Ruthless China Makes an Economic Blunder

With the United States in deep trouble, who can the developing nations of the world turn to for a helping hand? Not Britain. Not any of the European countries. Not Japan. They’re all struggling in a global economy gone awry.

Perhaps China?

That nation of a 1.3 billion people doesn’t have a fractious democracy to contend with. What the government says goes. That makes it a lot easier to run the economy and plan for growth. Of course, the Chinese people pay a terrible price – including the loss of their individual freedoms (see cartoon above). But the result is ruthless efficiency.

China’s leaders are very business oriented. Gone are the egalitarian notions of Mao’s communism. The nation’s new “communists” are playing the capitalist system for all they’re worth. And it looks like they’re winning. They have wooed and won a large chunk of western industry, and with it, western technology. They have moved into undeveloped countries, assuring themselves of a continuous supply of raw materials. They are preparing for the commerce of the future, cornering the rare earth metals market, for example, and surging ahead with research and development of “green” power production.

They have also established a huge export market in America, and hold American government IOUs for more than a trillion dollars.

So I thought the Chinese were in pretty good shape.

But Nobel prize winner Paul Krugman, who is definitely worth listening to, points out that the Chinese are fallible. Here’s an excerpt from his  New York Times article:

China’s current macroeconomic policy will someday be the basis of a cautionary tale. Basic economics says that when they decided to undervalue the renminbi, the Chinese put themselves under inflationary pressure, and sure enough, inflation is rapidly becoming a serious problem in that nation.

China’s economy has been growing at a fast pace and banks are widely lending money; the resulting increases in the costs of labor and materials are reflected in rising consumer prices.

In fact, the government announced in August that consumer prices were 3.5 percent higher than a year ago.

But domestic political considerations seem to be ruling out all options for reasonable responses to this problem, including the revaluation of the renminbi.

The Chinese won’t increase the value of their currency because that would hurt politically influential exporters. And while the government announced on Dec. 25 that it was immediately raising interest rates — for the second time in a little over two months — it had been reluctant to make this move because raising rates would hurt influential real estate developers.

The government is also trying to impose quantitative limits on credit, but powerful borrowers are able to circumvent the new rules.

Attempts to impose price controls on some agricultural commodities will inevitably come apart at the seams unless policy makers do something about the underlying pressures of accelerating inflation.

Krugman permits himself a sigh of satisfaction, commenting that China’s troubled economy is “an edifying spectacle.”  But he is quick to point out that the U.S. can’t gloat:

China may be corrupt and unable to make sensible short-run choices when it comes to dealing with inflation, but the United States outdoes China in terms of our fundamental inability to deal with long-term problems.

And it doesn’t augur well for the future of the global economy when an emerging superpower like China stubs its toe.