China Economy Forecast for 2017 Signals Potential Collapse Lombardi Letter 2017-02-23 07:14:12 China economy forecast for 2017China economy growth rateGDPChina debtunemployment rateChina economic collapsedevaluation The China economy forecast for 2017 is not optimistic as China's economy undergoes a natural and inevitable transformation, forced to adapt to a new world. 2017,International Markets,News,U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2017/02/China-Economy-Forecast-2017-150x150.jpg

China Economy Forecast for 2017 Signals Potential Collapse

Dour China Economy Forecast for 2017

The China economy forecast for 2017 might be the first to signal a slowdown in over a decade. China, which recorded almost 15% gross domestic product (GDP) growth in 2007, is heading toward a GDP level last seen in the 1990s. That was before the country joined the World Trade Organization (WTO). China must make do with 2017 growth estimates of 6.5%.

There’s little that China can do to change that. Faced with the protectionism of Donald Trump’s America, China further devaluing its currency, the yuan, might make matters worse. Such a move would not alter the China economy forecast for 2017. It could make matters worse, playing into Trump’s insinuations that China manipulates its currency.

Don’t expect even a significant devaluation of the yuan. If any devaluation occurs, it won’t be deliberate. Beijing will try to adapt to President Trump’s insular and anti-globalization policies. It had already expected a lower China economy growth rate before the 2016 presidential elections.

Thus, China’s gamble will be to focus less on growth in the sense of GDP and more on internal economic drivers. Until now, China’s government managed an economy that thrived on what we might call “monetary steroids.” It’s no surprise that some of its trade partners (U.S.A. included) have accused it of cheating.

The steroids that have kept the China economy growth rate comfortably above seven percent for so many years don’t have fancy names. They stem from a policy of access to easy credit and cheap labor. But neither one of these by itself can last forever, let alone together. China’s economy is undergoing a natural and inevitable transformation.

China has no choice but to start reducing its trade surplus. It has to become an economy based more on internal consumption. It has become too advanced an economy to rely on cheap labor. The shift must now turn toward improving the quality of life for its citizens. Not doing so would leave it open to significant risk of subversion.

There are two basic reasons why China must change. One is more short term, but the other, if left lingering, could pose an existential risk to the government of China itself. The first—the milder problem—is the China debt.

China, the world’s second-largest economy, is facing a difficult economic transition. To deal with it, Beijing has eased access to credit in an effort to inflate the slower growth rate. But this credit-fueled economic stabilization cannot last much longer. It has already reached a critical point.

Any longer, and the financial risks of this debt policy could spark the Chinese translation of the 2007-2008 subprime crisis. It would result in a cascading default of payments, as companies will be unable to repay bank loans or bonds. The level of indebtedness of China is such that it outpaces economic growth more than 2:1. That’s enough to generate economic collapse.

In other words, China debt is 2.5 times larger than economic growth. Every year that passes, the banks come closer to implosion if the situation continues. Yet, if the banks tightened the credit supply, recession would become inevitable. At the very least, GDP has entered a period of decline.

The second problem is that China has gradually developed the semblance of a middle class. It’s no longer enough for the state to sustain growth and keep unemployment in check. These were the main goals of China’s post-“Great Leap Forward” period, culminating in the major economic shift brought on by Deng Xiaoping in 1979.

China Economic Collapse: Too Late to Avert Total Breakdown of the System?

Since then, Chinese governments have focused on growth, and on improving infrastructure and agriculture, but they have given little thought to political changes. They have also ignored the social transformation that has occurred; they have not noticed the cost of their huge and admirable evolution. Ignoring this much longer would surely result in a China economic collapse. Wild industrialization, typified by the unfettered use of coal energy power plants that pollute Beijing’s air, cannot continue. The new more global Chinese citizens, educated and urban, living in the main cities, have already started to demand better air quality. They don’t simply mean a change in energy production.

China will have at least 100 new nuclear reactors by 2025. The shift to cleaner energy has long been recognized as a priority. But, the “clean air” is a metaphor for greater social and political freedoms. The Arab Spring, whatever its actual goals may have been, has shown that angry citizens can take on a dictatorial government if they become sufficiently angry.

Rapid growth at the expense of security and the environment—and by this, I mean the actual environment, not global warming—can no longer be sustained. China has reached a crossroads, and it should use Trump’s disruption as the spark to begin the next transformation. China took a huge economic leap between 1979 and 1989.

But that did not stop the people from demanding political change. Indeed, the Tiananmen Square revolt of 1989 was second in significance only to the fall of the Berlin Wall that same year. Beijing’s Communist Party government received an important lesson: economic growth alone cannot discourage the people from wanting and demanding political changes as well.

The possibility of China’s slowing GDP growth—which is, for all purposes, a recession, even if it’s 6.5%—converging with tighter credit and aspirations of political change represent a major risk. All the elements for such an explosive process are already in place. The fuse is set, it just needs a spark. The next Tiananmen-style event won’t simply be pushed under the rug as in 1989.

Could 2017 Be the Year the Collapse Happens?

Nobody has a crystal ball that accurate, but the conditions certainly are pointing to a China economic collapse. China must start reconsidering the current political and economic development model. The Communist Party leadership is neither blind nor stupid. This rethinking began some time ago, but has not yet produced results. That’s the problem.

This is not an intellectual issue but, so far, there is no way to translate the rethinking in political action. Some have proposed accelerating the processes of globalization, market opening, and privatizations. But that would perpetuate the current situation even as, without a collaborative America, that cannot happen.

The alternative might be to put a democratic face on China’s socialism. The idea would be to transform the Communist Party into a social democratic one. It would take courage, but no Chinese version of Mikhail Gorbachev—who led the Soviet Union’s transformation when it reached a crossroads—has shown up to lead it.

The issue today is whether there can even be a reform within the socialist system. Certainly, the government can make small technical adjustments. But these are merely delay tactics to avoid facing the bigger problem.

China’s System to Face a Major Shock in 2017

Still, China, as any other globally connected economic superpower, is subject to external shocks as well. Trump has only been in power three weeks. He has caused more shocks than anyone believed. This will put external pressure on China to find a new development model. The times when China can simply accelerate growth on command are gone.

To avoid economic collapse and political revolt, China must adjust to a new global equilibrium. It will be marked by a lower growth intensity of trade. There’s a simple reason for that. The world’s biggest economy, the United States, has become more insular. It has stunned the current order.

World trade and the very concept of globalization that helped China grow so intensely has finally faced a major obstacle. Note, for example, that South Korea’s Hanjin Shipping Co Ltd (KRX:117930), one of the most important shipping companies in the world, has entered bankruptcy; in fact, the company has officially sunk. (Source: “South Korean court all but sinks Hanjin Shipping,” The Financial Times, February 9, 2017.)

The Chinese economy was driven by booming exports since the beginning of the 1980s. That trend went into warp mode when China was admitted into the WTO in 2001. That’s when China became the main instrument and beneficiary of globalization, culminating in 2007.

That’s when China recorded a record account surplus equal to 10% of its GDP. It was all thanks to the huge trade surplus. Now, the presence of geo-political blocks in the form of Donald Trump, has sped up the need to reform. The assurances of the past no longer exist. Trump has already shown he does what he threatened to do during the campaign.

He has scrapped the Trans-Pacific Partnership (TPP), an agreement formally reached only a year ago involving 12 Pacific countries, including the United States. Without the trade mechanisms that have allowed China to grow so quickly, the country could now face a situation not dissimilar to that experienced during the Great Depression in the United States.

Governments reacted to the trade crisis, prompted by more protectionist and tariff-laden policies in the 1930s, aggravating the depression by slowing growth everywhere. Not surprisingly, at Davos, Chinese President Xi Jinping spoke of the importance of trade. He was the first Chinese leader ever to address Davos.

China has become the “world factory,” which is the favorite destination of foreign direct investment, a land of relocation, outsourcing, and production for the rest of the planet. But Trump’s election threatens that model and China directly. Exports have become a key element of China’s economic model.

Beijing has promoted domestic consumption as a driver of growth. If it fails to work, it will create a crisis of legitimacy for the Communist Party. The turn of events obliges China to adapt to a new world, threatened by trade wars. This international pressure, however, threatens to accelerate the demand for social and political change. It remains to be seen, whether China’s strategists have the tools to come out stronger.

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