Sino-American economic relations could well get worse before they get better, reported the Washington Post’s Zachary A. Goldfarb: “China’s response to its slowdown, which comes ahead of a rare change in power, could also create new tension with the United States, where the presidential campaign is focused on the economy.”
China is turning to policies that may benefit its economy at the expense of the United States’. This year, for instance, China has surprised a wide range of observers by allowing its currency to lose value relative to the dollar, which makes its exports cheaper than America’s. And there are prominent .
Goldfarb wrote: “China reported that its exports, a critical driver of economy activity, grew by only 1 percent in July, far below the 11 percent rate seen in the prior month. It was the latest evidence that the world’s second-largest economy is losing steam, a problem for U.S. businesses that sell their goods and services to China.
Writing more recently in the New York Times, George Mason University Professor Tyler Cowen wrote: China is confronting some serious economic problems, and how Beijing does — or doesn’t — respond to them could bend the course of the global economy. First, China’s real estate bubble is deflating. But its economy also seems to be suffering from what we economists call excess capacity — an overinvestment in capital goods, whether in factories, retail stores or infrastructure.”
Jeremy Warner, assistant editor of The Daily Telegraph, has written of the possibility of a “hard landing” for the Chinese economy: “Some parts of the more developed eastern seaboard may already be starting to suffer from the same sort of boom to bust dynamics that has engulfed advanced economies. Excessive credit expansion, over development, and an overheated property market – all these things are now coming home to roost. The standard view is that the Chinese authorities are well placed to counter the growing list of negatives, but I wonder.
The banking system is shot through with unrecognised bad debt, once buoyant Western export markets are in ragged retreat, and just how much more investment can the Chinese economy take before knocking up against already manifest levels of industrial overcapacity?
An optimistic outlook was recently advanced by economist Martin Feldstein in the Wall Street Journal: “China's critics predicted an economic hard landing when its growth began to slow, pulled down by shrinking export markets and the excess industrial and residential investment the country had generated in response to the global downturn at the end of the previous decade. Overcoming this slowdown was made more difficult by China's need to reverse a rise in domestic inflation, particularly the surge in real estate prices.”
While doubts can remain, it looks like all three problems are under control. GDP growth will probably be at an annual rate of 8% this quarter and heading higher. The central bank has eased monetary policy, and the government has instructed commercial banks to increase lending. Although some of the new stimulus will add to excessive industrial capacity, much of it will go into needed urban infrastructure and low-income housing.
Republican presidential candidate Mitt Romney has taken a much less charitable approach toward China, declaring in February that “on day one of my presidency I will designate [China] a currency manipulator and take appropriate counteraction.”
Indeed, China’s economic manipulations have propped up its own economy – and that of the United States in recent years. But those manipulations are artificial and not sustainable. Only a rule-based gold standard system can rule out such manipulations and restore sanity to the Chinese and world economy.