China is under growing pressure from Asia, Europe and the U.S. to revalue its currency. Until recently, it even looked like we were about to embark on a sustained process of yuan revaluation fairly soon.
Chinese carmaker BYD Co. may be getting some bad news as it prepares to start selling in the U.S. next year. A planned reduction in government subsidies and a phase-out of interest-rate controls threaten to raise costs for it and thousands of companies across China.
China’s relaxation of interest-rate controls has left cutting banks’ required reserves as the chief monetary tool to counter a slowdown, focusing attention on an option used in the past decade only during financial crises.
Lydia Wang, a 28-year-old marketing manager in Shanghai, gripes that the shoes and clothing she normally buys are at least 50 percent pricier than in 2009. Wu Sengyun, a 54-year-old retiree in the coastal city of Ningbo, Zhejiang, says prices of fruit and fish are up more than 20 percent in the past year.
If we accept the argument that China must, and will, rebalance its economy by reducing its reliance on investment, what happens if it proves politically impossible to cut investment rates sharply? Gross domestic product growth rates would remain very high, but debt levels would also grow unsustainably. At some point, China will reach its debt capacity limits and no longer be able to fund investment.
In the late 1980s, University of Chicago professor Robert Aliber proposed, partly in jest, what he called the Andy Warhol theory of economic growth: “In the future every country will grow rapidly for 15 years.” He had in mind the plethora of so-called miracle economies that seemed to take off one after the other in the postwar era. In every case, decades of high growth, almost always driven by very high levels of investment, eventually faltered.
If German Chancellor Angela Merkel hoped for some international recognition for her country’s role as the economic powerhouse of the European Union, she didn’t get it. And she only has herself to blame.