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Non-Prediction
#19
Two Scenarios Possible: China Deflation Leads to Global Recession
or China in WTO Means Breather for Global Economy
By Franz Schurmann, Pacific News Service, June 29, 1999
- Prediction:
My first non-prediction prediction came last week with Prediction
#18. I defined it in the following terms:
"It ... is two different scenarios either of which could
occur but not both at the same time."
This week's non-prediction also involves two mutually exclusive
scenarios.
- Outcome:
Non-prediction #19 will be evaluated on Tuesday, December
7, 1999. (This will be after the WTO meeting scheduled for
November)
Basis
for the Non-Prediction:
There's a lot of talk in the United States about the "China
threat." We are warned that within a few years "stolen"
weapons secrets will allow China to produce enough missiles
to wipe us off the face of the earth. But there's hardly
any talk about a much greater threat -- the possibility
that 1.3 billion Chinese are losing interest in consumption.
Decreasing consumption means too many unsold goods. That
leads to workplaces closing down thereby bringing about
recession. When goods go unsold prices also come down,
thereby reducing incentives for holders of capital to
produce. All of this is called deflation.
China is now the world's second largest economy, according
to the latest International Monetary Fund calculations, followed
by Japan. The Japanese have been losing interest in consumption
since their "bubble" burst in 1992 -- hence the seven year
running recession they are having difficulty getting out of.
If recession hits China as well, both giant economies will
in effect move out of the global economy. That would mark
the end of the global economy, and without it the United States
could finally experience that "great crash" predicted so many
times these last years. No wonder President Clinton is so
anxious to get China into the World Trade Organization (WTO).
Consider the following new facts of economic life about China
recently highlighted by the Chinese-language pro-Taiwan World
Journal:
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Worsening under-consumption is choking the economy
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Consumer goods prices have been falling for the last three
years
-
Factory and business inventories are soaring.
This is not because people have no money -- just the opposite.
People are putting their plentiful cash into savings or buying
speculative stocks. As a result total personal savings recently
reached $768 billion, a new high. And banks have far more
cash savers than loan takers -- recently, a quarter of $1.2
billion in low-interest production loans from the government
was not taken.
In both countries the currency is hard. The yen is the number
two global currency after the dollar. And China's RMB -- or
yuan as it's also called -- did not waver in the face of the
speculative blows which struck Asian financial markets two
years ago. It's exchange rate with both dollar and yen hardly
changed.
When Chinese prime minister Zhu Rongji spent a week in the
U.S. last April he kept saying that the worst problem he faced
at home is deflation. He couldn't convince the Chinese --
nor American reporters -- why deflation is so dangerous. Japanese
prime ministers also have that problem.
For almost two decades now China has been pursuing consumer
capitalist economic policies. They are called "reform and
opening up. "Reform" means marketizing and privatizing the
economy. "Opening up" means fitting China's economy into the
global economy. Benefits to the Chinese people of these two
policies, China's leaders said, will come mainly through two
new market systems: one a huge internal market and the other
a fast growing export market. The former will make American-style
consumerism available to virtually all Chinese. And the latter
will create profit on a large scale.
Obviously if China's production goes into recession then both
consumption and profits will suffer. Were China still a poor
country then the remedy would be obvious: get more money which
can be transformed into capital to spur production and wages.
But the paradox is that the Chinese people are swimming in
a sea of money. As in Japan what puzzles Chinese economic
policy makers, like Premier Zhu Rongji, is why Chinese holders
of money are not transforming it into production-creating
capital. It defies all modern economic doctrine.
Pat Buchanan likes to point out how trivial the China trade
is for the American economy. In reality it's just the opposite.
America's most dynamic production sector, high-tech, will
not survive without East Asian demand. The population of Northeast
and Southeast Asia numbers around two billion. Their combined
middle classes can be conservatively estimated at one-third
of the two billion namely 600 million. Six hundred million
East Asians form the chief market for American high-tech exports.
That is so because modern middle classes require large-scale
and sophisticated finance, trade and administrative systems.
These can't be created without vast amounts of state-of-the-art
electronic equipment
If deflation forces China and Japan to move out of the global
economy America will soon become the world's biggest economic
loser.
That's why the WTO is now seen by American government and
corporate leaders as the main instrument for keeping global
trade going. And that is why they are making every effort
to get China in. Because if China gets in its leaders will
continue their reform and opening-up policies. And that will
encourage the Chinese --- and Japanese --- governments to
bring about a top-down "reflation" of the economy. It's something
like pulling a half-drowned person from the water and administering
vigorous life-saving resuscitation.
Sometimes resuscitation works. Other times it doesn't.
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