For the Record: China in 2012 Is Not Like America in 2006

The Atlantic's home page and business channel are featuring an interesting item by Matthew O'Brien on the imbalances and weakening of the Chinese economy.

I recommend the article, but for the record I completely disagree with the way we're presenting it on our site:


China's economy in 2012 has lots of worrisome problems. But it confuses rather than clarifies things to compare it to America's in the subprime-bubble, pre-crash era. Folksy analogy: this is like telling someone, "Gee, you really should watch your weight. Remember how bad it was when your cousin had encephalitis?" Both problems, but not similar problems.

The asset bubble that brought America's and then the world's economies down starting four years ago had everything to do with over-leverage (too much debt) and over-consumption. As I argued in the magazine in 2005.

True enough, there are obvious signs of real-estate and asset bubbles all over China now. And many other worrisome indicators, plus a variety of over-leverage problems. But everything about this situation, and its potential for rippling collapse (which is what the 2006 comparison indicates) is different when we are talking about an economy whose net savings rate is roughly 50 percent of GDP, as is the case for China, versus one whose net savings rate is roughly zero percent of GDP, as was the case for America six years ago. Not to mention the thousand other deep differences in economic structure and performance between China and the United States. (U.S. per capita income roughly seven times as great as China's; China's recent GDP growth rates roughly four times as great as America's, etc.)

Moreover: the government has different tools at its disposal in China. As one proprietary newsletter pointed out just yesterday (emphasis in original):

Importantly for growth preservation, current economic drag is primarily coming from areas over which the government retains broad control. A stamp from the central government could put the Ministry of Railways back to work on the rail, and the NDRC fast-tracked projects will surely begin to buoy macro data in the next couple of months. We still feel the property market is recoverable - more ambivalent enforcement would see some local-level property activity return (as it already has) and a complete reversal of housing policy would likely see capital flood back into the market. Therein lies the problem, though.
It is clearly unwise from a sustainability perspective to pump-prime the economy with easy credit and government investment - authorities remain rightly weary of repeating the mistakes of 2008-2010. The interest rate cut signaled the end to government caution, and the start of a more active macro policy. The 'mini-stimulus' is out, and should lead to better economic data in the second half. But for now, weakness abounds.

"Weakness," yes. Danger, concern, possible dragging of the world into another long slowdown -- yes in all cases. But "2006," "panic," and "scarily" all suggest the risk of another cascading round of Lehman-style collapses, and that is not the sort of danger the Chinese situation now poses. Read the item, but skip the headline.