China: Boom or Bust?

The investment community is abuzz with economic predictions about China. Goldman Sachs and popular investment advisers such as Frank Holmes and Larry Edelson are bullish. Barron’s recently published “Falling Star” by Jonathan Laing, a severely bearish perspective on the Chinese economy featuring such China bears as hedge fund manager Jim Chanos.

Who is right? What comes next? A continued boom or devastating bust? The answer is vitally important, given China’s recent rise to prominence in the global economy, with all its implications for trade, investment, money flows and geopolitics. Rather than venture a guess about the future, let me offer some pieces to the puzzle—a few tiles in the complex mosaic that is China.

Winston Churchill famously described Russia as “a riddle wrapped in a mystery inside an enigma.” The same may be said of China, according to one of my mentors, the late Prof. J.P. (Jean Paul) Keller. Jean, (who once received a mailed invitation to join a society of female scholars—an honor he politely declined) was one of the smartest people I’ve ever known. He taught physics and numerous languages at the college level and was a world-class scholar in early Spanish literature. The son of missionary parents, he had been raised in China.

In the mid-’80s, I urged Jean (already well along in his retirement) to write articles sharing his knowledge of China. His unforgettable answer to me was, “I don’t understand China well enough to consider myself an expert. I only lived there 18 years.” Wow. If a brilliant man with 18 years of first-hand experience didn’t believe he was qualified to explain China, then perhaps we should be reluctant to jump to quick conclusions about the country.

One who truly was a China expert was the late Rev. Paul Winn, a retired missionary from whom I rented a room in 1980-’81. Paul had spent 35 years in China and even endured torture in a Communist Chinese prison. China’s economic turnaround was still in its embryonic stage then, but early in my stay with him, Rev. Winn told me with great confidence that because the Chinese people are so eminently practical, they surely would recognize the futility of communist orthodoxy, jettison it and become an economic powerhouse. What a great call!

The prolific and brilliant economist, Thomas Sowell, shares Paul Winn’s assessment of the Chinese as economic overachievers. In his trilogy of books about culture, Sowell observed that ethnic and cultural Chinese tend to excel economically wherever they go, if not thwarted by oppressive governments.

Here is a factoid that proves nothing, but is filled with important implications: As of the middle of the last decade, the People’s Republic of China accounted for 2 percent of the world’s privately owned automobiles, but 17 percent of the world’s traffic accidents. Hypothesis? Many Chinese people are in such a hurry to get somewhere that they advance recklessly—“Out of the way, people, I’m coming through!” I think of that statistic every time I read about some eager-to-be-rich Chinese businessman who cuts corners (e.g., putting unsafe ingredients in pet or human food) and then is imprisoned or executed by Chinese authorities.

How can one understand China’s schizophrenic economy? On the one hand, the central government in Beijing props up many state-owned enterprises; on the other, much of China’s economy today is reminiscent of the “wild, wild west” with the powerful national government seeming practically irrelevant to the daily economic life. I suspect that outsiders often don’t know who really is in charge in any given situation.

One economic truth to remember is that, no matter how clever the Chinese are, they haven’t repealed the laws of economics. Central planning leads inevitably to boondoggles, such as Ordos—the largely unoccupied modern city built to house a million people. Are such fiascoes fatal? Well, the Chinese regime’s piggy bank of $3 trillion of foreign exchange earnings can cover a lot central planning mistakes. However, their margin of error is not limitless.

The Chinese people are not immune to manias, and therefore the Chinese economy is not immune to bubbles that destroy wealth when they burst (think real estate). The Chinese monetary authorities may think they know how many yuan to create and the “right” level for interest rates, but they, too, may someday ignite inflationary fires or precipitate a deflationary collapse, either one of which could inflict a major hurt on China’s middle class.

The Chinese economy has been racing ahead at speeds that dazzle the rest of the world. Like a racecar, going fast may be exhilarating in the short run, but it is not without risks. If the wheels come off the speeding vehicle of the Chinese economy, the ensuing crackup may be spectacular and the effects felt worldwide.

Will China’s economy boom or bust? Stay tuned—we’re all going to find out.

Editor’s note: A version of this article first appeared at Forbes.com.  Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and fellow for economic and social policy with The Center for Vision & Values at Grove City College.