Sunday, July 21, 2013

Krugman's China Wall

There has been much speculation and discussion in recent months on the China slowdown and rebalancing from investment to consumption. Paul Krugman (the world's most readable economics nobel laureate) has posted a rather pessimistic op-ed at the NY Times: Hitting China's Wall

Yet the signs are now unmistakable: China is in big trouble. We’re not talking about some minor setback along the way, but something more fundamental. The country’s whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be.
Krugman's reasoning here on diminishing returns and the supply of peasants to a industrialising economy seems not dissimilar to his analysis of the booming Asian Tigers way back about 1994 and before the Asia Crisis crunch of the late 1990's.
Wages are rising; finally, ordinary Chinese are starting to share in the fruits of growth. But it also means that the Chinese economy is suddenly faced with the need for drastic “rebalancing” — the jargon phrase of the moment. Investment is now running into sharply diminishing returns and is going to drop drastically no matter what the government does; consumer spending must rise dramatically to take its place. The question is whether this can happen fast enough to avoid a nasty slump.
There are also a couple of associated blog posts from Krugman including an assessment of what impact any Chinese shock may have on the global economy with most fallout likely to be on commodity exporters.

China’s Ponzi Bicycle Is Running Into A Brick Wall

How Much Should We Worry About A China Shock?

Of course there have been plenty of predictions in the past decade of a China crash and a slowdown in trend growth was inevitable as the total size of the economy grew. Success or failure of rebalancing from investment to consumption has potential implications for the different Queensland regions. Macrobusiness has also recently posted on that and provides good coverage related to the Chinese economy: What Chinese rebalancing?

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