Why is China doomer Gordon Chang so wrong ?

Gordon G. Chang is a lawyer and author, best known for his book The Coming Collapse of China, in which he argued that the hidden non-performing loans of the “Big Four” Chinese State banks would likely bring down China’s financial system and its communist government and China would collapse in 2006.

He has in recent years hedged and indicated that the collapse will come by the end of 2011 The reason given is that “China’s political and economic system is unsustainable in a modern world.”

NBF – It seems that Gordon Chang starts from the premise that China must collapse and then works back to find his favorite reason based on things that he personally does not like about China as it exists today.

The Coming Collapse of China was published in 2001

He is a regular contributor to The John Batchelor Show, The Glenn Beck Program on Fox News, and CNN. He also appeared as a special guest on Comedy Central’s The Daily Show with Jon Stewart on July 17, 2006. On 3 February 2010, he appeared on Al Jazeera English and argued that China does not have a lot of economic leverage over the US, and it is actually the other way around.

The study stream of articles and commentary has been consistently wrong in predicting failures in China.

This is related to a nextbigfuture observation that Amory Lovins is a popular TV and other media “energy expert” despite being consistently wrong since the 1970s.

China, national and world economies and Energy are both large and complex topics. Apparently being able to explain some of the mechanisms is good enough to be considered an “expert” even if your overall point of view and overall forecasting themes are wrong. Also, many in the media want an “expert” to push a prediction that the media wants to happen.

China is projecting 11% industrial output growth in 2012 and most forecasts are for China to maintain 8% GDP growth in 2012

What are the claimed triggers for collapse in China ?

Beijing faces many challenges—growing sovereign debt, social dislocations caused by accelerating economic growth, unreformed state banks plagued by nonperforming loans, an insolvent pension system that cannot provide for a graying population, a severely degraded environment, out-of-control corruption, skyrocketing crime, and broken educational and public health systems, just to name a few of them.

What are some of the signs that are pointed out as China being in the early stages of collapse right now ? Mass demonstrations and a month or two of bad PMI numbers and a downturn in the real estate markets.

Yet. The United States and Europe have growing sovereign debt, mass social demonstrations (Tea Party and Occupy), insolvent pension systems, banks plagued with bad loans, graying populations, significant corruption, educational system problems etc…

Gordon Chang criticizes World Bank economist Justin Lin Justin Lin is says China needs to correct the “triple imbalances” by boosting lagging domestic consumption, narrowing the widening income gap, and protecting the degraded environment.

China will not be able to ramp up exports or eliminate the “triple imbalances,” it is sure to be snared in what economists call “the middle-income trap,” where growth stalls before a moderately well-off population becomes rich. China has already reaped all the easy growth that comes with starting from a low base, and now it needs to, among other things, encourage consumption, allow the renminbi to float, flatten the social structure, promote democratization, remove restrictions on labor, adopt the rule of law, and strengthen the social safety net. The Party will not make substantial progress toward any of these goals—with the possible exception of the last one—until it adopts fundamentally different political and economic models.

In the meantime, Justin Lin’s triple imbalances are getting larger because Party leaders have ruled out the structural changes necessary to lay the foundation for the next multi-decade round of growth. So, despite what the World Bank economist hopes, China will not become the next Japan, South Korea, or Taiwan. It’s much more likely to resemble the trapped Venezuela and Argentina—not to mention the former Soviet Union.

The middle income trap is – As wages rise manufacturers often find themselves unable to compete in export markets with lower-cost producers elsewhere; yet they still find themselves behind the advanced economies in higher-value products. The trapped countries depend upon low wages and cannot move up the value chain and increase productivity to compete for higher value products and services. This is the middle-income trap which saw, for example, South Africa and Brazil languish for decades in what the World Bank call the “middle income” range (about $1,000 to $12,000 gross national income per person measured in 2010 money). How can China avoid the middle-income trap? (18 pages)

China is making major moves into high value products for export and internal use such as nuclear power plants, airplanes, cars, large ships and many others. China’s market share of advanced machinery is already over 8% and is on track for 30% in 2020.

Ten reasons why China is different by Stephen Roach (Yale University and Non-Executive Chairman of Morgan Stanley Asia and author of The Next Asia.)

Education. China has taken enormous strides in building human capital. The adult literacy rate is now almost 95%, and secondary school enrollment rates are up to 80%. Shanghai’s 15-year-old students were recently ranked first globally in math and reading as per the standardized PISA metric. Chinese universities now graduate more than 1.5 million engineers and scientists annually. The country is well on its way to a knowledge-based economy.

Innovation. In 2009, about 280,000 domestic patent applications were filed in China, placing it third globally, behind Japan and the United States. China is fourth and rising in terms of international patent applications. At the same time, China is targeting a research-and-development share of GDP of 2.2% by 2015 – double the ratio in 2002. This fits with the 12th Five-Year Plan’s new focus on innovation-based “strategic emerging industries” – energy conservation, new-generation information technology, biotechnology, high-end equipment manufacturing, renewable energy, alternative materials, and autos running on alternative fuels. Currently, these seven industries account for 3% of Chinese GDP; the government is targeting a 15% share by 2020, a significant move up the value chain.

Rural-urban migration. Over the past 30 years, the urban share of the Chinese population has risen from 20% to 46%. According to OECD estimates, another 316 million people should move from the countryside to China’s cities over the next 20 years. Such an unprecedented wave of urbanization provides solid support for infrastructure investment and commercial and residential construction activity. Fears of excess investment and “ghost cities” fixate on the supply side, without giving due weight to burgeoning demand.

Low-hanging fruit – Consumption. Private consumption accounts for only about 37% of China’s GDP – the smallest share of any major economy. By focusing on job creation, wage increases, and the social safety net, the 12th Five-Year Plan could spark a major increase in discretionary consumer purchasing power. That could lead to as much as a five-percentage-point increase in China’s consumption share by 2015.

Low-hanging fruit – Services. Services account for just 43% of Chinese GDP – well below global norms. Services are an important piece of China’s pro-consumption strategy – especially large-scale transactions-based industries such as distribution (wholesale and retail), domestic transportation, supply-chain logistics, and hospitality and leisure. Over the next five years, the services share of Chinese GDP could rise above the currently targeted four-percentage-point increase. This is a labor-intensive, resource-efficient, environmentally-friendly growth recipe – precisely what China needs in the next phase of its development.

The imbalance that Gordon Chang claims is insurmountable is viewed as low hanging fruit by Roach.

China already has several cities that are breaking through the $12000 per capita GDP level in 2012.

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