the Bull will eventually leave the China shop

"In any set of data, the fact that is most undoubtedly true, beyond all need of measurement, is the mistake".


It has been a truism for over a decade now that the Asian tigers (especially China) are on the rise and the old Western powers are in decline. Certainly there is more than ample empirical evidence for this. China's growth rates have outstripped the West's by a multiple, they have industrialised vast areas and vast numbers of their population. They have made some (though not very impressive) advances on moving up the economic value chain, they have gained new technologies by means fair or foul (depending on who you listen to). The list is endless, but the narrative is the same -China vigorous, West sclerotic. The evidence seems to be overwhelming.

Yet it does not feel right. There are a limited number of doubters of this hypotheses (Chris Patten and Will Hutton for starters), but they are held out as rather fringe views. Nonetheless, there are questions to be answered about financial lending practices, poorly developed financial systems, political stability, income inequality, a credit boom and above all -demographic projections. The customary response to any such query usually takes the line that China is different, that it has a track record of defying Western maxims and that it is simply not possible to assess China by the same criteria as other countries.

It does not ring true.

In recent weeks there have been (very muted) articles warning about a high inflation rate, exposure to Western sovereign crises, the imminent peaking of the demographic dividend, the Chinese Government's unhappy choice between curbing inflation or killing growth etc.. Though it seems unlikely that these are the harbingers of a full-blown economic/political upheaval in China, nonetheless, it does not seem possible that the People's Republic can continue to defy gravity indefinitely.

Indeed I would go further than this. In my view, demographic input to China's development is being dramatically underestimated (ditto for Ireland during the Celtic Tiger years). Much of their growth story can be attributed to their (now reversing) demographics, a transitory benefit that will soon be militating against them. Besides demographics, a chronically loose monetary policy (which includes lending targets for banks and massive export subsidies in the form of currency manipulation) has supercharged the economy -but this too can only be a transitory advantage. Indeed the Chinese financial bubble might have burst long ago if it did not have the demographic trend underpinning it all along.

China, like Ireland has had very favourable demographics and a loose monetary policy which delivered consistently high, but ultimately illusory growth rates. Ireland came back to earth with a bump, but is too small to really damage the global economy. However, needless to say that an Irish style recession in China would really make waves in the global economy.

I feel sure that such a reverse is coming. If it came now while Western powers were still sorting out the financial crisis, then it would really put the tin hat on this recession. But regardless of when it happens, it will be a huge upheaval.