The End of Growth: Adapting to Our New Economic Reality (34 page)

China’s older workers have largely been left behind in rural villages, or pushed from their urban homes into apartment blocks on cities’ outskirts to make way for new apartments and office buildings occupied by younger urbanites and the companies hiring them. Age discrimination is a fact of life.

All of this will gradually change as China’s work force ages. Within a generation, the average age of a Chinese worker will be higher than that of an American worker.
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One of China’s leaders’ biggest fears, expressed repeatedly in public pronouncements, is that the nation will grow old before it grows rich (Japan, in contrast, got rich before it grew old).

To avoid this fate, China is trying to grow its economy as fast as possible now, while it still can.

One way it does this is to offer paltry pensions and poor-quality healthcare to older citizens. This makes China an attractive place for foreign corporations to do business. In the US, healthcare costs for older workers are often double the costs for workers in their 20s, 30s, and 40s. By keeping its workforce young and denying them benefits, China’s leaders keep costs down. American or European companies that move production to China or buy Chinese goods gain leverage to rewrite terms of employment with their older workers at home — or they can simply shut down domestic factories.

China’s youthful labor force attracts foreign investment. But as the country’s work force ages, its competitive advantage may evaporate. Moreover, the lack of adequate pensions and healthcare for Chinese workers will eventually result in worsening social stresses and strains.

It is the financial sacrifices of its people that have given China the opportunity to attract capital investment to its industries, and that generate subsequent profits that are then loaned back to the United States and other industrialized nations.

To understand the significance of those sacrifices, one must understand a little of the country’s recent history. At the end of the Communist revolution in 1949, China was impoverished and war-ravaged; the overwhelming majority of its people were rural peasants. Communist Party chairman Mao Zedong set a goal of bringing prosperity to the populous, resource-rich nation. A period of economic growth and infrastructure development ensued, lasting until the mid-1960s. At this point, Mao appears to have had second thoughts: concerned that further industrialization would create or deepen class divisions, he unleashed the Cultural Revolution, lasting from 1966 to the mid-1970s, when industrial and agricultural output fell. As Mao’s health declined, a vicious power struggle ensued, leading to the reforms of Deng Xiaoping. Economic growth became a higher priority than ever before, and it followed in spectacular fashion from widespread privatization and the application of market principles. “To get rich is glorious,” Communist officials now proclaimed.

During the 1950s, ’60s, and ’70s, the Chinese people had worked hard and endured grinding poverty for the good of the nation. But in the 1990s a small segment of the populace — mostly in the coastal cities — began to enjoy a middle-class existence. Some Chinese were indeed becoming gloriously rich, while most remained mired in extreme poverty. The resulting wealth disparity is only bearable as long as the middle class continues to expand in numbers, offering the promise of economic opportunity to hundreds of millions of destitute peasants in the rural interior.

China’s central government has unleashed a firestorm of entrepreneurial, profit-driven economic activity that is both unsustainable and difficult to control. Meanwhile, as we have seen, the uncontrollably dynamic economy is export-dependent and ill suited to meeting domestic needs.

China has encouraged rapid export-led, coal-fired economic growth, perhaps as a way of putting off dealing with its internal political, demographic, and social problems. If that is indeed Beijing’s strategy, it has worked spectacularly well for a short while. But it is built on contradictions and false hopes. Over the course of the current decade, the Chinese demographic-economic strategy will likely begin to unravel. What happens next is anybody’s guess.
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4. Oh No — Not Another Real Estate Bubble!

There is one more similarity between Japan and China that is worth mentioning. During the 1980s, real estate prices in Tokyo were jaw-dropping. In the Ginza district in 1989, choice properties fetched over 100 million yen (approximately $1 million US dollars) per square meter, or $93,000 per square foot. Prices were only slightly lower in other major business districts in the city. By 2004, values of top properties in Tokyo’s financial districts had plummeted by 99 percent, and residential homes were selling for less than a tenth their peak prices. Tens of trillions of dollars in value were wiped out with the combined collapse of the Tokyo stock and real estate markets during the intervening years.

Once again, China is following in Japan’s footsteps. Massive real estate projects — houses, shopping malls, factories, and skyscrapers — have been proliferating in China for years, attracting both private and corporate buyers. As prices have soared, investors have turned into speculators, intent on buying brand-new properties with the intention of flipping them.

Building is being driven by artificially inflated demand — the very definition of a bubble. And this is resulting in oversupply. In city after city, acres of commercial space sit vacant. Indeed, whole cities intended for millions of inhabitants have been built in the Chinese interior and now stand all but empty.
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Some might argue that the Chinese are investing in infrastructure now in anticipation of many millions more citizens moving into urban centers over the coming decades — however, this presupposes continuing rapid economic growth, which is exactly what is in question. If growth sputters, this infrastructure overbuild will be a dead weight on the Chinese economy.

Though Beijing initiated an effort to cool the real estate and stock markets in 2008, the global financial crisis forced officials to relent in favor of lavish stimulus spending on shovel-ready infrastructure projects. The Chinese funneled 4 trillion yuan (about $590 billion) into what in many cases turned out to be yet more empty new shopping malls, empty new cities, and empty new factories.

For Chinese citizens, investment in the stock market hardly makes sense, given dramatic episodes of turbulence in recent years. Instead, a condominium or a house is seen as the most sensible and profitable investment. But this results in a bidding up of prices to the point where, in major cities like Beijing and Shanghai, a condo can cost 20 times a worker’s annual salary. A worker in Tokyo might expect to pay only eight times her annual wages for a similar property.

What are the chances of putting off a property price meltdown? According to a November, 2010 article by Wieland Wagner in the German magazine
Der Spiegel
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Cao Jianhai of the Chinese Academy of Social Sciences in Beijing likens the Chinese economy to “a volcano before an eruption.” Nevertheless, he doesn’t believe that the government of Hu Jintao, the Communist Party leader and president, and Prime Minister Wen will allow a crash to occur before its term in office ends in 2012 — local governments are too dependent on the real estate boom. According to Cao, Beijing will go to “any expense” to pump money into the financial system and spur a renewed surge of rapid economic growth.
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Once Hu and Wen are gone, however, it will be up to their successors to deal with the fallout from a housing crash.
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Economic Growth’s Last Stand?

China is no more able to sustain perpetual growth than any other nation. The only questions, really, are when its growth will stall, and by what pace and to what degree its economy will contract.

The property bubble is likely to be China’s biggest short-term problem, and it could have knock-on effects on the nation’s banking system. The bubble could start to deflate as soon as next year, or the year after. Beijing will do what it can to prop up growth and tamp down social strain, and this could buy another couple of years — though there is no guarantee that the effort will succeed.

Over the longer haul (the next 2–10 years), China’s greatest vulnerabilities are in the areas of energy, demographics, and the environment (water, climate, and agriculture). By the period 2016 to 2020, problems in these areas will accumulate and become mutually exacerbating, and it will eventually be impossible for China’s leaders to plug all the leaks in the dike.

Already, China’s social structure is stressed, as can be seen from the many regional rebellions that take place each year (but that go mostly unreported in world media). This is the main reason the central government is ruthless with respect to press and Internet freedoms and other civil liberties.

Talk to a businessperson from China and you may hear how the continued expansion of the Chinese economy is inevitable and unstoppable. But peer beneath the surface and you will see roiling, boiling ferment.

We have discussed China at some length, not only because it has become the world’s second-largest national economy and is the world’s foremost energy user, but because it is emblematic. India, Thailand, Indonesia, Malaysia, and Vietnam are each pursuing somewhat different paths toward the same grail of rapid economic growth, but their strategies and vulnerabilities are sufficiently similar that an understanding of China’s predicament provides useful context for gauging these other countries’ prospects.

China is likely the site of world economic growth’s last stand. This nation, together with the other Asian “tigers,” comprises the main engine of expansion that remains after the faltering of the older, more established economies in North America and Europe. When China sputters, the quickening slide of the global economy will be clear and obvious to everyone.

Currency Wars

Since the economic crisis began, stresses in trade between the US and China have led to unfriendly official comments on both sides regarding the other nation’s currency. Some financial commentators suggest that “currency wars,” which might also embroil the European Union and other nations, may be in the offing, and that these could eventually turn into trade wars or even military conflicts. The US dollar, as the world’s reserve currency and as the national currency of the country leading the world into the post-growth era, appears to be central to these “money wars.”

It takes a little history to understand what currency conflicts are about.
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Prior to the 20th century, most national currencies either consisted of gold or were tied to gold; therefore the currency of one nation was fairly easily convertible to that of another. National monetary reserves consisted of gold, and balance of payments deficits were settled in gold. Limited supplies of gold kept public spending within fairly tight bounds. Inflation through the debasement of a currency resulted in the refusal of other nations to accept that currency in trade. Typically the financing of wars presented the only exigency strong enough to overcome disincentives to debase money.

World War I, a conflict that engulfed at least 17 nations, was the first occasion when several countries simultaneously abandoned a hard money policy. Britain took on long-term war loans while Germany issued short-term bonds. Deficit financing arguably prolonged the war, resulting in millions of needless casualties.

Though Germany had entered the war with a thriving economy, its short-term debt, compounded by the harsh post-war terms of the Versailles Treaty, resulted in economic ruin through hyperinflation, leading to the destruction of its middle class and to the rise of Hitler, setting the stage for World War II.

At the Conference of Genoa in 1922, a partial return to the gold standard came about as the central banks of the world’s powerful nations were permitted to keep part of their reserves in currencies (including the US dollar) that were directly exchangeable by other governments for gold coins. However, under this new Gold Exchange Standard, citizens could not themselves redeem national banknotes for gold coins. Now dollars and pounds were effectively equivalent to gold for the currency issuer, but not for most currency holders. This was an inherently inflationary development from a monetarist point of view (in that it meant that money could be issued substantially beyond the amounts of gold on deposit); however, the world’s growing energy supplies and manufacturing capacity required an increase in the money supply, so for most countries and in most years measurable rates of price inflation remained relatively low.
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