criminal charges relating to the so-called “jasmine revolution”—an inchoate internet campaign to emulate in China recent upheavals in the Middle East and north Africa. Human Rights Watch, another NGO, reports that a further 100-200 people have suffered repressive measures, from police summonses to house arrest. This has been accompanied by tighter censorship of the internet, the ousting of some liberal newspaper editors, and new curbs on foreign reporters in China, some of whom have been roughed up....

Even more worrying, however, is the increasing resort to informal detentions, punishments and disappearances. These are outside the law, offering the victim no protection at all. The government now dismisses the idea that one function of the law is to defend people against the arbitrary exercise of state power. On March 3rd a Chinese foreign-ministry spokeswoman told foreign journalists: “Don’t use the law as a shield.” Some people, she said, want to make trouble in China and “for people with these kinds of motives, I think no law can protect them.”

3)  As for China's assessment of its external security situation, the  State Council released its 2010 White Paper on defense last month.   As this East Asia Forum summary suggests, there's a slight change in tone from the 2008 white paper:

The introductory assessment of the ‘security situation’ section notes that the ‘international balance of power is changing,’ that ‘international strategic competition centring on international order, comprehensive national strength and geopolitics has intensified,’ and that ‘international military competition remains fierce.’  Despite this sense of turbulence, and as was the case in 2008, the 2010 paper assesses that ‘the Asia Pacific security situation is generally stable.’ But the additional observation in the 2008 paper, namely, ‘that China’s security situation has improved steadily’ does not appear in 2010. One possible reason is that the 2010 paper reports that ‘suspicion about China, interference and countering moves against China from the outside are on the increase.’ 

In light of all these developments, yesterday's Economist editorial should come as no surprise:

The view from Beijing, thus, is different to the view from abroad. Whereas the outside world regards China’s rulers as all-powerful, the rulers themselves detect threats at every turn. The roots of this repression lie not in the leaders’ overweening confidence but in their nervousness. Their response to threats is to threaten others.

Now, as someone who's pointed out these problems on occasion on this blog, you might think I'm pleased as punch about these developments.  Nope.  First, from an economic standpoint, a recessionary China eliminates a vital engine of global economic growth.  Second, as I wrote back in January

Exaggerating Chinese power has consequences. Inside the Beltway, attitudes about American hegemony have shifted from complacency to panic. Fearful politicians representing scared voters have an incentive to scapegoat or lash out against a rising power -- to the detriment of all. Hysteria about Chinese power also provokes confusion and anger in China as Beijing is being asked to accept a burden it is not yet prepared to shoulder. China, after all, ranks 89th in the 2010 U.N. Human Development Index, just behind Turkmenistan and the Dominican Republic (the United States is fourth). Treating Beijing as more powerful than it is feeds Chinese bravado and insecurity at the same time. That is almost as dangerous a political cocktail as fear and panic. 

Developing.... in very disturbing ways. 

Daniel W. Drezner

The shallow response of Ted Galen Carpenter

In response to my critical post from last week, I see that Ted Galen Carpenter has doubled down on his thesis that, "China benefits from U.S. policy blunders."  Let's go through his main points, shall we?  

In his initial post, Carpenter argued that the American brand was damaged.  I argued that there had been a rebound.  Carpenter's response:  

America’s global popularity is still at anemic levels—and the initial euphoria about Barack Obama has faded noticeably. And as shown in the Pew Research Center’s 2010 survey of global attitudes, America’s reputation in the Muslim world is not just anemic, it is hideous. That’s 2010, Dan, not 2006.

Two responses.  First, the poll data Carpenter cites reflects attitudes about Barack Obama in particular and not the United States in general.  Since what we're both concerned with is America's soft power rather than Obama's, let's take a look at the BBC's latest World Service Country Rating Poll, since that asks the more appropriate survey question: 

Views of the US continued their overall improvement in 2011, according to the annual BBC World Service Country Rating Poll of 27 countries around the world.

Of the countries surveyed, 18 hold predominantly positive views of the US, seven hold negative views and two are divided. On average , 49 per cent of people have positive views of US influence in the world--up four points from 2010--and 31 per cent hold negative views. The poll, conducted by GlobeScan/PIPA, asked a total of 28,619 people to rate the influence in the world of 16 major nations, plus the European Union.

In 2007 a slight majority (54%) had a negative view of the United States and only close to three in ten (28%) had a positive view; America was among the countries with the lowest ratings. Views began to rise in 2008, with positive views rising to 32% on average, and now the USA is in a middle tier position, ranking substantially higher than China (emphases added)

 Oh, and that's 2011 data, Ted.   

Carpernter emphasizes the Middle East, and it's certainly true that U.S. favorability there remains quite low.  Even in that region, however, the latest data suggests things aren't getting worse, except in the country where the data is OBE: 

As views of the USA continue to improve globally, the upwards trend is also apparent in Muslim countries. For the first time, a majority of Indonesians are now positive about the USA's role in the world (58%, a rise of 22 points over the last year). Negative views of the USA in Turkey have dropped sharply from 70 per cent to 49 per cent, while negative views in Pakistan of the USA have also fallen slightly, from 52 per cent to 46 per cent. Conversely, Egypt, after a lift in 2009 and 2010, has reverted to a predominantly negative view of the USA, with 50 per cent of Egyptians considering that the USA's role in the world is mostly negative.

As for China's ability to exploit the current situation, here's Carpenter's response: 

China has shown recent signs of dialing back some of the more objectionable features of its policy. That stands in marked contrast to the U.S. military escalation in Afghanistan, Washington’s transparent efforts to maintain an outsized presence in Iraq after the scheduled withdrawal of its military forces, and the new intervention in Libya. In terms of intrusive policies, China doesn’t begin to compete with the United States....

[China's] weaknesses do not include running $1.5 trillion annual budget deficits (much less having much of that debt funded by one’s principal geopolitical competitor). Nor do China’s weaknesses include overstretching its military forces in Middle Eastern and South-Central Asian snake pits. Those are actions that the United States has taken, and it is naïve in the extreme to assume that China does not benefit strategically and financially from such folly. Yet, oddly, Drezner addresses none of those points contained in my TNI piece. 

Carpenter's point about U.S. military overextension is a good one, and is a concern I share.  Our disagreement is on the magnitude of the policy externalities that flow from this overextension.  Carpenter thinks it's disastrous; I think it's regrettable but not at the root of imminent U.S. decline to China.

First, it's worth noting that while defense spending plays a supporting role in the worsening U.S. fiscal situation, tax cuts and domestic expenditures are far more culpable.  Second, I have looked at whether China's holdings of U.S. debt lead to geopolitical weakness -- and concluded that this concern has been vastly exaggerated

Third, again, looking at global public opinion, there's evidence that China's economic rise has provoked far more anxiety than Carpenter realizes.  As Chinese power continues to grow (and that's going to happen regardless of U.S. strategy), more and more countries will be willing to balance with the United States regardless of past military errors.  Indeed, the "nationalistic swagger" that Carpenter references among Chinese policy circles is going to exacerbate and not retard this trend. 

I agree with Carpenter that it would be better for the U.S. to reduce its overseas military posture, particularly in Iraq and Afghanistan.  That said, China has profited surprisingly little from these missteps, and will experience greater geopolitical pushhback over time.   I'm also disappointed that Carpenter failed to address the question of how democratizing nations in the Middle East will view a China that continues to act in an authoritarian manner -- particularly towards its own Muslim population in Xinjiang.  It's not a coincidence that Iranian protestors started chanting "Death to China!" back in 2009. 

The bottom line is that Carpenter's analysis exhibits far too much of the doomsaying and pessimistic thinking that plagues American realists and their cheerleaders.