Chinese legitimacy in a recession?

By Fester:

Via Naked Capitalism:

a coded story on capital flight from China, "China warns of risks from "abnormal" cross-border capital flow," from Xinhua. The reason that capital is exiting China now is that a lot of hot money came into China in 2008 to take advantage of a widely expected RMB apprecation...

Pettis and Logan Wright wrote a Financial Times comment in July that gave a good overview:

During the first halves of 2005 and 2006, the trade surplus, FDI and estimated interest on China’s reserves accounted for 80-90 per cent of the country’s reserve accumulation. In the first half of 2007, these components accounted for about 70 per cent. This year, however, their share has declined dramatically to 39 per cent from January to May....Because there are likely to be speculative inflows buried in the trade and FDI accounts, their true share is probably even lower.

So what is powering China’s accelerating reserve accumulation? Probably hot money....

If, and the following post is pure speculation and relatively uninformed speculation at that, there is significant capital flight from China, what happens to the legitimacy of the current Chinese government? 

Right now, China's social-economic stability breakeven point is growth between 8 to 10 points per year.  This is the rate of growth that is needed for the coastal exporting cities to absorb tens of millions rural migrants and provide for increasing living standards within the cities themselves.  Anything lower than that and it will feel like tough times as urban unemployment will increase and the pressure relief valve of the hinterlands will be jammed shut. 

So what will happen in a world where trade financing is collapsing, American consumers don't want to buy anything, electronic doodads are not popular and intermediate goods are getting whacked as well?

Most of the Chinese export sectors will be whacked.  They may not decline in size, but they will stop growing at anything near the current rate.  And if they stop growing at anything near the current rate, then the hot capital that has been funding a good chunk of China's reserve accumulation will leave as the risk-reward-hassle profile will have dramatically changed.  Massive capital flight is never good news for an economy as it dislocates and damages otherwise healthy economic activity.

And if that dislocation leads to either a growth recession or an actual recession, where does the Chinese government's legitimacy stand as it has been based on delivering better living standards for almost my entire life?

Comments

[Monkeyfister]

I was just reading a Bloomberg article this morning about possible "Black Swan" events, and China's grim growth forecast for this year:
http://seattlepi.nwsource.com/opinion/395110_pesekonline08.html?source=rss

Looks like they are unlikely to hit that 8-10%, and as you say, anything less will cause serious problems in the rural sector, as well as in the commerce/manufacturing/export centers.

Already, factories are closing by the thousands per week, with owners simply disappearing overnight.

Here's a quick quote:

A Saxo Bank team led by London-based Chief Investment Officer Steen Jakobsen also pondered this question: Will we see a China crisis with gross domestic product at 0 percent?

Their rationale is that the export-driven industries of China's economy will be hurt by the freefall in U.S. growth. Many commodity-related investments in recent years will sour with global demand. And since China has been running an overly expansionary monetary policy for many years, the gamut of speculative bubbles will be revealed.

Clearly, zero growth isn't the most likely outcome. Walker, for example, expects 0 percent to 4 percent this year, with a 30 percent probability of a contraction.

For a developing and highly populated nation like China, 5 percent growth is as good as zero. For Japan, such output would be a dream; for China it would be a nightmare.

This year is going to be one helluva strange and ugly ride.

--mf

[Peter G.]

You seem to be posting frequently and on a wide range of subjects Fester. Very odd in someone who should be suffering from newborn sleep deprivation. I look forward to seeing how long you can keep this up.