The U.S. can’t afford a Chinese economic collapse

By Zachary Karabell
March 7, 2013

Is China about to collapse? That question has been front and center in the past weeks as the country completes its leadership transition and after the exposure of its various real estate bubbles during a widely watched 60 Minutes exposé this past weekend.

Concerns about soaring property prices throughout China are hardly new, but they have been given added weight by the government itself. Recognizing that a rapid implosion of the property market would disrupt economic growth, the central government recently announced far-reaching measures designed to dent the rampant speculation. Higher down payments, limiting the purchases of investment properties, and a capital gains tax on real estate transactions designed to make flipping properties less lucrative were included.

These measures, in conjunction with the new government’s announcing more modest growth targets of 7.5 percent a year, sent Chinese equities plunging and led to a slew of commentary in the United States saying China would be the next shoe to drop in the global system.

Yet there is more here than simple alarm over the viability of China’s economic growth. There is the not-so-veiled undercurrent of rooting against China. It is difficult to find someone who explicitly wants it to collapse, but the tone of much of the discourse suggests bloodlust. Given that China largely escaped the crises that so afflicted the United States and the eurozone, the desire to see it stumble may be understandable. No one really likes a global winner if that winner isn’t you.

The need to see China fail verges on jingoism. Americans distrust the Chinese model, find that its business practices verge on the immoral and illegal, that its reporting and accounting standards are sub-par at best and that its system is one of crony capitalism run by crony communists. On Wall Street, the presumption usually seems to be that any Chinese company is a ponzi scheme masquerading as a viable business. In various conversations and debates, I have rarely heard China’s economic model mentioned without disdain. Take, as just one example, Gordon Chang in Forbes: “Beijing’s technocrats can postpone a reckoning, but they have not repealed the laws of economics. There will be a crash.”

The consequences of a Chinese collapse, however, would be severe for the United States and for the world. There could be no major Chinese contraction without a concomitant contraction in the United States. That would mean sharply curtailed Chinese purchases of U.S. Treasury bonds, far less revenue for companies like General Motors, Nike, KFC and Apple that have robust business in China (Apple made $6.83 billion in the fourth quarter of 2012, up from $4.08 billion a year prior), and far fewer Chinese imports of high-end goods from American and Asian companies. It would also mean a collapse of Chinese imports of materials such as copper, which would in turn harm economic growth in emerging countries that continue to be a prime market for American, Asian and European goods.

China is now the world’s second-largest economy, and property booms have been one aspect of its growth. Individual Chinese cannot invest outside of the country, and the limited options of China’s stock exchanges and almost nonexistent bond market mean that if you are middle class and want to do more than keep your money in cash or low-yielding bank accounts, you buy either luxury goods or apartments. That has meant a series of property bubbles over the past decade and a series of measures by state and local officials to contain them. These recent measures are hardly the first, and they are not likely to be the last.

The past 10 years have seen wild swings in property prices, and as recently as 2011 the government took steps to cool them; the number of transactions plummeted and prices slumped in hot markets like Shanghai as much as 30, 40 and even 50 percent. You could go back year by year in the 2000s and see similar bubbles forming and popping, as the government reacted to sharp run-ups with restrictions and then eased them when the pendulum threatened to swing too far.

China has had a series of property bubbles and a series of property busts. It has also had massive urbanization that in time has absorbed the excess supply generated by massive development. Today much of that supply is priced far above what workers flooding into China’s cities can afford. But that has always been true, and that housing has in time been purchased and used by Chinese families who are moving up the income spectrum, much as U.S. suburbs evolved in the second half of the 20th century.

More to the point, all property bubbles are not created equal. The housing bubbles in the United States and Spain, for instance, would never had been so disruptive without the massive amount of debt and the financial instruments and derivatives based on them. A bursting housing bubble absent those would have been a hit to growth but not a systemic crisis. In China, most buyers pay cash, and there is no derivative market around mortgages (at most there’s a small shadow market). Yes, there are all sorts of unofficial transactions with high-interest loans, but even there, the consequences of busts are not the same as they were in the United States and Europe in recent years.

Two issues converge whenever China is discussed in the United States: fear of the next global crisis, and distrust and dislike of the country. Concern is fine; we should always be attentive to possible risks. But China’s property bubbles are an unlikely risk, because of the absence of derivatives and because the central government is clearly alert to the market’s behavior.

Suspicion and antipathy, however, are not constructive. They speak to the ongoing difficulty China poses to Americans’ sense of global economic dominance and to the belief in the superiority of free-market capitalism to China’s state-managed capitalism. The U.S. system may prove to be more resilient over time; it has certainly proven successful to date. Its success does not require China’s failure, nor will China’s success invalidate the American model. For our own self-interest we should be rooting for their efforts, and not jingoistically wishing for them to fail.

PHOTO: New apartment buildings where the local government built homes for former miners and farmers as part of an urbanisation programme, are seen in Mentougou district, suburb of Beijing, February 28, 2013. REUTERS/Kim Kyung-Hoon

17 comments

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I saw a special on this the other day, and I’m amazed at just how many projects are sitting there – finished and unfinished – in China. I’m even more astounded at the costs of the housing projects built. It seems like it was doomed to fail from the start. Now they’ve got entire “ghost cities,” with no money to complete them – or people to move in!

Posted by DonaCollins | Report as abusive

“the superiority of free-market capitalism”. No such thing. Sure, if you repeat it enough the people suscepitble to the messages in the two-minutes hates will absorb it, but there is no freedom, no capitalism and no free market.

China’s real problems will hit when they have polluted their contry so far that they actually have population decline. Until then, their government will just keep faking it. Much like ours actually.

Our systems are not all that different except that we have a government controlled by business and they have business controlled by government.

Posted by brotherkenny4 | Report as abusive

The story line about Americans wanting China to fail doesn’t make sense and contradicts:
“The consequences of a Chinese collapse, however, would be severe for the United States and for the world. There could be no major Chinese contraction without a concomitant contraction in the United States. That would mean sharply curtailed Chinese purchases of U.S. Treasury bonds, far less revenue for companies like General Motors, Nike, KFC and Apple that have robust business in China…”

Why would any American who knows of our dependency on China want China to fail?

Posted by ptiffany | Report as abusive

I think eventually state sponsored capitalism will “win”. It is far better for, well, the state ( the people). American capitalism is not better for the democracy, only for the capitalist.

Posted by tmc | Report as abusive

I live in liberal California, in El Dorado County, perhaps one of the most conservative counties in the state. Around town I always here people ripping on the Chinese, blaming them for things that are structurally wrong in our state and country. These folks would love to see China fail, even though they are the same folks shopping at Walmart! People are capable of overlooking just about anything if they try hard enough…The stupidity of it all makes me sad.

Posted by CanyonLiveOak | Report as abusive

well, i kinda want the opposite… i want their Made in China junk they ship to us not to fail but rather to work…

Posted by UauS | Report as abusive

After every meeting of the Chinese Parliament, they will almost inevitably release a document which among other things will always contain a strong statement that the government is fully committed to running the country based on sound “scientific” principles.
So far in the past few decades, they have carried out this pledge to the letter.
This is their recipe for success. And for this reason, the Chinese economy will not crash and will keep on growing from strength to strength.

Posted by Bensony | Report as abusive

Mr.Karabell, Americans and others all like to play God- “As I wish them to fail, they will fail; as I wish them to success, they will success.” Ask yourself, constructive or not constructive, are you rational? Do you really think your prayer works at least for once? Or do you really have the power to control others’ fate? If so, listen to Beethoven’s No.5 may greatly intensify your such a power to make a ideal world, not only upon China, but also upon this universe, as I wish this universe exist as we have now or even better (although I cannot figure out what is ‘a better universe’) and forever. הַלְּלוּיָהּ

Posted by gee.la | Report as abusive

The problem of China is not in real estate; it is in mentality. Mentality is the center; everything else is surrounding this center. Its problem is deep and untouchable. In most of the times, it is unobservable, but it is sensible, if you have this sense that many don’t have.

Posted by gee.la | Report as abusive

America would only be made stronger as a country if China had a major economic setback.

Do not confuse the interests of the American people with the interests of multi-national, pseudo-”American” organizations or with the interests of American investors. These are by no means whatsoever the same, and as the economic decline in living standards in the USA should make clear, those interests are generally in conflict with those of the population as a whole.

As median household income in the USA has dropped every year for the past 6 years we have been told it is “good” for us to be in decline, and that our troubles are inevitably the result of our own flaws as a people, and not due to flaws in our tax system, our foreign policy, or our definition of essentially hostile foreign organizations as “domestic” in return for political bribes (“campaign contributions”) to the politicians who are paid to look after the people as a whole rather than special interests. Now suddenly we should be concerned that other countries are having difficulties which will result in increased employment in the USA and increased opportunity for those of us whose primary economic interests are in the USA? I do not think so.

Posted by usagadfly | Report as abusive

“Why would any American who knows of our dependency on China want China to fail?”

I think you misphrased your question a bit. Americans who *knows* of our connection to China generally do not want China to fail. Those who have educated themselves on the subject matter (whether formally or informally) knows that the two nations are joined at the hip economically. Unwinding that relationship is not impossible but it would certainly inject massive dosages of economic pain on both sides of the Pacific.

Now if your question was simplified a bit into; “why do many Americans want China to fail?”, the answer to that would be ‘because emotions override logic’. Very basic human nature.

Frankly, the average American isn’t all that up-to-date when it comes to knowledge of China and the global economic links. Instead, they just turn on the TV to get their daily fill of China-bashing by our news media and politicians. Just look to the 2012 election for a prominent example. Under those circumstances, it’s hard not to develop xenophobia or inherent biase against another nation and its people, especially one that is so large and influential with a vastly different culture/belief system as China. Sad to say, racism against the Chinese has became a socially acceptable norm in many communities across the U.S.

We Americans love those ‘good triumph over evil’ stories. American Exceptionalism would dictate that we view ourselves as ‘forces of good’ in a rather naive, heroic light. Now that terroism have become less of a concern, the theatrical role of *global evil doer* falls squarely on the shoulders of China. The reality isn’t so clear cut and simple-minded.

Posted by blah77 | Report as abusive

We all heard the “Too big to fail speech” that prompted the bailout. We’d hear something similar if China goes down. They’d say “Too much of the world depends on them, we must prop them up for our own interest”. Complete BS. God forbid we make things here again, right? What happened to the benefit of economic independence and sustainability? Hogwash, right?

Posted by LysanderTucker | Report as abusive

>>We all heard the “Too big to fail speech” that prompted the bailout. We’d hear something similar if China goes down. They’d say “Too much of the world depends on them, we must prop them up for our own interest”.

China wouldn’t need anyone to ‘bail them out’ per se. They have 3 trillion USD in their foreign currency reserve. They also have an additional 300 billion in other assets that aren’t counted as part of that official reserve. The only thing that will completely cripple that resource is if the USD declines sharply in value since about 60% of their reserve is held in US Treasury assets. Frankly, you would not want to see what happens should the USD collapse. Ugly and chaotic won’t even begin to describe it. As for economic/monetary policies, China is also much more flexible because they can bypass much of the standard bureaucratic non-sense. They certainly won’t be sitting around for 3 months trying to come up with compromised (some say half-assed) solutions while a major economic issue continues to develop. Either way, if China tanks, so does the rest of the world. That is an indisputable reality.

With regards to ‘economic independence’, there is no such thing in a globalized economic system. Even well-capitalized and strong economies like those of Germany and Switzerland are still very sensitive to the fluctuations of Euro and Franc as well as ‘hot money’ (safe haven seeking) inflows. They also rely heavily on export markets.

Frankly, the only way to accomplish the goal of economic independence is complete isolationism. Basically, sever all ties with the global financial/trade system. That is little more than a fantasy. The only other option is to restrict our trade flow to ‘exports only’ while not importing anything of significance. Now what country is going to accept that sort of economic colonialism where only we get rich while they get bled dry? Retaliation will certainly be in order and that is how trade wars get started. Simply put, having our cake and eat it too is not a realistic option here. What are we going to do if they don’t play ball? Have Pentagon park a carrier battle group up their wazoo until they submit to our draconian economic imperialism? I don’t think so.

Posted by blah77 | Report as abusive

>>”America would only be made stronger as a country if China had a major economic setback.

>>Do not confuse the interests of the American people with the interests of multi-national, pseudo-”American” organizations or with the interests of American investors. These are by no means whatsoever the same, and as the economic decline in living standards in the USA should make clear, those interests are generally in conflict with those of the population as a whole.”

Rather simplistic point of view. It is almost if you are assigning all of blame to China. The main reason why China exports so much is because of the insatiable global demand for it. Make the goods first and then wait for orders to come in is certainly not the standard practice of their manufacturers. If their economy collapses and the exports stop flowing, what would happen to the price of these goods? It would rise dramatically and guess who will get affected the most? The middle or lower class America who have to live within a modest discretionary budget. The wealthy wouldn’t care whether they had to pay $600 or $6000 dollars for an iPhone/iPad. Discretionary income and real(purchasing power) income are both extremely important when it comes to determining the overall economic health of a nation.

Secondly, China isn’t merely an exporter as they import a lot as well. In all, China imports $1.4 trillion worth of goods while exporting $1.57 trillion annually. That 10% disparity is shrinking by the year as well as they are actively shifting to internal consumption while scaling down export dependency. This trending would suggest that China may very well become a net-importer inside of a decade. The issue is that they don’t import as much from us as they do with other nations (relative to bi-lateral trade size) such as Japan, South Korea, Germany or Australia. Part of this is our own fault because the State Department places many restrictions as to just what we can export to China. Regardless of all that, America still does export many agricultural products, heavy machinary, electrical equipment, automobile and raw materials to China in the tune of $110 billion a year and rising. It wouldn’t even be a stretch to say that many of those businesses would struggle mightily if the orders from China stopped coming. Now in the face of sharply declining revenues, what is the preferred method for businesses to cut expenses? Layoffs. Mass unemployment is the surest way to ensure an equally massive decline in median income and living standard.

Now with regards to those ‘American investors’ you brought up, do you fully comprehend just who you are referring to there? If China’s economy collapses, our market will experience a similar collapse because many of our companies will no longer be profitable and simple expenditures such as debt servicing will become difficult. With that said, American millionaires and billionaires aren’t the only ones with a vested interest in our markets. Public retirement pension plans, private 401k/403b plans, individual IRAs and retail investors would all be impacted accordingly. All told, roughly 60% of all Americans are currently invested in the market in one form or another and they certainly aren’t all wealthy. I don’t know about you but if my 401k suddenly declined 50% in value, I think my financial well being and ‘living standard’ would also be decline sharply.

You may have a point when it comes to wealth disparity and corporate practices but you are taking it out on the wrong people. Our tax code is what is causing the growing income disparity. The wealthy are far more adapt at using tax loopholes and accounting tricks to maximize their investment gains and personal financial benefits.

Posted by blah77 | Report as abusive

The Chinese system is artificial. Recent demise of the USSR once again showed that sooner or later all artificial systems fail.
Another question is how much the USA will be affected in case of China, as we were not intertwined with the Soviets economically. ©

Posted by UauS | Report as abusive

we have, in canada,these counterfeit canadian stamps,more than half of the ones sold and used successfully are fake, china may be artificial but so is every other 2013 village of earth that calls itself nations,there never were so many bogus liars in all world history, men taking perfectly fine, healthy four years old,ok with stealing their corneas,and livers, for fat new yorkians, and hollywood movie stars, this earth, has a plague, thankfully, most ‘men’ are controlled by bogus, counterfeit, money systems, the counterfeit men, that is one artificial that is very difficult to accept, all you 2013 crapmen, unite in the acknowledgement of the wisdom of our Lord God Almighty, at least He Knows how to keep you busy.

Posted by siat | Report as abusive

When people buy multiple homes in China they pay cash, but the cash often came from a loan — not a home loan, a business loan. The loans were made to a business… and then they got the money. The reason the business got the loan is because credit is cheap to state-owned companies, and the banks don’t care if the companies’ proposed investments don’t have any real economic purpose because the banks are also state-owned (privately owned companies have a much harder time getting loans in China). This is the source of the bubble. If they can come to grips with it sooner rather than later they might avoid a collapse.

Posted by JohnMountfort | Report as abusive