Agence France Presse covers a recent report by Albert Keidel, a senior associate at the Carnegie Endowment for International Peace and a former US Treasury official for the Office of East Asian Nations and World Bank economist in Beijing. He believes China's economy could be overvalued by as much as 40%, citing data from the Asian Development Bank and guidelines from the World Bank.
Keidel's analysis is based on purchasing power parity (PPP), which strips out the impact of exchange rates. There are a few quick consequences and implications that drop out of this, if true:
- The number of people living in poverty in China is about 300 million, not 100 million
- China wouldn't overtake the world as the largest economy until 2030, even if its present growth path continued - which is itself unlikely, given no rule of law and the other handicaps discussed in our multi-variable look in "China's Stresses, Goals, Military Buildups... and Futures."
- There are some implications re: China's ability to devote defense dollars, though as a dictatorship thay can do it on the backs of their elderly and poor, as they're doing now.
- Keidel: "For example, risks to its impoverished rural hinterland from a sudden large revaluation of its currency loom larger in Beijing's eyes than in Washington's."
- One implication Keidel says does NOT drop out is any useful information re: currency over/under valuations.
The World Bank's lead economist for China, Bert Hofman, disagrees. He thinks it's too early to use the PPP as a basis to revise the size of China's economy, because the tools are still at only a research stage.
Still, call it one more useful maybe to plug into "China's Stresses, Goals, Military Buildups... and Futures."
When the wheels come off China, Inc., which I think will be a lot sooner than most think, it is not going to be a pretty sight. It will look like th old Soviet Union only worse. Massive pollution, major engineering disasters, areas of complete social breakdown, food shortages. What a mess. I hope there are contingency plans for a DE-VALUATION of the yuan.
If china collapses they'll have to sell their dollars quick to buy what they need.
There's a saying, "When the USA catches cold, mexico gets pneumonia." When china get pneumonia, what happens to the USA?
We would have a major inflation problem for sure, but inflation has been so low for so long it shouldn't be too horrific. If there is any upside a Chinese crash would ease oil and metal prices, so that would offset some of the mess.
Plenty of people have gone broken underestimating the resiliency of the US economy and its ability to adapt quickly. Mexico would probably see a net gain as companies rushed manufacturing south to make up for their chinese sources. We could see a resurgence of US manufacturing as well, although that would take longer and be quite expensive. Its to be hoped exports would help with a very week dollar.
Currency woes are an issue but the farther the dollar sinks the more attractive it becomes to long term investors in Europe and elsewhere in Asia. The track record of the US economy is tough to beat and the dollar is so intimately tied to global commerce it wont do the Euro much good to see the dollar founder completely.
I've also seen some strong concerns about China's internal banking system stability that make the recent sub-prime lending market collapse look like the proverbial tempest in a teapot.
The concerns about the real size of China's economic output match some observations I've seen from some acquaintances who have business interests in the area who have said that they think that recent economic advances in China remain very shallow. Their concern is that the inability to bring the poor's living standards up rapidly enough will see increased instability and any serious economic backlash to China that sets back the middle class will give such movements the necessary core of leadership.