China the next World Power?

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Gordon Chang's The Coming Collapse of China

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As follow-up on my yesterdays article ‘The End of an Empire’, here my analysis whether China is a likely candidate as successor.

America, as superpower, has passed its peak. Although in public China’s leaders avoid triumphalism, there is a sense in Beijing that the reassertion of the Middle Kingdom’s global ascendancy is at hand.
China worries about America’s extravagant spending that endangers its $1 trillion accumulated reserve. So China is in a more precarious situation than many Westerners think. The world is not yet bipolar and may never become so far. The EU, for all its faults, is the world’s biggest economy. India’s population will overtake China’s. But that does not obscure the fact that China’s relative power is plainly growing, and both the West and China need to adjust to this.

The G20 is a chance to give China a bigger stake in global decision-making than was available in the G7 or G8. But it is also a chance for China to show it can exercise its new influence responsibly. Over the past quarter-century no country has gained more from globalisation than China. Hundreds of millions of its people have been pulled out of substandard living conditions into the middle class.

Now China in particular, is being asked to bolster the IMF’s resources so that the fund can rescue crisis-hit countries in places like Eastern Europe, but political hindsight may be the obstacle because those countries are old Communists.

Chinese exports slumped 26% as demand faded. The consequences are not hard to figure out as made clear below. Remember, this financial crisis is a depression, not a recession. In a recession, consumers take a breather, orders diminish, and consequently exports decline.
But to explain is more detail; let us follow the export trail to figure out what is going wrong.

A factory in Guangzhou has cut its production, due to orders that have fallen off. A truck is leaving the factory less frequent and only 3/4 full. Once arrived in the harbour in Hong Kong, the shipping schedule has become less frequent, along with a reduction of transport rates. Two weeks later because it is sailing slower than usual in order to cut expenses by preserving fuel, the ship arrives in the USA, where the container quickly is unloaded because there are no queues and put on a truck that will take it to a warehouse, where the container will be opened and its contents off-loaded onto other trucks for distribution to retailers all over the United States. The whole process takes less time than it did a few months ago, simply because there's less traffic and less back up at every step. When finally the merchandise gets onto the shelves, it finds fewer shoppers and thus fewer buyers.

And here lies the reason of China's troubles, a cause from which it cannot quickly recover. It has set up its economy to provide end products for foreigners. Those foreigners can't and won't buy like they used to; they don't have the money. The credit bubble has popped. It's over.

Well, maybe the Chinese could lend U.S. consumers money? And there lies another catch because U.S. consumers have more than twice the debt they usually carry. The last thing they want is more debt. They now have become aware how hard it can be to pay back debt, especially when you lose your job. Unemployment in the United States is already over 8%. It will probably be over 10% by the end of the year. Each percentage point represents about 1.5 million people who aren't buying many Chinese goods.

Anyway the Chinese perhaps could make stuff for their own people? Well, they could and eventually will do. But that's exactly what makes this crisis a depression and not a recession. The whole structure of the economy must be changed. Again, this is possible, but that will take time while the adjustment will be painful. Workers need to be retrained. First many will be fired as the factories search and adapt for a new product line. Without revenues, they might go broke, and hopefully repurchased at an auction by another manufacturer.
This process is called creative destruction that Schumpeter described. One industry is destroyed so that another might be created. It is what depressions are good for. It is what we all do face now, including China. Maybe especially China even more. Because China has a command economy compared to our free market economy. Central planning is inept to deal with those changes quickly while time and energy is wasted in finding ways to avoid doing things.

Conclusion:
The answer to the question whether China will be the next world power, is not yet.