Why is everybody getting so worried by the sudden falls in the Chinese stock exchanges? It is not because their problem (too much creation of credit) is somehow going to spread to us like some sort of virus. It can’t do so — or . . . at least only to a small extent — because their currency is the yuan and, so far, very little world trade is carried out in yuans. The worry about a possible 1929 Wall Street-type collapse on the Shanghai and Shenzhen stock exchanges (they went down 8% yesterday) is for an entirely different reason.
This is that if China has a stock market collapse and its economy is suddenly reduced to a much reduced version — to, say, 85% of what it is now — then trading with China would largely cease. China’s economy wouldn’t need to reduce further than 85% of what it is now because its own domestic economy is large enough to be almost self-sustaining, but if it did we’d be knee deep in revolutions all over Europe just like 1848.
True, China would still need to import food in order to avoid the sort of deaths of 30 or 40 million people (when peasants would be selling their babies and young children to one another in order to eat them) or the poor diets of maybe 600 million rural Chinese which went on in communist dictator Mao Zedong’s rule. It would also need to import some raw materials, too. But China would still be able to export enough to pay for those.
China could sustain itself economically. Whether it would hold together socially and politically is another matter. That can only be a matter of guesswork. My guess is that its 2,500 year old Confucian framework of social deference to authority and the still very strong family and clan networks would hold them together. But never mind that — the fact is that if China was reduced to a survival-only economy for the time being, the advanced countries of the West would probably collapse totally. Our own family and clan networks have been disappearing for the last 250 years since the industrial revolution started and our “authorities” have become so incompetent and have lost so much credibility that they wouldn’t last long. That’s why we’re so worried (and politicians most of all).
We’re so worried because, in the last 35 years since Deng Xiaoping set China free, and our manufacturers made haste to go to China to take advantage of cheap labour instead of developing more advanced automated methods here at home, we have now become totally dependent on China’s economy. Not just on China’s economy but on its continuing growth.
There was a chance in pre-First World War days — before science developed into the higher realms of basic research and when technology was still at a modest level — that the benefits of half-a-dozen countries of northern Europe plus America and Japan (China might have been one of those had the genius-reformist Empress Dowager Cixi had had her way) would have rippled out to the rest of the world. But no. Because of the enormous costs of the Great War, the leading countries then went off the gold standard and from then onwards — what with the incessant printing of excessive money — the ‘favoured few’ were able to keep the bulk of world trade value largely confined to themselves.
Any idea of classical economists that trade should always be balanced went out of the window. The world is now in the absurd position where all the governments of the ‘favoured few’ are now deeply in debt and there is something like a $70 trillion lop-sided world trading imbalance when it should be zero.
But it’s as much in China’s interests that it gets over its temporary difficulty, just as it’s done several times since Deng Xiaoping’s reforms — when, every time, Western economists and financial journalists have reported that the End is Nigh. China wants to get all of its population up to the standard of living of the ‘favoured few’. China has had to adopt the money-printing madness of the West (that is, depending on the dollar as the prime currency) in 1979 in order to have a chance of breaking into our trading network.
Remember: (a) China tried money-printing itself long ago in the Ming Dynasty and knows that it has fateful consequences sooner or later. It trains ten times more economists than the rest of the world put together — it knows our financial system and its weaknesses like the back of its hand;
(b) China is itself steady working towards a world trading currency of its own (probably gold-backed if we are to believe its massive gold-buying in the last 20 years) which will be steady, unlike the dollar, and will result in balanced world trading.
I’m not a supporter of the Chinese system because I’m English and, over thousands of years in Europe, my brain genes have mutated slightly differently from Chinese brain genes and my English culture is greatly different. But I don’t worry about China. It will be looking after itself and it will be looking after us purely as a by-product. So cheer up, Ambrose Evans-Pritchard and other Western financial journalists, central bankers, economists and politicians who are having kittens about China at the present time.