Is China on the brink ?

There was an interesting and provocative op-ed in the NY Times a few days ago about China’s economic woes. The piece was written by Nobel Prize winning economist Paul Krugman. Krugman argues that China now faces a number of challenges, which he does not think it can overcome. These problems include an abnormally low rate of consumer consumption and lower returns on investments in domestic infrastructure.

All China’s current problems, Krugman argues, are owing to the end of the era of cheap labor, an era which catapulted China’s economy to global dominance. But the rise in wages has meant that growth is just that much more difficult to achieve. Investments in domestic projects no longer return as much because they cost more. As returns diminish so does purchasing power. And Krugman points out that the average Chinese has never really spent much anyway simply because they don’t have much to spend. The stories you read today about China’s consumers running wild generally describe the middle classes in major cosmopolitan cities like Shanghai, and Guangzhou. Yet 50 % of China is still rural and still mired in poverty. Krugman’s vision of China nowadays is nothing short of apocalyptic.

I have read many doomsdays scenarios about China over the last 25 years, all of which failed to materialize. But all those scenarios were cast when China alone was having problems. The rest of the world was doing OK and because of this China always seemed to pull through, largely becuase the demand for China’s exports was a constant. Now everyone seems to be hurting as the effects of the Global Economic Crisis menacingly linger five years on. In other words, this may be the one time the doomsday scenario written about China plays out. And this is Krugman’s point, that this time is different.

I really don’t know what to think. I have always seen China as more resilient than anything else. The Chinese always seem to get it done, no matter what the odds are. They are like the baseball team without any superstars that just seems to win games. And a lot of games. But I guess how I really feel is summed up by an article I saw in one of the China papers recently. The article was about a new wave of Chinese camera enthusiasts who are now paying big bucks for vintage Leica cameras. “Hmmm…the Chinese are buying vintage Leicas,” I think to myself as I read this. Wow. Or as Edgar Bergen used to say “Who woulda thunk it.”

So my gut feeling is that Krugman is wrong. The times are different now, yes. But the Chinese are different now too.

Here is the link to NY Times piece.

Krugman op-ed

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