Category: China Page 1 of 2

IS US / CHINA CONFLICT INEVITABLE?

On March 27, 2023

IS MANAGED STRATEGIC COMPETITION A POSSIBILITY?

The most worrying phenomenon in the world today is the warlike rhetoric being exchanged between China and the United States.

Almost the only topic, on which Republicans and Democrats agree nowadays , is that China must be curbed economically and militarily.

President Trump imposed punitive tariffs on Chinese goods worth $50 billion. He cited the theft of intellectual property and currency manipulation among the reasons for penalising China. President Biden has kept these tariffs

Former Vice President Pence said the US must henceforth prioritise competition over cooperation, in its relations with China.

The Biden Administration is not only continuing with Trumps tariffs , it is introducing restrictions on the export of certain semiconductor chips to China, in order to hobble the Chinese semiconductor industry.

A lot of the world’s semiconductors are made in Taiwan, an island that is officially part of China but militarily and politically independent of Beijing. US media are full of speculation about a Chinese invasion of Taiwan.

China is restricting the exports of rare earths need to build the batteries necessary for Renewable power.

Meanwhile Chinese military spending increased by 15% pa every year from 1990 to 2005. China is prioritising its navy, and navies can be used to enforce blocades.

In any confrontation with China, the US enjoys the support of its allies in NATO, and from countries like Japan, South Korea the Phillipines and Australia.

China, on the other hand, has no significant allies, except perhaps Russia.

Interestingly, the country whose population feels itself most threated by China is India (78% are of that opinion).

Next is Japan (73%), and the US (61%).

Only 48% of the French, and 40% of Germans, feel China poses a risk to their country.

Notwithstanding its concern that China be required to trade fairly, the US continues to weaken the World Trade Organisation (WTO), a body that could discipline unfair trade practices by China.

Former Australian Prime Minister, Kevin Rudd, has called for a structured relationship between China and the US. He calls for “Managed Strategic Competition”.

Working out the terms of this arrangement to manage relations between the world’s two biggest powers would not be easy. It would creativity, and a measure of good will on both sides, which may be absent. On the other hand, President Bidens remarks about China in Ottawa this week were hopeful and proportionate.

IS A PEACE DEAL POSSIBLE IN UKRAINE?

By John Bruton

On March 20, 2022

In China, Russia, Ukraine

The Russian invasion of Ukraine…an attempt to end the independence of a sovereign country by force…would, if successful, set a precedent that should frighten smaller nations across the globe.

It is an attack on the system on international law that has given us 80 years of relative peace in Europe, and, as a side benefit, allowed international trade to develop, thereby raising living standards everywhere.

The UN Charter of 1946 established the principles of the inviolability of borders, of respect for the territorial integrity of states and the prohibition of the use of force.

When Ukraine gave up its nuclear weapons in 1991, its borders were formally guaranteed by Russia, the US and the UK. Now one of those guarantors is deliberately breaching those borders (for a second time)

The Helsinki Conference (1975) reaffirmed the respect of borders in Europe, and gave birth to the OSCE, of which Russia is a member. Its Charter confirms the above-mentioned UN principles.

The Helsinki Final Act goes on to say

“They (states) also have the right to belong or not to belong to international organizations, to be party or not to bilateral or multilateral treaties, including the right to be party or not to treaties of alliance”

The Russian pre text for war, to stop Ukraine joining NATO and the EU, is a direct contradiction of this Helsinki principle.

Many, including President Putin, hoped the war would be a short one. Increasingly it is looking like becoming a long war of attrition, much like World War One, where most of the deaths are caused by missiles and shells falling for the sky. This sort of war can grind on for months and even years, until all is ruined.

The devastation will be felt far from Ukraine.

Ukraine and Russia between them grow 25% of the wheat traded in the world. 12% of all the calories consumed in the entire world derive from crops grown in Russia and Ukraine.

It is impossible to sow and harvest crops on a battlefield. Indeed both belligerent nations are likely to keep any crops they can grow, for the use of their own beleaguered people.

The effect of this on bread prices will be dramatic. 75% of all the wheat consumed in Turkey, and 72% of that consumed in Egypt, comes from Russia or Ukraine. Israel and Tunisia are also dependent for half their supplies from the same sources. We can expect bread riots and renewed political instability in these countries.

The effect of the war will be to increase social tensions everywhere. The higher fuel and food prices that are flowing directly from the war will affect poorer families much more than better off ones because these items are a bigger share of the weekly budget in poorer families. They will also hit rural households much harder, because they have to rely on a private car to obtain the necessities of life.

The cost of replacement motor cars will rise because of shortages of minerals like aluminium, titanium, palladium and nickel, of which Russia is a major supplier. This will hit Germany’s car industry hard. Lithuania, Estonia, Latvia and Finland will be disproportionately hit by the loss of Russian markets for their exports.

China’s Belt and Road initiative, creating a land based route for Chinese exports to Western Europe, is being radically disrupted by a war which cuts right across China’s road westwards, and whose effects are being felt all the way from the Baltic to the Black Sea.

Continuance of this war is not in China’s interests.

The longer the war goes on, the more the sanctions on Russia will begin to sap its war making capacity. Supplies of missiles and shells will become progressively harder to pay for. Those supplying weaponry to Ukraine have deeper pockets. This is the significance of Russia’s overtures to China.

These overtures are an opportunity. China has an incentive to broker a peace deal between Russia and Ukraine. So has Turkey. Timing will be crucial.

But the ingredients of such a deal, where there is no trust at all between the parties, are much harder to describe.

Ukraine could perhaps find a formula to give up Crimea, but it can hardly concede an inch in Eastern Ukraine. Russian language rights in Ukraine could be guaranteed, but what has Russia to offer in return? Perhaps reparations for the physical damage they have done to Ukraine’s infrastructure. Ukraine could join the EU, but not NATO, with Russia’s encouragement (which would be a big U turn for Russia).

None of these compromises are palatable , but they are preferable to a war of attrition which could go on for years, until all the participants are exhausted, or dead.

WHAT IS EU POLICY ON CHINA?

By John Bruton

On May 17, 2021

In China, USA

Some scholars have warned about the likelihood of rivalry, leading to conflict, between a rising power, China, and the incumbent super power, the United States.

Alarm about this may be premature.

The table in the file posted here shows that US military spending equals the combined military spending of China, India, Russia, Saudi Arabia, France, Germany, the UK, Japan and South Korea.

This puts the rivalry of China and the US in proportion. It is not, at this stage, a competition between equals.

That said, Chinese military spending is rising more quickly albeit from a much smaller base.

Over the past thirty years the Chinese economy has also grown more quickly and its GDP already equals that of the US.

The US has already banned the export of certain technologies to China if these could have a military application. It is a small step from this to actively trying curb China’s natural economic growth. China could be expected to resent this deeply, if the US were to adopt such a stance.

China is thinking in a long perspective. Its goal is to have a “world class military” by 2049, the centenary of the Communist takeover of China. This is worrying for Taiwan in particular. Although the US recognizes Taiwan is legally Chinese, it backs its retaining its independence.

China’s population is beginning to age. The number of births in China in 2020 was 18% less than in 2019. The Chinese population of working age is beginning to decline.

By 2049, China may face a really hard choice between maintaining high levels of spending and supporting its large elderly population. In the west, where the elderly can vote, it would be able to influence such a choice in favour of elder support by voting for a party that prioritized spending on pensions over spending on the military. But China is a one party state so that option is not there.

Even so, the ageing of the Chinese population will tend to move China in a more peaceful direction.

I think Europe should make a clear distinction between its opposition to specific Chinese policies, both internally and in relations with its neighbours, and its acceptance of China’s right to become more prosperous in a peaceful and sustainable way.

HOW TO COPE WITH CHINA’S RISE

By John Bruton

On March 14, 2021

In China

Above (on the image) is a link to a policy statement on relations with China prepared by Radek Sikorski MEP and approved by the members on the EPP group in the European Parliament.

The economic rise of China has been accompanied by a much more assertive political stance on its part.

Chinese policies are causing disquiet by the claims it is making to hegemony over the South China, its attitude to Taiwan and Hong Kong, and its assimilationist policies towards Tibetans, Uighurs and its intrusive and illiberal relations with religious minorities.

On the other hand, the positive economic contribution of China has been substantial.

It helped mitigate the impact of the 2008 financial crisis on the global economy and it has lifted a billion of its own people out of poverty. It is investing in infrastructure abroad and is making vaccine supplies available to poorer countries.

The rise of China has led to anxiety in the United States.

China’s GDP ( a poor measure of welfare) may exceed that of the US by 2028 and this worries Americans.

China’s military spending is rising, but is still well below that of the US. Some Americans feel a military confrontation of some kind with China is inevitable (possibly over Taiwan which China has said it wants to reintegrate by 2049).

The paper written by Radek Sikorski sets out how the EU might respond to all of this. I believe it is well worth reading. I would welcome your views on it

HIGH NOON IN BUENOS AIRES

By John Bruton

On December 2, 2018

In China, EU, USA, WTO

The G20 meeting in Argentina, which took place last weekend, simply postponed a confrontation between the US and China which could prove to be as momentous for Ireland as the Brexit vote in the House of Commons on 12 December.

Will a deal be possible in 90 days time?

The omens are mixed. Some US officials say China is offering nothing concrete to bridge the gap between the countries, just promises. President Trump is particularly sensitive about imports in the wake of thousands of lay offs by General Motors last week, which he blames on import competition.

President Trump has already imposed a 10% tariff on a wide range of Chinese goods in an effort to rebalance trade between the US and China. He has said he will increase the tariff rate from 10% to 25% on 1st January, if he does not get satisfaction from the Chinese.

He has threatened further measures to follow.

His concern is about the alleged theft on US intellectual property by China, Chinese subsidization of exports through state supported companies, and the supposed under valuation of the Chinese currency to boost Chinese exports.

A full fledged trade war could start if matters are not sorted out in the next 90 days.

One might think that a dispute like this might be referred to an arbitrator, who could adjudicate on the facts and the arguments. The WTO dispute panels are there to do this. But the US is refusing to appoint judges to sit on these panels, and President Trump has even threatened to withdraw from the WTO altogether.

A Trade War between the US and China would be very bad news for Ireland.

More than any other EU country, Ireland is dependent on the US as a destination for our exports. If the trade dispute with China hits US growth, the effect of that would be felt in Ireland more than in any other EU country.

As an export oriented country, Ireland has also invested heavily in building an export trade to China. We rely on a growing Chinese middle class to consume our meat and dairy products.

We also depend disproportionately on multinational companies, who use global supply chains, which would be disrupted drastically by a trade war between the world’s two biggest economies.

President Trump feels that China has gained unduly and unfairly from its membership of the World Trade Organisation (WTO) since 2001. Since then, while still being a state directed economy, China, through its membership of the WTO, has been able to get easy access to the markets of the world under the WTO’s Most Favoured Nation principle (MFN).

MFN requires a WTO member state not to discriminate between countries, and to charge the same tariffs of goods from all WTO members, including China, unless it has a comprehensive trade agreement with that other country (in which case it is allowed to discriminate in favour of that country).

President Trump’s deeper worry is that China is using the profits it is making from its export industries to build its military and naval strength in the Western Pacific, where the US also has bases and alliances.

The US sees its bases in Korea, Japan, Thailand and the Philippines as defensive. After all, the US has had a military presence in the western Pacific, in the Philippines, since its war with Spain in 1898. But to China, these US bases, ringed across the sea lanes China uses to survive, are a threat.

To break out of its encirclement, China has increased its own military spending substantially. But it is still spending less than a third of the US defence budget.

So this is not a simple trade dispute that can be settled easily.

China will continue to want to break out of ring of US bases on its eastern flank. Indeed its much publicised “One Belt One Road” initiative, to develop transport links from western China all the way to Europe, could be seen as an attempt to break free of its dependence on the Pacific sea routes, where it confronts the US and which the US could block in the event of confrontation between the two countries. Japan faced a similar situation in 1941.

The growing trade dispute is already having an effect. China’s economy is showing some signs of stress. New car sales there have declined. Corporate borrowing is high and could be hit by a rise in interest rates, which might be forced on China if it needed to revalue its currency to meet one of President Trump’s complaints. The biggest increase in global debt in recent years has been in China. It is an important element in the global banking system. A slowdown in China would affect the rest of the world.

China acknowledges it has a surplus in goods exports to the US, but believes this is compensated by services exports by the US to China, and by the privilege to US enjoys because its currency, the dollar, is the world’s reserve currency.

To an extent, China and the US are talking past one another. The Americans are even complaining about having to translate Chinese trade proposals from Chinese into English!

Given the complexity of the rivalry between the US and China, the best outcome one can hope for in 90 days time is a some form of combination of minor agreements and postponements.

The really important battle for Ireland and for the EU will be that of defending and strengthening the WTO.

Arbitration, rather than confrontation, should be the way to resolve trade disputes.

CHINA TRANSFORMED …..A NEW BALANCE OF POWER

By John Bruton

On December 18, 2016

In China, EU, Ireland, John Bruton

The economic transformation of China is the most important global economic event of the past forty years. It has changed the balance of power on the Eurasian landmass, in ways we are only beginning to comprehend.

The economic transformation of China happened because, since 1979, there has been lively economic competition within China, something that was not allowed in the Soviet model. China’s economy grew, while the centralised Soviet system stagnated. This explains why Communism survived in China, but collapsed in the Soviet sphere. China also grew thanks to the opening up of global trade, under successive rounds of trade liberalisation, which allowed China to build a powerful export sector.

Now China is having to transform itself again. Its export led model has reached its limits. Labour costs are rising because the big transfer of labour from farming to industry is over, and the Chinese population is beginning to age. The working age population of China peaked in 2015 and will decline from now on. Chinese exporters are being undercut by lower wage economies like Vietnam.

The Chinese economy has also reached environmental limits. The pollution level in some cities is dreadful, and the air is dangerous to breathe, even on an apparently clear day. I experienced this for myself when I visited China in the past fortnight on business. Environmental losses reduce China’s GDP by 10%.

The proportion of its population living in cities will grow from 20% in 1978, to 50% today, and to 75% by 2030. This will lead to even more pollution, unless the cities are built to a different model. China is devoting a lot of research to this and may soon become an exporter of green technology. Necessity is the mother of invention.

Meanwhile China has an increasing number of well off, high spending, consumers. The Boston Consulting Group recently estimated that what it calls the “upper middle class” ( a group that can afford regular foreign holidays) will rise from 53 million today, to 102 million by 2020. Interestingly it estimates that, by 2020, the upper middle class in will reach 73 million in Indonesia, 32 million in India, and 21 million in Thailand.

At the other end of the scale, China has not got a well developed welfare system. The income gap is very wide. Stress is high. Parents are left looking after grandchildren back in rural China while sons and daughters seek work in the cities. There is a two tier labour market, under which long established city residents qualify for social supports, but recent arrivals in cities do not, and can remain in a precarious situation for years.

Nationalism is very strong in China, and one can foresee a clash between the American nationalism of Donald Trump, and the Chinese nationalism of the Communist party.

Both can exploit suspicion of the other, to rally political support internally.

The United States should be cautious. The abandonment of the Trans Pacific Partnership, by both Donald Trump and Hillary Clinton, will leave China in the driving seat, as far as trade policy in East Asia is concerned. It is ironic that China increasingly sees itself as the defender of an open world trading system, while the United States adopts protectionist rhetoric. Adding a conflict over the status of Taiwan to this mix could have unpredictable results.

If, under Donald Trump, the US moves closer to Russia, the EU may find its interests aligned more with those of China in some fields, like climate change. This will be reinforced by the anxiety many of the central European members of the EU feel about Russian intentions, and Russia’s view that some of them should properly belong in a Russian sphere of influence, rather than being so closely aligned with Western Europe through the EU. Russian support for west European politicians like Marine le Pen is part of a strategy to undermine the EU.

Historically, China has been a supporter of EU integration, while Russia has been hostile, because it felt itself excluded from pan European security structures. Russia feels itself hemmed in. Russia’s seizure of Crimea, and its involvement in the Syrian Civil War, can also be seen as attempts to break out of its strategic isolation and gain access to the Black Sea and the Mediterranean.

It is also to break out of its sense of isolation, that China has promoted its “one Belt, One Road” policy to link itself with Western Europe.

As a continuing member of the European Union, it will be in Ireland’s economic and political interests to play its full part in building a balanced structure of peace on the Eurasian land mass, that protects the rights of small states, but which also one that ensures that no great power feels itself hemmed in, or isolated. For that is how wars start.

NATIONALISM’S UNEXAMINED LIFE…….

By John Bruton

On December 24, 2015

In China, Nationalism

An ideology that does not have all the answers.

I was in Asia when I read the New York Times obituary of Benedict Anderson posted above.

I confess I had never read any of his books but was struck by the huge contemporary relevance of the quotations from him in this fascinating obituary.

Many of the disturbances in the world today are driven by the phenomenon Anderson spent his life analysing…..nationalism.

For example,

it is nationalism that lies behind the tension between China and its neighbours over islands in the South China Sea.
It is English nationalism that lies behind the UK effort to detach itself from the EU, while still enjoying its benefits.
It is French nationalism that is fuelling the growth in support for the Front National.
And it is, of course, a particularly virulent form of American nationalism that lies behind the anti Muslim, and anti Mexican, rhetoric of Donald Trump and friends.

Nationalism frequently defines itself by the people it is AGAINST, rather than by the values it is FOR.

US Senator Cruz exemplified this aspect of nationalism when ,in a recent speech, he called for “moral clarity” in US foreign policy, defining moral clarity as knowing how to identify America’s enemies!

Unfortunately nationalism often has to pick on violent events to provided cohesion for the “imagined community” that is the “nation”.

In Ireland, for example, we are embarking on a year of celebration of killings and death, in the Dublin rebellion of Dublin in Easter Week 1916, and this rebellion, and the Proclamation that launched it, is being presented as the “founding event” for the Irish nation.

This is historically inaccurate.

The Irish national identity was built, much earlier, by peaceful agitation, by people like Daniel O Connell, Charles Stewart Parnell and others, much more than it was, by the killing and dying of the 1916 to 1923 period. In fact O Connell’s movement was arguably the first peaceful mass democratic movement in the world.

But I fear that will not be not the message that will be conveyed to Irish school children during 2016.

One interesting thing about nationalism is that is so un self critical.

It does not examine the assumptions it makes, whether about

+ who belongs to the nation,

+ who can opt out of the nation,

+ whether a nation is about territory or people and

+ whether the nation comes before the individual or vice versa.

Another thing to note is that nationalism is modern, and not an ancient, ideology.

It came about, as Benedict Anderson says, because the other forces, that previously sufficed to persuade people to cooperate such as a shared religious belief or a shared allegiance to a ruling dynasty, had lost their force . Nationalism has replaced Communism in Easter Europe since 1989.

Nationalism also uses simplifications of history, and mysticism, to avoid asking difficult questions of itself.

This is evident in Japan, in its approach to China and to the legacy of its war in China from 1936 to 1945.

Similar over simplifications and blindness to the other side are also present in the dispute between Israeli and Palestinian nationalisms.

These conflicting interpretations of history make it difficult for people, whose objective interests may actually largely coincide, to cooperate fruitfully with one another.

That is why I believe there should be an open debate about what nationalism really means.

The 150 traditional “nations” of the world ,who met in Paris on our global climate, are all of them far too small to cope on their own with the challenges of global interdependence, global waste, and global environmental degradation. Nationalism does not have an answer to that problem.

While nationalism will always be with us, it needs to accompanied by other, more global, foci for loyalty and common action.

THE LITTLE KNOWN WOMAN WHO RULED CHINA FOR OVER FORTY YEARS

By John Bruton

On November 8, 2015

In China, Chinese Emperor, Jung Chang

I immensely enjoyed reading “Empress Dowager Cixi” by Jung Chang, published by Vintage Books in 2014.

It tells the story of a well read young girl, named Cixi, from the Manchu aristocracy, who was selected to be one of the concubines of the Chinese Emperor. In 1861, the Emperor died young, without a male heir by his wife. Cixi ,had, however, borne him an infant son, and this son became Emperor

Power was to be exercised on his behalf by Regents.

But, with the surprising connivance of the legitimate wife of the late Emperor, the infant Emperor’s mother, Cixi succeeded in dismissing the Regents, and, along with the old Emperor’s widow, the exercised full power on her sons behalf.

In 1875, her son, the Emperor, died, not long after he reached maturity. Cixi then managed to have another infant, a nephew of hers, named as Emperor.

Cixi thus continued to be the real power in the Chinese Empire, until her death in 1908.

She opened China up to modern ideas in public administration, transport and education. She wanted to learn from the West, so that China would not be dominated by the West.

But Japan had been modernised twenty years earlier than China, and had developed a far stronger army and navy. Japan wanted to control China, or at least the Chinese market. When it did not get its way, Japan defeated China in a war over Korea in 1894. As a result , Japan obtained huge reparations, which further weakened China economically and politically..

Other powers then made demands on China, which, in 1900, provoked a popular, anti foreigner, uprising known as the Boxer rebellion.

Cixi sympathised with the Boxers, and was forced to flee Beijing when her capital was taken by foreign troops from a number of nations, including Britain, Germany and Japan, who had intervened to suppress the Boxers.

The foreign troops could not , however, fully control China without the legitimation of a native Chinese government. Cixi was thus able to return to power in Beijing after the foreign troops had left.

At this stage, having learned the lesson of the failure of the Boxer revolt, she set out to prepare dramatic reforms of China, including an elected parliament and turning the Empire into a constitutional monarchy. The laws for this were passes, but Cixi died before these could be brought into effect.

A few years after her death, the Empire itself was replaced by a Republic . This Republic survived, but not as a democracy as Cixi had envisaged, until 1949.

This book is a dramatic story on intrigue, tragedy and extreme ruthlessness. The character of Cixi, and of her advisors and opponents, is drawn out very skilfully. So also is self satisfied and inefficient social structure of mid nineteenth century China, which Cixi did so much to change, long before China became a republic in 1911.

Cixi’s role has been downplayed by both the Nationalist and the Communist Chinese leaders, because both want to claim the full credit for the modernisations she had, in fact, initiated.

Above all this book is the story of how an intelligent a woman was able to exercise immense power, in what appeared, on the surface, to be a completely male dominated society.

It is also the story of the humiliations suffered by the people of an ancient nation at the hands of foreigners, and explains why China today, is so determined to equip itself to resist unwanted external interference.

DEMOGRAPHY IS DESTINY

By John Bruton

On November 2, 2015

In Africa, China, One Child Policy

CHINA CHANGES ITS ONE CHILD POLICY ………………..

AFRICA COULD BE THE WORLD’S 21ST CENTURY ECONOMIC GIANT

I was in China this week. The purpose of the visit was to promote Chinese investment in Ireland.

I met the Irish Ambassador, Paul Kavanagh and his small team, who are working very hard to promote links between Ireland, and what is now the largest economy in the world.

The Chinese economy is being rapidly restructured.

Services are now the largest sector, 48%, as against 41% in manufacturing. There is now less reliance on exports and more on the home market.

Last Thursday, it was announced that China is to end its one child policy. This is a response to the fact that labour shortages will eventually be a problem for China.

This one child policy was first brought into force in 1980.

It has been very effective. The Total Fertility rate globally is 2.5, in developing countries it is 2.7, in the poorest countries it is 4.4, but in China it is only 1.6!

The Chinese population will peak in 2027 and begin to decline thereafter. In this, China is like Europe.

In contrast, the population of Africa could increase from 1.1 billion to 4.8 billion by the end of the century. Africa’s labour force will grow whereas that of Asia will remain stable, and Europe’s labour force will fall. As a result, Africa’s economy could enjoy the fastest growth in the world, over the next century, if it can maintain political stability.

A labour shortage is already evident in China. The number of young people in the 18 to 24 age group today is 108 million, as against 124 million in 2008. The number in that age group will fall by 7 million in each of the next 10 years.

At the other end of the age spectrum, the number of retired people will start to grow rapidly. That is bound to have an effect on the overall productivity of the Chinese economy.

More and more Chinese families now consist of four grandparents, two parents, but only one child.. Growing up as an only child is a very different experience from growing up in a large family and it remains to be seen what effect this will have on society.

Because of the preference of families for sons over daughters, more female babies are aborted, which has led to an imbalance in society. Abortion is contrary to the tenets of traditional Chinese religions, like Taoism, as I saw in a plaque displayed in a temple I visited in Beijing. But it is the policy promoted by the government. The fact that more girls than boys are aborted has not got much attention from the world feminist movement.

The new two child policy will not become effective straight away. Regional laws have to be passed to bring it into effect, and to remove the severe penalties that still apply to having a second child.

There are also practical difficulties in the way of parents who may wish to have a second child. Housing is in very short supply in the big Chinese cities and there will simply not be room for a second child. Already many parents, who have gone to work in the cities, have had to leave their only child behind them in a rural village, to be cared for by a relative, because they cannot find room for the child in the city where they work.

A declining labour force and housing shortages are among a number of challenges China must face at the same time.

The country must also

orientate the economy away from heavy industry to consumer goods
reduce the level of debt of local governments, state owned enterprises, and households. 80% of all public spending in China is done by local governments
reduce reliance on coal as an energy source because coal burning causes so much pollution

WILL CHINA BE ABLE TO MANAGE THE NECESSARY ECONOMIC CHANGES?

By John Bruton

On August 31, 2015

In China, IMF report, Stock market

The Chinese stock market has fallen 40% from its 2015 peak. By comparison the US market is only 10% down from its 2015 peak, and the Euro zone only 15%.

House prices in major Chinese cities are out of reach of most employees.

Air quality in the same cities is poor because China relies disproportionately on coal as a source of energy.

Meanwhile China does not have a comprehensive welfare state, so Chinese families have to rely on savings, sometimes in the form of stocks and shares, and house property, to provide for their retirement. The fall in the stock market will thus have a direct effect on many Chinese families.

I have visited China a number of times in the last few years.

On one of those visits, in 2013, I drew the attention of my Chinese audience to the then latest IMF report on the country.

It contained warnings that will sound familiar to those who have studied recent Irish economic history.

The IMF talked, even then, of the risks in China of

“a steady build up of leverage eroding the strength of the financial sector”,
“a boom in non traditional sources of credit”, and of the need to take
“steps to reduce moral hazard to ensure that banks do not engage in potentially destabilizing competition” .

On the other hand, The IMF recognised that China has very well capitalised banks.

Most commentators believed that the Chinese Communist party, with its immense concentration of talented people in key positions, would be able to manage the huge structural changes required in the Chinese economy. It was believed they could impose technocratic solutions more easily than would be possible in a democracy.

The changes required include

a managed dissipation of the stock market and housing bubbles,
a shift China away from reliance on investment in physical infrastructure to support the economy, to a western style reliance on consumer spending.At one stage China was pouring up to 40% of its GDP into physical investment. When one is investing to that extent, one is bound to be putting some of the money into projects that will never yield a return.
a shift away from coal to cleaner energy sources and
the inauguration of a welfare state which would facilitate the development of a consumer led economy and less speculative investment by savers trying to provide for their old age

The fact that the Chinese authorities have now had to revert to a policy of currency devaluation is worrying.

It suggests that the authorities are not as firmly in control of the situation as one might have thought, and may not be able after all to manage the structural changes required, without the sort of political turbulence we have seen in democratic countries.