Twofish's Blog

November 10, 2007

Follow the money

Filed under: china, finance — twofish @ 4:19 pm

There are two arguments which suggest that China can withstand a US recession.

1) Export/GDP figures vastly overstate the importance of exports to China. You put together two widgets worth 50 cents to one spocket that is worth $1.10 which is then exported. This gets count in export revenue as $1.10 but just contributes to 10 cents to GDP. If you then calculate export/GDP you get a figure that overstates the importance of the export.

2) The second is historical. Since 1978, the Chinese economy has been unaffected by US recessions, including most recently the 2001 recession which hit a lot of other East Asian countries hard.

As far as jobs, I don’t see it to be particularly difficult to redirect export production inward if this is necessary. Most of the exports to the US are consumer goods, which Chinese would want if the US doesn’t take them. Also, most of the new jobs in China produced in the last 25 years aren’t in manufacturing. They are in services. What happens is that as productivity increases and as people have fatter paychecks, they want to get their hair done, remodel the apartment, eat in nicer restaurants etc. etc.

Unemployment can be dealt with through public works projects. Tension between rich and poor may be less destablizing then one imagines. The really, really poor are too busy trying to survive to fight the system. The less poor are able to fight the system, but they are more interested in using it to get rich. IMHO, banks are in much less bad shape than some people think, and certainly in much better shape than the last US recession in 2001.

The reason global imbalances aren’t talked about much any more is that the reason they were talked about in 2004 was that certain interest groups in the US wanted certain specific things, and talking about RMB revaluation and global imbalances was a way of uniting the groups. No one cares about it much any more because those groups basically got what they really wanted. Textiles manufacturers got an extension to the multi-fiber agreement, and Wall Street has gotten a lot of financial service liberalization.


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