In the last few months, the successes of the Chinese economic 'model' have been presented variously as reasons to reform our own capitalism and politics in emulation (Anatole Kaletsky), to disbelieve in the efficacy of free markets (John Gray), and to hail the establishment of a new hegemonic power and culture (Martin Jacques*).
And those who doubt China will fulfill the ambitions of these boosters because of immediate problems have been given some lapidary advice by Thomas Friedman: 'Never short a country with $2 trillion in foreign currency reserves'. (I find this comment bizarre as I'm pretty sure both Japan in 1989 and the US in 1929 both had huge foreign currency reserves, but anyway...)
Friedman was responding to a remark by Jim Chanos, who runs the biggest short-selling hedge fund in the world (that is, they aim to make money when the value of specific investments go down). Chanos recently said that China was 'Dubai times 1,000 — or worse'. He made a boat-load of money by betting against Enron. Now, he's on China's tail.
I'm as sceptical as Chanos that China has discovered a new golden egg-laying goose and for pretty much the same reasons - he's just got one or two more of them and has an awful lot more telling detail to hand. If you're really interested in this stuff you can hear about it all from Chanos's own mouth here.
But here's a quick summary if you haven't got the leisure or the interest to listen to the whole thing (it's about an hour long).
China is an economy where GDP targets appear to drive growth. This should make us suspicious about the value of this growth. It's highly reminiscent of the Soviet Union, where 'growth' came about as a consequence of targets that were often economically irrational and wasteful.
In any event, Chinese growth is what economists call 'extensive' rather than 'intensive'. It's reliant on population migration from country to town, on increases in the educational level of the workforce and the application of large amounts of capital in the form investment in fixed assets (buildings, machinery, bridges, etc.). The first two of these factors is peaking and the third is showing increasing diminishing returns. This looks very much like the Soviet Union in its latter years.
The extent of over-investment in fixed assets is striking. Bubbles are being created, the biggest in real estate. There's massive over-building funded by credit. Banks are increasing their loan books by over 40% a year versus the 10-15% seen in the US bubble economy of recent years. The result is that the equivalent of a 5'x5' office cubicle for every man woman and child is currently under construction in China.
The aftermath of this bubble will be ugly. As in most economies, property investment is critically important, not least because residential property forms the major store of wealth for the Chinese middle classes.
And longer term the future isn't necessarily rosy. China has yet to prove it can transform its talent for extensive growth into one for intensive growth, i.e. growth that doesn't rely on increasing applications of labour or capital goods but on increased productivity and innovation.
Chanos reckons China is showing promising signs of having the wherewithal to move to a technology-driven intensive growth phase. But with the important caveat: 'Everyone's backing 9 men in a room can get it right all the time'. (A more pithy version of what I said here.) Contrary to the message of the China boosters referred to above China's political system may well turn out to be a hobble. As another commentator I respect, Thomas PM Barnett, puts it (directly countering Kaletsky elsewhere):
Once the extensive growth period is done and the "golden period" of demographic advantage dissipates, there is no advantage to having authoritarian government--despite the many myths recently created about the "superiority" of China's single-party state. China is heading to the all-things-being-equal part of advanced development, and when a regime reaches that point, democracies simply perform better--not by how they run things but by how they get the hell out of the way of those who really need to run things, aka the private sector.
Chanos ended his talk with this arresting mirror image:
Apart from the paradox isn't it always the way? It's the elites that run off with the money and it's the poor wot gets the blame. And being poor - or even just moderately wealthy - may soon become a lot less fun in places other than China. Just ask the Greeks. Or the Spanish, Portuguese, Italians...you know how this ends.
China embraced capitalism to entrench its socialist elite. The US embraced socialism to entrench its capitalist elite.
* Critics from various quarters agree that Jacques's book is wrong-headed. I agree with the couple who also think it ignorant and unpleasant.