No Dispensation from The Laws of Economics

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Global Economic Crisis
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That's not sustainable for any economy, China doesn't get special dispensation from the rules of economics.

Crisis Management
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<p>Look, I think China's really had the right strategy and if you've studied economic development, and I've studied it for a number of years if not decades. Export-led growth has long been viewed as the key to economic development and the theory is that, at some point, you reach a critical mass in terms of the employment and income-generating capacity of your export sector that you establish a solid foundation for consumer purchasing power that can then be directed at supporting internal, private consumption. Now, I think China recognized, probably 5 years ago, that they were at that point in their development journey where they had to make that transition. And when the 11th 5-year plan was enacted, in March, or February, of 2006, it had the broad outlines of a huge transition from export, and investment-led export, to a pro-consumption growth model. The Chinese correctly identified high-levels of precautionary saving as a major impediment to this transition and they also identified correctly the lack of a social safety net as being one of the most significant headwinds that kept precautionary savings high and restrained internal consumption. So, they knew it was coming, they knew they had to do it, but they didn't execute. And this is sort of unlike the Chinese because usually, when they identify a clear set of goals and objectives, they're pretty darn good at execution. And, it's hard to know why, I think the reason that I'm most comfortable with is that this is a period from 2005, 2006 and 2007 where global trade was booming, the Chinese export business was just unstoppable, it was increasing every year as a share of GDP. In the year 2000, exports were 20% of Chinese GDP, by 2007 they were 36%. I mean, this sector was getting levered up at just the right time. It was delivering growth beyond their wildest dreams. 3 years of 12% growth ending in 2007, 2007 itself was 13% growth. So, if it ain't broke, why fix it? And they just stayed the course. Did they stay the course too long? It's hard to say. They got hit like any other export economy by a massive external shock late last year after the crisis, it was a big jolt. They knew that they didn't really have a plan B. So, they went into their typical pro-active fiscal stimulus mode where they immediately jump-start infrastructure spending through state-directed bank lending and they did it on a scale they had never done before. And they increase some export incentives under the premise, which I think will turn out to be wrong, that once the investment stimulus wears off, the export sector will kick in courtesy of a snap back in external demand. And so, I think they're going to be in for a bit of a shock at some point next year when the impetus for infrastructure investment does wear off, there's no kick to the export business, and they have another sort of growth alert at some point in 2010. I think they'll adapt, I think they'll, at that point, really focus much more on consumption than they have. They've waited a little bit too long. I think over the broad sweep of history, if you're a couple of years late, or even 5 years late, you won't get penalized, but they can't afford to wait much longer. If they stay on the path they're doing, where all they do is grow their GDP through investment and exports, it's a model that ultimately is driven by supply and it creates a huge imbalance with internal demand. So that's not sustainable for any economy, China doesn't get special dispensation from the rules of economics.</p>
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Stephen Roach talks about China's plan to move from an export dominated economy towards a more balanced and sustainable internal consumption based economy.