Morici: China’s market chaos

Peter Morici

China’s economic chaos is fomenting fear across global stock markets, and President Obama would do well to start listening to Donald Trump about the menace posed by Beijing’s economic strategies.

For two decades we have heard about the coming Asian Century and how China’s hyper growth and socialist market economy provide developing countries with a better alternative to western-style capitalism.

In reality, China’s strategies are remarkably patterned after the “Japanese miracle” of the 1970s and 1980s. An undervalued currency – calculating what a yuan actually buys in China it should be trading at about 3.53 per dollar not the current rate of about 6.49 – makes its products artificially inexpensive at Wal-Mart and many western products prohibitively expensive in China.

Additionally, developing economy status in the WTO permits China to maintain much higher tariffs than western nations, and its banks have provided endless credit to state-owned enterprises even as profitability dwindles into losses.

To satisfy a resulting ravenous appetite for energy and materials, commodity rich nations like Saudi Arabia, Chile and Australia invested heavily in more oil wells, bigger mines and refining facilities.

Its export juggernaut imposed trade deficits on the U.S. and many European economies, and slowed their growth and jobs creation.

During the Bush/Obama presidencies, the U.S. economy has averaged only 1.8 percent annual growth. That’s about half the pace achieved during the Reagan-Clinton years and goes a long way toward explaining falling family incomes.

Prior to the 2008 financial crisis, consumers in the United States and Europe borrowed heavily against homes and through their governments to maintain living standards. Meanwhile, China manufactured its own real estate frenzy by forcing farmers into new cities with inadequate employment opportunities and few real economic imperatives but to boost construction activity and juice GDP statistics.

When the bubbles burst, the Europeans and Americans reformed their banks, whereas Beijing encouraged even more lending for everything from factories to luxury flats. And it encouraged ordinary Chinese to pour savings into and borrow from banks to purchase stocks and drive equity prices to unrealistic levels.

Like Japan at the dawn of its lost decade in 1990, Chinese businesses cannot grow their exports or domestic sales enough – and ordinary folks cannot find good enough paying jobs – to support all the debt and many would be bankrupt if domiciled in the West.

The Chinese collapse is driving down global oil and resource prices, sending commodity-based economies into recession and pummeling the U.S. mining and petroleum sectors.

Chinese private investors are heading for the doorspanic selling stocks and converting their yuan into dollars as fast as they can find ways around Beijing’s restrictions on investing outside the Middle Kingdom.

Fear of a permanent collapse in global commodity markets is inspiring private investors elsewhere to also seek safe haven in the dollar by buying real assets, such as New York condominiums, and Treasury securities.

All of this is driving the dollar up against the yuan and other currencies and killing the demand for U.S.-produced goods and services.

U.S. businesses are increasingly reluctant to invest in factories and equipment, and the durable goods industries – the backbone of U.S. exports – has shed 35 thousand jobs since last summer.

Now, disappointing holiday season sales indicate pessimism is spreading to consumers, and the economy could easily slip into recession this winter.

If Obama does not want his presidency punctuated by another economic crisis, he must finally do something radical about the overvalued dollar – especially against the yuan.

Donald Trump’s proposed 45 percent tariff on Chinese imports is remarkably similar to a tax suggested by Nobel Laureate Paul Krugman and a logical step to stop Beijing from shifting its unemployment and financial woes onto the backs of hardworking Americans.

Peter Morici is a professor at the University of Maryland’s Robert H. Smith School of Business. He served as chief economist of the U.S. International Trade Commission from 1993-1995. He tweets @pmorici1.