Thursday, 1 September 2011

Comment on Gavyn Davies's Blog on Chinese Economy

A singularly poor piece from Davies this time. There are so many "gaps" in this argument that one feels embarrassed, not just by the piece, but on which "gap" to attack first! Let me try. The most obvious one: the Chinese exchange rate. Yes, it has risen by 20% - whatever. But in reality the distribution of income in China has worsened because the share of domestic consumption in GDP has fallen from already low levels! This has been achieved through inflation, low interest rates, and above all cheap capital made available to State-Owned Enterprises which represent the Chinese dictatorship at the expense of Chinese people!
What this means is that much of the "fixed capital investment" that Davies mentions is in fact "unprofitable" and therefore results in an expansion of debt levels that will soon push China's economy over the edge!

Davies even manges to conjure up a mythological "demand from other emerging markets" - which simply does not exist and, if it exists, will soon wane to nothing given that the "developed economies" (beginning with Germany) are grinding to a halt! Furthermore, these "emerging countries" (starting with Brasil and Indonesia) are in fact competitors with China for cheap exports to developed countries! The likely outcome will be more "conflict" between these countries, not more "co-operation and trade"!

The biggest problem, of course, is that US monetary policy and quantitative easing - which I predicted would continue with QE3 - will fuel inflation in China and Germany to destabilising levels, the political effects of which we are already witnessing! Look. I could go on. The biggest "bufala" (as Italians call a "tall story") is Davies's sanguine reference to the Chinese dictatorship's "gradual adjustment" of the hopelessly unbalanced, fallimentary Chinese economy! That is really worth the ticket! 


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