With each passing day, it is becoming increasingly likely that the future of our gasoline prices and consequently our economic well-being over the next few years will be determined by what happens with China’s economy.
For over 30 years, China’s GDP has grown at an unprecedented 10 percent a year allowing for the absorption of 15 million new workers into the labor force annually. Much of this growth has been supported by ever-increasing exports as China converted itself from a backwards agricultural nation to the center of world manufacturing.
With domestic consumer consumption in China running at less than 35 percent of GDP as compared to over 70 percent in the U.S., it has long been believed that China had to export to survive. Indeed the global economic slump of 2008 reduced China’s exports by more than 20 percent, cost tens of millions of its workers their jobs, and slowed economic growth to the lowest seen in recent decades.
To counter this situation, Beijing embarked on a massive stimulus program much larger in proportion to its GDP than the one undertaken in the U.S. In China, where the government directly controls the bulk of the banking system, and state-owned enterprises receive most of the loans, there do not exist the internal frictions and efforts for profit maximization that exist in other financial systems. The government simply orders and the banking system obeys.
The problem in China is what to stimulate. With well over half of its population mired in rural poverty and in no position to step up consumption of consumer goods, the state turned to expanding its infrastructure and housing – whether their was a need or demand for new projects or not. Millions of still empty apartments and retail establishments were built. Speculation drove real estate prices well beyond the means of the average worker. New highway and railroad projects were started. Production capacity was expanded and modernized. It was not long before foreign and few domestic critics of all this growth were starting to ask the question – Why?
It is one thing to build a trillion dollar dam that will supply massive amounts of electricity for decades, but another to spend trillions on 11,000 miles of ultra high-speed passenger lines that will whisk a relatively few passengers between cities at unprecedented speeds and costs. While improved electrified rail lines makes sense in a resource limited world, the 40,000 miles of new expressways that the Chinese will have completed in another few years does not make sense. Neither does the serious overcapacity in industrial production that is constantly being increased in the drive to keep growing. In short a lot of what is going on in China does not or will not have much real economic value outside of keeping the economy growing over the short term.
But if the screws are tightened too much, there will be recession.
As economic troubles grow in the OECD nations, it is becoming apparent that a major rebound in China’s exports outside of Asia is unlikely in the foreseeable future. Unless China can find a replacement for this market either in Asia or domestically, growth cannot grow indefinitely. This is the crux of China’s dilemma.
Beijing of course has other problems. If projections for future global oil production that predict a marked decline starting in 3-4 years are correct, Beijing like all oil importers will have trouble sustaining growth. Although China is making a major effort to lock in dedicated oil supplies all over the world, this will only be a temporary remedy and shortages will inevitably develop. By the end of the decade China’s economic growth will be at an end unless it finds ways to import increasing shares of the dwindling global supply of natural resources – a possibility that is not out of the question.
China, however, has a higher vulnerability to climate change than many other nations. With 1.3 billion people to feed, falling water tables, rising sea levels, and melting Himalayan glaciers, the country will one day be in considerable trouble This of course may well be decades away, but a couple of years of major droughts will force major shifts in priorities as the nation scrambles to find sufficient supplies of food and/or water.
Beijing, of course, is starting to realize that it may be in more trouble than a casual glance at its growth statistics would suggest. After an unexpected and unwanted spurt in lending in January, the government has begun to tighten the economic screws through its monopolistic control of the banking system.
Last week, the government’s state-controlled press published an unusual admission from the Chairman of the National Development and Reform Commission, Zhang Ping. Ping said that 2010 would be a year that would severely test China’s ability to macro-control its economy. If the government continues to lend out too much money, rapid inflation will occur. But if the screws are tightened too much, there will be recession.
The story went on to quote numerous senior economic officials to the effect that building too much capacity in certain industries cannot be good for the economy and that more emphasis needs to be placed on stimulating consumption and new [green] energy industries.
As March of 2010 opens there are already some tentative indications that the Chinese economy is slowing. Maybe the Chinese can tune their economy to the sweet spot between inflation and recession so that they can continue growing at their accustomed pace for awhile – and maybe not.
In recent months more and more of the world’s exportable energy has been moving in the direction of China and to a lesser extent India and a few other Asian states. Due to the global recession, there is still excess capacity in the energy markets, but this will be a fleeting time. For America, growth or stagnation of China’s economy will have much to do with the stability of oil prices during the next five years.
Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.