Burn Out by Dieter Helm

Author:Dieter Helm
Language: eng
Format: epub
ISBN: 9780300225624
Publisher: Yale University Press

China’s economic model

An export-led growth strategy requires others to have a corresponding demand for imports. The Chinese transformation just happened to coincide with the great late-twentieth-century boom in the US and Europe. After the dismal 1970s, from 1980 the Reagan and Thatcher era kicked off a revival of consumption in the West, and it was further underpinned by the communications revolution (again a key ingredient in explaining China’s growth). As the US embraced a new optimism, consumption could be sustained at ever-greater levels on the assumption that the future would be bright, and hence higher future incomes could pay off higher current debt levels. This was as much a part of the commodity super-cycle as China’s satisfying of it.

The great consumer-led boom in the West was accompanied by the abolition of exchange controls and many of the constraints on borrowing, particularly for mortgages. Reagan went for a very Keynesian demand stimulus, backed up by military expenditure. A boom ensued, leading to the first of a series of stock market crashes in 1987. The result was a lurch towards ever-looser monetary policies, which were to last for three decades. Notwithstanding the Japanese crash in 1989, US and European stock markets powered on until 2000 when they too crashed, never to regain their real value again through to 2016. Yet more stimuli were applied – negative real interest rates, George W. Bush’s tax cuts in the US, and Gordon Brown’s splurge of public expenditure in Britain, and similar if more constrained moves across much of Europe. After 2000, consumption boomed again, this time with an asset bubble on a new and frightening scale. This started to burst from 2006, leading to the credit crunch and the sub-prime lending crisis, and to even more stimuli and even lower interest rates, and eventually to outright printing of money (quantitative easing, QE). Nominal interest rates even went negative.

Without this demand from the US and Europe (together nearly half of world GDP), the Chinese transformation would have been an altogether more muted affair. China’s growth was focused on its eastern coast, and on large-scale energy-intensive manufacturing in steel, fertilizers, cement, clothes, electrical goods, and so on.

To meet this demand, China put its cheap labour together with abundant coal. Between 1980 and 2012, the ‘Great Migration’ led to more than 200 million people flocking from the countryside to the cities, and China’s urban population tripled.5 Two numbers stand out from the perspective of coal and steel, the commodity super-cycle and energy. Coal-burn went up from 610 million tonnes to more than 3,500 million tonnes over the same period; by 2000 China was building more coal-fired power stations each year than the UK’s total installed capacity. And China’s production of steel rose from 37 million tonnes in 1980 to 823 million tonnes by 2014.6

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