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Macroeconomic Issues Viewpoints

Stability Proves Testing for China

by Matthew Gertken


Matthew Gertken is a Geopolitical Analyst at STRATFOR. He is responsible for researching and writing analysis, shaping forecasts, and assessing the geopolitical implications of events on a wide range of topics and regions for STRATFOR readers and clients.

Gertken joined STRATFOR in 2008 as an analyst covering east and southeast Asia. He has also researched and written analysis on topics in Europe and the former Soviet Union. Currently he is engaged in producing a monthly series of STRATFOR Net Assessments on Australia and East Asian countries including Thailand, Japan, Taiwan, and Indonesia. Gertken has been quoted in numerous news articles and has been featured as an expert on CNBC Asia and Bloomberg Television. He holds a master’s degree in English from the University of Cambridge in the United Kingdom and a bachelor’s degree from the University of Kansas.

China’s ability to maintain steady growth is seen as fundamental to the developed nations’ success in emerging from recession. How confident are you that China will be able to sustain high single-digit growth over the next few years? What are the immediate challenges to that growth?

Right now, China has a number of challenges, not least of which is a housing and real estate bubble. In fact, it is worth taking a serious look at just how stable the Chinese economy appears when one takes the medium to long view. The country has had a tremendous run from 1980 onwards, through the period of economic liberalization. However, while the world has been captivated by China’s record year-on-year growth, there is much about the Chinese economy to worry analysts who look beneath the surface.

One of the most obvious defining features of the economy is that China’s closed monetary policy means that it has near-total savings capture of all household and business surpluses. These massive deposits are funneled, via state-run banks, to state-linked firms at below-market rates. The massive liquidity provided from the savings of nearly a billion workers enables the country to self-fund huge projects, quite apart from the huge surpluses generated by its exports.

However, plentiful liquidity at artificially low rates, with little by way of market mechanisms and market penalties for waste, encourages massive inefficiencies. No-consequence loans encourage no-consequence projects, things undertaken purely so that the participants can gain political kudos without suffering any immediate economic pain for such actions. The cumulative weight of these is most definitely not trivial.

It is important never to lose sight of the fact that with China one is starting from a point that is totally different to the route that many developed countries have followed. The country’s growth in the modern era begins from a very totalitarian position and what follows is a series of cycles of tightening and loosening of control, with the government’s instinct being to tighten restrictions whenever it feels things have gone too far.

What this means is that the liberalization of a sector gets interrupted. There are reversals and backtrackings, followed by a new phase of liberalization that does not quite pick up where the last one left off. Moreover, the last reserve of government control is the very tight linkage between the government and the banking economy. Maintaining this control is vital for them, so it means that they cannot at this point allow capital to flow in and out of China unchecked and unregulated by the CCP. Quite apart from ideological considerations, the Chinese government has seen what has happened to Japan and the Tiger economies over the last two decades when they opened the floodgates. A massive surge of private investment always generates a hangover, which inexorably leads to a recession that hits the overextended banks and ripples outwards into the wider economy. Equally, China is very wary of a liberalization process that would lead to a flight of capital out of the country.

At present, China and Chinese companies are busy buying up strategic assets all over the world. Does that not, in a sense, constitute a “flight of capital”?

It is diversification, and a kind of flight of capital, certainly. A number of Chinese investors and state firms expect greater returns from investments outside of the country. This is not preventable even if the government should try to stop it. Instead, the government is encouraging it. China needs to grab hold of the resources that are fuelling its growth, so it is actively encouraging state-owned companies to go and buy external resources. It also wants its national companies to generate profits and to work alongside foreigners with better skills and technology to become more sophisticated.

China adds substantially to its surplus almost every month, with exports far exceeding imports most of the time. What problems does this create internally?

China has to find a way of sterilizing the vast amounts of dollars flowing in or the inflows would pump up inflation. The best way of doing this is turning the flows around and buying US dollar assets, including Treasury bills. Talk about finding an alternative reserve currency to the dollar plays well internally in China, but in reality the Chinese government is not in the least bit interested in seeing the dollar weakened. It has increased its holdings of US debt dramatically over the last 10 years. Of course, they would like to diversify away from the dollar to some extent, but the global economy has not yet arrived at a point where an alternative to the dollar as the world’s major value store is feasible.

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Further reading


  • Becker, Jasper. The Chinese. New York: Free Press, 2000. An insider’s look at the issues which affect and shape China today. The work of someone who knows the nitty-gritty of China, it was written after the volatile financial difficulties of the late 1990s, so gives a good indication of what the social ramifications of the next round of economic and financial disruption will be.
  • Friedman, George. The Next Hundred Years: A Forecast for the 21st Century. New York: Doubleday, 2009. For an account of China’s future economic bust.
  • Keay, John. China: A History. London: HarperPress, 2008. Condenses the entire sweep of China’s history into relatively concise chapters.
  • Lao Tzu. John C. H. Wu (trans). Tao Teh Ching. Boston, MA: Shambhala, 1990. Ancient Chinese philosophical text that explains some of the culture’s deepest political and social characteristics.
  • MacFarquhar, Roderick (ed). The Politics of China: The Eras of Mao and Deng. 2nd ed. Cambridge, UK: Cambridge University Press, 1997. The most authoritative Anglo-American scholarly account of China’s modern history.



  • STRATFOR: Includes an archive of over 10 years of analysis on China’s economic imbalance and its unsustainable growth model.

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