The markets and investors are rattled by a downturn in global trade and by a sharp decline in China’s exports. My answer: the world has been riding on China’s bubble for more than two decades but now the Chinese are shifting gears. The net result is the entire world is being affected by developments in the world’s second largest economy that no one predicted or foresaw.
China has been growing by 7 to 9 percent ever since the aftermath of Tiananmen, starting in the early 1990s. The model was driven by government officials at all levels, who were also members of the Communist Party, who figured out how to build a hard infrastructure very quickly, enriching themselves in the process. The model was driven by corruption. Officials conspired to control real estate that was developed for highways, bridges, factories, steel mills, etc, and to extract billions of dollars along the way.
This model of hyper-growth was so powerful that it drew in goods from all over the world–metals from Africa, oil from Venezuela, iron ore from Australia, rubber and palm oil from Southeast Asia, and many items from the United States and Europe as well. The entire emerging market boom of recent years appears to have been fueled by China’s appetite for raw materials from those countries.
Enter President Xi Jinping in 2012. He has proceeded to crack down on corruption in the Party’s ranks, whether for personal consolidation of power or out of genuine conviction or both. That means the Chinese have to figure out a new model, a new way to grow. Xi is pushing the idea of turning China into an “innovation nation” by 2025 but the jury is still out on whether that can be achieved or or not.
In the meantime, the whole world is feeling the decline in China’s pace of growth, now believed to be around 5 percent annually.
The moral of the story is that we have to do a better job of understanding how political developments inside China can affect the entire planet. Starting out with virtually nothing in 1979, an era I personally witnessed, China has engaged in arguably the greatest development of wealth in human history. And our understanding of China’s internal mechanisms and global aspirations has lagged far behind.