Fractured Fairy Tales

Chimerica is a term coined by Niall Ferguson and Moritz Schularick to describe the symbiotic relationship between China and America. Both countries need each other, with China’s export driven economy reliant on U.S. consumers, and the U.S.  government reliant on the Chinese government to purchase its debt to fund ongoing operations.

However, besides being locked in a symbiosis, the two countries sometimes face similar situations but drastically different outcomes. Why? Because of dramatically different levels of societal equality. Case in point: this article by the WSJ describing the beginning of China’s annual legislative session. What does the WSJ start off the piece with?

China’s leaders, kicking off the annual legislative session Friday, face the challenge of how to explain to the nation the gradual withdrawal of an enormous stimulus program without denting public confidence.

Seems just like the U.S., right? Enormous stimulus package enacted, things got better, now it’s time to slow down the growth machine. However, unlike the U.S., China’s stimulus package was quite successful. Inflation is actually a concern, and in some areas of China there are more jobs than workers. What a nice thought! Here in the good ol U S of A, economists are worried about disinflation (decline in rate of inflation) or even worse, deflation (reduction in prices).

What’s different in China is how the government responds to these issues. Overseas investors have become more pessimistic about China, and since the government is authoritarian, the WSJ explains that

Such big swings happen in part because it is so difficult for investors to track China’s policy changes. The government has actually been ratcheting back the stimulus since the second half of last year. But most of its early moves came through regulatory changes and instructions to banks that were communicated privately rather than publicly announced. It wasn’t until January that the central bank used a more transparent and public tool, raising the share of deposits that commercial banks must keep on reserve.

The Chinese government is secretive, as everyone knows, and the U.S. is transparent (well, sort of). However, China appears to be doing better in terms of rebounding from the Great Recession. This has people thinking that maybe the Chinese way of doing things isn’t so bad. What’s important to separate here is the economy from the society. The numbers from the reality. Sure China may have great growth numbers, but at what cost? For instance, you may have read about the identical editorials plastered on the front page of dozens of leading Chinese newspapers asking for an end to the household registration system (hukou system). The hukou system prevents those rural poor who migrate to cities from getting the same benefits of current city dwellers. What did the Chinese government do after the editorials were published?

But a few hours later, the editorials had largely vanished from the Internet, presumably erased by a government that is wary of abandoning a 50-year-old system that many critics say has fed the surging gap between China’s urban and rural population.

The Chinese may be recovering economically, and may even be surpassing America in ability to rebound from crises, but is going to be facing the same social problems that America had to deal with over its beginnings. In the end, that may be the true cost of growth.