This is a fascinating event to me. I'm still trying to sort out exactly what's happening and this article isn't complete, but it gives a good idea of what's going on and how those forces are effecting the market.
I'm still trying to find a god explanation of how it will effect the US, let me know if you find one.
You won't find a good explanation because there aren't many macroeconomic events bigger than this and we simply don't have the data. Economics in general is a curve-fit process; it's far easier to look back on past events and explain them than it is to forecast.
To complicate the issue, China has a hybrid market/command economy which allows them to do things that a market economy (like the US) or a command economy (like the former Soviet Union) can't do. It's not an easy combination to manage; as I understand it, most of what you're seeing here is China's burgeoning middle class taking a beating. The peasant class is unaffected by this, the wealthy are less effected by this.
I've read a few books on investing with China in mind and I can't say that I'd recommend any. I have a bias towards the rationalists but I recognize it as a bias, not some deep insight into their accuracy.
I think there's a chance that this could be good for the US. China hasn't had to deal with a large scale economic calamity since its middle class has risen. They had a stock market crash in 07-08, and they dealt with it fine, but the forces in that case were mainly external. The US stopped buying their goods temporarily, and their economy suffered as the world's did.
Here, I think the situation is quite different. The US economy is fine. China, however, is slipping, possibly into a real recession. They have had a negative PPI for months on end, and many construction companies, especially those who do business in USD, have gone belly up. These indicators together could signify a step backward for their economy (although the data don't say so, the gov't is full of lies, so I don't trust the official line ever).
The reason people tolerate the regime there is because their economic prospects keep improving. Once that train leaves the station, political unrest is inevitable. Nobody wants to do business in a place with a lot of unrest.
It is easy to envision manufacturing coming back to the US, because of our stability and ability to do more lean manufacturing that didn't exist when most of the offshoring became popular in the first place. Companies could probably score some great PR and government incentives to bring industry back to the US. If the political situation looks untenable in China, then I think there's a decent chance of this happening.
I doubt we'd see any significant regime change with the path that China is on right now. Generally political systems are fairly stable when either on the more authoritarian or the more democratic side. It's in the middle where instability is most prevalent (called an anocracy). I'd expect that only if China starts to reform its political system to be more democratic that we'd see significant unrest calling for a regime change, and China is currently reluctant to do so.
However, as Youwei notes in "The End of Reform in China" (Foreign Affairs May/June 2015), China is starting to run out of areas it can reform without becoming less authoritarian.
- [M]ost easy reforms have already been launched. Revamping agriculture, encouraging entrepreneurship, promoting trade, tweaking social security—all these have created new benefits and beneficiaries while imposing few costs on established interests. What is left are the harder changes, such as removing state monopolies in critical sectors of the economy, privatizing land, giving the National People’s Congress power over fiscal issues, and establishing an independent court system. Moving forward with these could begin to threaten the hold of the Chinese Communist Party on power, something that the regime is unwilling to tolerate.
- Generally political systems are fairly stable when either on the more authoritarian or the more democratic side.
I know of no other case of an authoritarian regime being successful when ruling over a large, dynamic economy. The USSR lasted 70 years. China is pushing that right now, although they might get extra life, because they have been able to liberalize a lot more than the USSR ever did.
Soviet was a "communist" dictatorship, modern China is a ultra capitalistic dictatorship. That's the difference. Also USSR poured insane amounts of GDP into the military, where China doesn't (or I should say, as far as we know they don't).
China will prevail, may cause a lot of suffering for 10-100 millions but the new empire will most probably not fall.
Elaborate on that. Because by my read, the likelihood of regime change in China has gone down every year since 1988. That is what Tienamen Square was ultimately about - whether the transition from command economy to market economy would occur on the command side's timeframe or the market side's... and the command side won that debate handily.
- ...the command side won that debate handily.
Yes they did. But how have they accomplished all that they have in the interceding years? Some of it through real, sustained economic development, but a lot of it through graft, corruption, environmental destruction. They've thrown money at every problem, and greased every wheel that needed greasing along the way.
For example:
They've had a building spree that has left entire cities unoccupied (literally). People have invested a lot of money in these unoccupied buildings, and construction companies are now a dying breed in China. Lots of people are going to lose their ass a lot more than what the Shanghai market can do to them.
We've been seeing discontent with the environmental degradation in recent years. Reports abound that people won't let their children play outside in many ares due to the risk of illness. There's hell to pay in terms of human health for the way they've handled air quality issues.
The Internet occasionally leaks into mainstream China, and it often ends with someone going to jail for a long time for saying something pretty benign about the government. It doesn't take much to be labeled a subversive enemy of the state there.
I read one account of Xi trying to resurrect the personality cult of Mao among the peasants. That strikes me as desperation.
And these are all things that make the US media, so one can imagine how bad things are below the surface. So, with all these underlying fundamental problems, why have the people tolerated it? I believe it's because the only thing people really care about is the ability to feed their family. So long as their paycheck this year is bigger than last year, then all the other problems look small and manageable. However, when unemployment rises (and it will) for the first time since Tienanmen, people aren't going to stand for getting fucked six ways to Sunday any longer.
The people are richer and more educated than they ever have been, and this will express itself eventually. The rulers of China aren't dealing with all farmers anymore (although there are certainly still a lot of them). It is much harder to pull the wool over the middle class's eyes than the peasant class.
Add all this to the hyper media environment we now live in, and I think it's a real tinderbox over there. Just wait until there's a large protest to try to force the government to bend on some issue (like for example when their new policy of investing pensions in the market blows up), and it gets met with the government mowing down a bunch of people with tanks. They won't be able to spin it nearly so well this time. I hope for a peaceful transition, but I fear for a bloodbath.
- Yes they did. But how have they accomplished all that they have in the interceding years? Some of it through real, sustained economic development, but a lot of it through graft, corruption, environmental destruction. They've thrown money at every problem, and greased every wheel that needed greasing along the way.
My point exactly: The command economy has advanced the market economy through command reforms. With the market economy in turmoil, the market will expect the command economy to step in. Does Xi need to resurrect a cult of personality? No... because central control of China remains strong.
China remains a place where you can go from "accused" to "dead" in a week. They're a draconian place, and always have been. My argument is that China has a lot more leeway for austerity and aggressive controls and corrections than any market economy does... and that the entrenched democracy the Western world demands is a recent luxury in China.
I've been trying to talk to people about China's bubble for about a month now. It has been all over CNBC this morning. I'm amazed that so many people are unaware of the issues facing Chinese markets at the moment. They are just now waking up to it as the shit hits the proverbial fan. This shares a lot of similarities to how the United States, Japan and others have handled their issues in the past (not well at all). It is fascinating to see the same mistakes made over and over again.
I have to say that I'm one of the uneducated. From what I've seen they crashed in 08 just like everyone else, so I'm curious to find out what's leading to this second crash.
Any suggestions on where I should look or what I should know about Chinese economy?
I think that Vox article is a good introduction to some of the issues that China is dealing with at the moment.
What in particular did you want to know more about?
The problem is I don't know what I don't know. Klein used an interesting new phrase to me "market/command economy" which seems like a fascinating idea.
Mostly I'm just getting into foreign affairs and there's a large learning curve to breech the subject. I don't have questions in particular, I'm more so looking for anything that I can digest into the larger picture.