ABRAHAM: China could possibly defer financial crisis


Opinions Column: Unconventional Wisdom

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The economic growth of the People's Republic of China (PRC) has been something akin to a miracle. Consistent GDP growth in China, around the 10 percent mark for the greater part of three decades, had the entire world absolutely baffled. These precipitous levels of development have allowed it entry in a club of three other countries as an Asian Tiger, alongside South Korea, Taiwan and Singapore.

The Solow-Swan Model was a semi-resolution to this paradoxical growth by explaining much of China’s economic growth out of the fact that the Chinese capital was decimated after the failed Communist Revolution. In other words, “catching-up” growth, or growth with meager initial levels of capital, is much greater than “cutting-edge” growth — the growth of many Western countries which have already attained the highest levels of per-capita GDP.

However, many years later its economy continues to soar at a decelerating rate with little incentives offered by the governorate to protect incentives for innovation. For this reason, many today claim that the end of China’s ascent to wuthering heights is nigh.

On Wednesday, the PRC’s leaders assembled at the biannual National Congress at the Central Politburo of the Communist Party of China to discuss political and economic strategies for the country moving forward. The leaders come from China’s ruling Communist Party, and as the President Xi Jinping has made it clear during his five-year term, central planning has been of utmost priority for the PRC. At this Summit, leaders are carefully considering its strategies in order to ensure that its economy doesn’t collapse.

While a financial crisis for China is certainly inevitable due to its unsustainable policies, the Chinese government may have one strategy to defer this crisis from occurring in the near future. We start with a consideration of the cons:

Currently, China’s debt crisis is so dire that the Moody’s and S&P Index downgraded China’s debt last year for the first time since the Savings and Loans Crisis almost 30 years ago. With national banks issuing loans to nearly everyone who asks for them (and especially bloated, state-owned companies), debt continues to rise with growth rates slowing down in recent years to about 6.7 percent.

The People’s Bank of China, China’s central bank, is also caught between a rock and a hard place. On Thursday, the chief of the central bank Zhou Xiaochuan claimed that cyclical fluctuations may amplify as a result of positive sentiments toward investments, leading to a massive drop in the price of assets. Should this occur, one of China’s only bartering chips — it’s high level of investments — may begin to tank.

What’s worse, the People’s Bank of China does not have many methods at its disposal to combat such issues. With interest rates kept stable to keep the Yuan as a competitive currency, China cannot respond by depressing interest rates to encourage investment. In conjunction with its heavy debt levels, the PRC may find itself hard-pressed to recover from such a potential crash or large-scale bankruptcy.

Adding insult to injury, many countries of the world have been experiencing shifts in populism and promoting politicians who are outspoken against free trade agreements such as the Trans-Pacific Partnership. Should these sentiments continue to gain popularity, the profitability of China’s export economy could decline as countries close themselves off to Chinese produced goods and services.

We finally turn to China’s sickly demography. Because China’s population is aging rapidly, the labor force is shrinking. So in spite of China’s policy of investment from incurring debt, China’s investments may seek little return if there are no sources of human capital to be added to these investments.

Taking all these provoking considerations into account, the PRC may choose to tap into one of its investments that has promise:

Chinese investment holding company, Tencent, has recently joined other investors by adding $4 billion USD in investment to the Chinese internet platform Meituan-Dianping. Meituan-Dianping has been one of several other internet services in China that has revamped consumer culture in China: quickly gaining market share and attracting sizeable evaluations by investors. While government strategies haven’t been able to combat the investment crisis, these internet services may do more to connect people with different businesses across the country and spur consumption. Tencent also produced an odd new video game that has allowed people to clap for President Xi-Jinping as a means to presumably garner support for the president during the National Congress. On Wednesday, this game was reportedly played 400 million times. Such games and social media platforms have been part of Tencent’s strategy to link consumption with nationalism.

The lesson here is that if China abandons its policy of bloating a number of unprofitable investments and straightjacket monetary policy while getting behind internet-based platforms to increase consumer confidence and political unity instead, China may be able to posture to investors and become an interesting new force in the service-based global economy. While the methods here are certainly odd and borderline megalomaniacal, desperate times call for desperate measures.

Nour Abraham is a School of Arts and Sciences senior majoring in mathematics and economics. His column, "Unconventional Wisdom," runs on alternate Fridays.


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