Next: The Great Recoupling
The chart below from UBS' George Magnus captures perhaps better than anything, not only the reason why the global economy grew with the speed it did over the past 40 years, not only why "globalization" (a/k/a finding news places to issue debt in exchange for secured assets and unsecured cash flows all the while under the umbrella of globalist organizations: see Confessions of an Economic Hit Man) was the primary urgency for the status quo, not only why the developed world managed to delay the inevitable day of reckoning for as long as it did, but most importantly, why the global day of debt-saturated reckoning is coming.
Because after decades of letting the developing world (a place which Goldman was nice enough to even give it its own special name successfully with the BRICs, and not so successfully with the N-11) carry the heavy burden of new debt creation, which by now should be clear to all is the only driver for global "growth", said developing world is now full to the brim with debt, and can do no more (the question of whether Africa as the last bastion of secured and unsecured leverage and can carry the weight of all other insolvent continents on its shoulders remains to be answered).
It also means that first slowly, then very fast, the "Asian economies" will rapidly recouple with the "advanced" ones, but instead of meet in the middle, the orange will chase the yellow one all the way down, down, down.
There are two possibilities as to what happens then, one of which is good, the other not so good. Both are the topic of the latest analysis by UBS' George Magnus titled "Asia: is the miracle over?" which is a must read for anyone who wishes to know what happens next in Asia, and thus, in the world.
One way or another, China is going to rebalance. The question is whether it occurs in an orderly fashion with the investment side of the economy slowing to a rate less than the growth in GDP, but still growing. Or whether it happens in the context of a sharp decline in investment, with more alarming economic and political consequences that will cut across the economy.
After two decades of unparalleled economic success, we believe China now needs a reform programme on a scale similar to that adopted 30 years ago. Without it, a heavily investment-centric and credit-intensive economic model could soon become unstable, and later stall in a middle income trap. There’s only so much labour transfer from rural areas to urban factories. There’s a limit to how high the investment share of GDP can go. Rapid population ageing is chipping away at Chinese growth. The exceptional impact of accession to the WTO a decade ago is fading. And the significant, direct role of the government, state banks and SOEs in the economy as agents of economic policy, and owners and providers of heavy investment and infrastructure may no longer be appropriate as the economy becomes richer, more complex, and in need of greater competition and innovation.
In our view, the bottom line about reform is whether the CPC is willing and able to do three fundamental things. First, we feel it should move towards a fuller market economy, changing the legacy role of the state. Second, it should allow power to drain from itself, regional governments, state entities and the military towards the private sector and households. And third, it should introduce rules and transparency, including adoption of the rule of law, into the overall system of governance.
You can be optimistic or pessimistic about the outcomes, but you can’t speak of the China or, by implication Asia, miracle nowadays, without considering the chances of successful political and institutional reforms. More to the point, perhaps, what would the consequences be for China if, for existential reasons, the CPC wasn’t willing or able to go down this path?
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