China… something new? Or is Einstein’s insanity nearby?

I’m going to talk about China for a little bit, its going to range quite a bit though… so i apologize.

There’s seems to be a strange communist movement arising from China’s recent surge in the news, being hailed as the next super power… and it is amazing how well they keep their balance of trade in check with such a well bolstered export economy. But is China really spectacular in its exports? i mean basic arithmetic suggests otherwise the only thing we need to take into account is their population. They are a sixth of the world’s population, which is over 16% of the world. Now China’s share of World export is not anywhere close to that number… you could say its still developing but wait until you read further.

China’s main advantage is its labor costs, and with that growing in double digits, its very hard to imagine this advantage remaining for long , this effect will also have currency as a catalyst if China decides to listen to western pressures to stop using a fixed exchange rate.

There’s also a wide perception that China’s surplus is what’s leading its growth. In truth the trade surplus is less than 10% of its GDP with over 50% being domestic consumption.

1 per cent per year… this is two things, the share of the economy that is privatized every year, 2012, will be 50-50. Can you really call them a communist economy now? And the second is the % of people living in Urban and Rural, every year 1 per cent of people move to Urban areas where the opportunity is greater.Which brings me to my next point area of interest: China’s distributive power… it may seem that China is a very unequal country by just looking at the GINI, however its not so much the systemic structure of the economy that causes this so much as it is the geographical structure, within rural areas inequality is nothing outlandish and probably is close to the western structure, the same goes for Urban areas, however when you juxtapose them and look at them in tandem the GINI jumps.

Here we see a comparative study of China and US in terms of money illusion, are its people better educated? probably not then why is the money illusion in China much less prominent? Well in my opinion it helps that the currency is artificially controlled… but this article here has a much more ornate view on this and concludes its to due with less inflationary pressures due to the cycle of the country’s development.

Lastly this study here, discusses China’s openness as a main variable for contributing to its growth and compares it to Mexico, here’s the conclusion:

Absent serious reforms in China in such areas as the financial system and contract enforcement, we expect economic growth there to slow down sharply at some point. It is an open question whether or not this slowdown will occur when China is still behind Mexico in terms of real GDP per working-age person. In fact, in the 22 October 2011 edition of the Economist, one articlepoints out the fragility in the Chinese financial system, while another asks whether China can avoid a hard landing when its economy starts to slow down. It is worth reflecting on the 1982–95 crisis period in Mexico that followed its rapid growth from 1952 to 1981.

China, like Mexico did, has a weak financial system, and without it, this growth will surely slow.

The later you open up, the quicker your growth will be, probably due to technological advances that you can just skip to. I.E you can skip the tapes and the dvd’s and go right to Blu Ray and HDMI. Especially when your like China and have very little respect of Intellectual Property. Does this suggest all countries should wait? Of course not, the only reason the growth is this fast is because they lagged behind and only joined the WTO in 2001. The growth is fast but its people are still relatively poor(in PPP terms), and just like other developing countries, it will reach the point where it will slow down, i have doubts they will surpass Mexico’s GDP per capita any time in the next 10 years.

China is doing great, sure, but the general consensus is that its unsustainable, even by the Chinese government itself, whose 12 year plan basically openly admits this and is structured for change.

Its impressive that your son gets a mm taller every day, but don’t forget to look at their accumulated height… if you believe the media’s expectations of China’s growth, then you should also believe that all our kids heights will exceed 3meters in due time. If not then congratulations, you’ve realized adolescence isn’t forever.

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