Is the Party Over For China?

In the 1980s it was common for people to say that America's time in the sun was over, that we were about to be surpassed by the Japanese. Japanese investors were buying American real estate left and right. Japanese manufactured goods were everywhere. Workers raged about "unfair competition" from Japanese imports. But even before the tragic earthquake and tsunami, Japan's supposed economic threat to the US was fading. But by the late 1990s, the same fears were arising again, this time with China playing the role of Eastern Threat. In both these cases the fear mongers assumed that trends at the time would continue unabated. That did not prove to be the case in Japan (Japan has spent much of the last 15 to 20 years in severe economic distress) and it may be proving to be not the case in China. Here are some signs of trouble for the Chinese political-economy:

First, inflation. Chinese food prices and fuel prices are soaring. There have been numerous stories in the press lately about Chinese people finding it increasingly difficult to buy the basics of fuel, cooking oil and food staples. This is a big problem for a single party, authoritarian regime who's legitimacy is based largely, if not entirely, on continuously rising prosperity.

Second, rising transportation costs (see stories here and here for slightly different perspectives). A major driving force for China's economic boom in the last 20 years has been exports. China's vast and cheap labor force can only impact the world economy if it's products can make it to markets. That means shipping to North America and Europe. Improvements in port facility standardization and relatively cheap shipping costs in general made that easier. But as the oil that the large container ships run on gets more expensive, the advantage that manufacturers in China realize from the cheap labor will be off set by high transportation costs. That could encourage some manufactures to relocate back to older manufacturing centers closer to their markets. China's government has responded by investing heavily in alternative fuels and by trying to build their own domestic markets as quickly as they can. They may be running out of time.

Third, rising unemployment especially among young, college educated Chinese. China's economic advantages lay in a huge, cheap, relatively low skilled workforce. China has invested a lot of its recently gained wealth in university education. But now it's economy is incapable of finding rewarding jobs for all those new college graduates. Again, for a regime who's legitimacy depends on maintaining prosperity, a large population of unemployed or underemployed college graduates is a dangerous thing. It was underemployed college graduates who were much of the driving force behind the revolution in Egypt. Chinese officials are concerned about similar unrest breaking out in China.

Fourth, China is developing a nasty real estate bubble (see stories here and here). I've heard annecdotal stories from friends with relatives in China that real estate is a popular investment for middle class, urban Chinese. If this real estate bubble pops (and signs suggest it is about to), much of China's emerging middle class could see their savings wiped out in the blink of an eye just as rising prices in other areas, reduced exports and rising unemployment are becoming problems as well.

Fifth, increasing political unrest (see stories here, here, and here). Riots over local corruption, food prices and abuses of eminent domain have been popping up around China for some time now and appear to be getting more common.

Finally, all of this is a contributing factor to a final worrying development: an authoritarian retrenchment in the Communist Party of China leading to oppressive crackdowns (see stories here, here and here).

If all this comes to a head at once, I'm not sure how it would impact the world economy. I suspect that it might not be the worst thing in the world for US manufactures and jobs. If China's political economy starts to look less attractive to investors, the US will look like a safe haven in comparison. But a more repressive and insecurity Communist Party of China is probably not a good thing for the world. This could be a bumpy ride.