China Comes in for a Landing

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China Comes in for a Landing

Twenty years ago, it was Japan, with its fast-growing economy, that was heralded as the world’s rising star.  Then, its real-estate and stock-market bubbles burst, bringing a humiliating financial meltdown. 

It now appears it is China’s turn to follow the path of a formerly rising economic powerhouse that falls from grace.  This plunge will, in turn, discredit the idea that China has somehow discovered the secret to mixing “state capitalism” and “authoritarian rule” to produce “economic magic.”  To those who understand the shortcomings of centralized economic planning, the coming reversal will not be a surprise. 

China’s Growth Is Returning to Levels Not Seen Since the 2008 Financial Crisis

China’s Growth Is Returning to Levels Not Seen Since the 2008 Financial Crisis

A key problem when a government exerts strong control over the economy is that trends tend to be self-reinforcing.  This can prove deceptively positive during an upward economic cycle, but it sets the stage for devastation when the cycle inevitably reverses and begins to move downward. 

GDP Growth Year-to-year, real

GDP Growth
Year-to-year, real

All that emerging reversal is the product of changes in the two major factors that have been producing extraordinary growth since the end of the ‘80s:  exports and domestic investment. 

  • In July 2012, China’s exports were up just 1 percent from a year earlier, and while trade surpluses topped 8 to 9 percent of GDP in 2007 and 2008, the 2012 figure has dropped below 2 percent.1  This is the result of falling Western demand for Chinese goods, while China’s labor and material costs have been rising.  This drop in demand is being felt in places such as Dalian, a city in northeast China...

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