China may Collapse in 2012 and Suffer Japanese Deflation, Perhaps Even the Collapse of the Communist Party

Posted by PITHOCRATES - January 1st, 2012

Week in Review

The Chinese aren’t invincible.  Just like the Japanese weren’t invincible.  Even though many in our government like to point to the heady days of their economic dominance and say that’s what we need to do.  Partner government with business.  Because Big Government people love central planning.  Because they love being in charge.  But central planning doesn’t work.  And government interference into the economy rarely ends well.  It put the Japanese into a deflationary spiral for a decade and change.  And there are some who think the Chinese are heading down that same road.  They believe that China will collapse.  Even give three reasons why (see The Coming Collapse of China: 2012 Edition by GORDON G. CHANG posted 12/29/2011 on Foreign Policy).

First, the Communist Party has turned its back on Deng’s progressive policies. Hu Jintao, the current leader, is presiding over an era marked by, on balance, the reversal of reform. There has been, especially since 2008, a partial renationalization of the economy and a marked narrowing of opportunities for foreign business…

Second, the global boom of the last two decades ended in 2008 when markets around the world crashed. The tumultuous events of that year brought to a close an unusually benign period during which countries attempted to integrate China into the international system and therefore tolerated its mercantilist policies. Now, however, every nation wants to export more and, in an era of protectionism or of managed trade, China will not be able to export its way to prosperity like it did during the Asian financial crisis in the late 1990s…

Third, China, which during its reform era had one of the best demographic profiles of any nation, will soon have one of the worst. The Chinese workforce will level off in about 2013, perhaps 2014, according to both Chinese and foreign demographers, but the effect is already being felt as wages rise, a trend that will eventually make the country’s factories uncompetitive. China, strangely enough, is running out of people to move to cities, work in factories, and power its economy.

China’s economic ascendance happened when the ruling communists backed off and let in some capitalism.  In their eastern cities.  Which erupted in economic activity.  People poured in from the country.  Where there was still the occasional famine.  And abject poverty.  These workers became wealthy beyond their wildest dreams.  They got a taste of the good life.  And they liked it.  Especially all of those Western toys.   And the Internet.  Next thing you know they started talking to each other.  Enjoying this new life.  And these new freedoms.  A little too much for the ruling communists.

As a result, we will witness either a crash or, more probably, a Japanese-style multi-decade decline. Either way, economic troubles are occurring just as Chinese society is becoming extremely restless. It is not only that protests have spiked upwards — there were 280,000 “mass incidents” last year according to one count — but that they are also increasingly violent as the recent wave of uprisings, insurrections, rampages and bombings suggest. The Communist Party, unable to mediate social discontent, has chosen to step-up repression to levels not seen in two decades. The authorities have, for instance, blanketed the country’s cities and villages with police and armed troops and stepped up monitoring of virtually all forms of communication and the media. It’s no wonder that, in online surveys, “control” and “restrict” were voted the country’s most popular words for 2011.

So the Chinese are reversing their policies that led to the great economic ascendancy.  Which can only reverse that economic progress.  And after years of explosive economic growth what can follow but deflation?  Just like the Japanese experienced during their lost decade.  It is inevitable.  Because Big Government central planning just doesn’t work.  It never has.  And it never will.  Even in China.


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