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Jeff Lukens
Could China’s Instability Threaten America?
December 4, 2010
China’s double-digit economic growth over the past thirty years has been
breathtaking. Growth has limits, however, and China may soon be reaching them.
With worldwide recession, and inflation coming to the yuan, a slowdown in
China’s growth is increasing probable. If China experiences any let up in
growth, the nation’s internal stability becomes a concern. The modern western
trait of rising expectations has set in with the populace. By their sheer
numbers, any setback in the standard of living could ominously jeopardize the
nation’s political and economic structure -- and affect us as well.
Beijing has established, over the years, an integrated economy with surrounding
Asian nations equal in size to that of the United States. They have the
technological and financial advantages of a modern economy, and with their huge
population, the cost advantages of a developing one.
But China has problems too. Part of their insecurity stems from a dependence on
foreign sources for raw materials. China imports about half its oil, for
example, and the vast majority of that comes from tankers that pass through the
strategic chokepoint at Strait of Malacca near Singapore. And to reach Africa or
the Persian Gulf, they must cross a vast Indian Ocean heavily patrolled by the
U.S. and Indian warships.
And then there is the one-child policy adopted in the 1970s. The policy has
resulted in an inherently unstable demographic of 125 men for every 100 women of
childbearing age. Moreover, China is aging faster than almost any country on
Earth. By 2030, about the time China’s economy is projected to surpass the U.S.,
their population will begin to decline.
A massive wealth disparity also exists between China’s coastal populations and
its poorer interior regions. With the vast majority of China’s population living
in the eastern-third of the country near the coast, the other two-thirds of the
country is relatively unpopulated.
About 17 million people annually migrate from the country to the cities. Beijing
is hoping to limit that flow by taxing and shifting resources away from
wealthier coastal regions and giving it to the interior regions without meeting
great resistance from either.
When economic growth inevitably slows, however, conflicts will arise and
competing factions could emerge with some calling for a strong central
government that imposes a heavy-handed order, and others calling for a more free
decentralized government. How this struggle will play out is uncertain. In the
end, China may remain formally united, but its power could be distributed among
its regions much as it was before Mao.
China’s immediate problem, however, is inflation. A succession of wage increases
has occurred this past year for factory workers. That, along with a rise in
commodity prices, could bring a spiraling inflation where higher wages and
prices feed off each other. The threat of inflation is forcing their central
bank to begin cooling the economy. Beijing is already contemplating price
controls for some consumer staples, and particularly for food items. The Wall
Street Journal recently reported that China’s "consumer price index's spike to
4.4% on-year in October was mostly due to a 10.1% on-year rise in food prices.”
By keeping the yuan artificially weak against other currencies, Beijing may have
allowed its economy to overheat, and has contributed to trade imbalances and
global recession. The fading value of the euro has compounded the problem. In
preventing the yuan from fully appreciating, China has accumulated $2.6 trillion
in foreign-currency reserves, mostly in dollar-denominated assets.
Although Beijing has recently decided to allow the yuan to strengthen, it has
much further to go to reach fair value with the dollar. Ending trade and
monetary imbalances, and the global recession, is unlikely unless the yuan is
allowed to rise freely. Allowing the yuan to rise, however, would slow China’s
economy still further. Such a policy would be mostly for the benefit of other
nations, and is therefore very improbable.
History suggests that China will continue to act in its own best interest by
maintaining trade advantages. This, in turn, allows them to keep their people
employed, and to grow their economy and their military. They have little for
error. With 1.3 billion mouths to feed, and food prices rising, no one knows
when some chance incident might trigger another Tiananmen Square type
bloodletting, a Chinese selloff in the U.S. Bond market, or a showdown over
Taiwan.
We cannot assume Chinese and American interests are the same. For policy makers
in Washington, China's ravenous appetite for raw materials and our growing
indebtedness to them are worrisome. We must be open to the possibility that our
current approach is not working, and is strengthening a regime that represses
its people and threatens other nations.
In a world of sovereign debt defaults, currency devaluations and quantitative
easing, China’s goal is to protect its economy. In doing so, however, they could
be destabilizing the world economy, and causing an aggressive competition for
resources. We too will feel the economic effects of their actions. It is
inescapable.
The United States
must undoubtedly begin the difficult process of reducing its budget and foreign
trade deficits. So far, few in Washington have shown a genuine will to address
these issues. That must change. With China’s inherent instability, a wise and
measured policy approach by Washington will be required for the good of both
nations. No easy answers exist for either country. |
