Despite the current extremely robust growth of the Chinese economy during the last decade, some economists, looking ahead see clouds on the horizon. Michael Pettis is a professor at Peking University's Guanghua School of Management, and author of the well received book, The Volatility Machine: Emerging Economics and the Threat of Financial Collapse. Pettis is a pessimist about the stability of the international finance order, and sees international boom and bust monitary cycles effecting the economies of developing countries even more than the econmies of developed countries. In a recent article in China Financial Markets, Professor Pettis argues that
we are at the end of one of the six or so major globalization cycles that have occurred in the past two centuries. If I am right, this means that there still is a pretty significant set of major adjustments globally that have to take place before we will have reversed the most important of the many global debt and payments imbalances that have been created during the last two decades. These will be driven overall by a contraction in global liquidity, a sharply rising risk premium, substantial deleveraging, and a sharp contraction in international trade and capital imbalances.Professor Pettis predicts:
* BRICS and other developing countries have not decoupled in any meaningful sense, and once the current liquidity-driven investment boom subsides the developing world will be hit hard by the global crisis.The rest of Professor Pettis's article fleshes out his predictions about the course likely followed by the Chinese economy for the rest of the decade, and the implications of that course for Chines society, and political system. (Hat tip to Brian Wang for his recent post on Professor Pettis's economic forecast.)
* Over the next two years Chinese household consumption will continue declining as a share of GDP.
* Chinese debt levels will continue to rise quickly over the rest of this year and next.
* Chinese growth will begin to slow sharply by 2013-14 and will hit an average of 3% well before the end of the decade.
* Any decline in GDP growth will disproportionately affect investment and so the demand for non-food commodities.
* If the PBoC resists interest rate cuts as inflation declines, China may even begin slowing in 2012.
* Much slower growth in China will not lead to social unrest if China meaningfully rebalances.
* Within three years Beijing will be seriously examining large-scale privatization as part of its adjustment policy.
* European politics will continue to deteriorate rapidly and the major political parties will either become increasingly radicalized or marginalized.
* Spain and several countries, perhaps even Italy (but probably not France) will be forced to leave the euro and restructure their debt with significant debt forgiveness.
* Germany will stubbornly (and foolishly) refuse to bear its share of the burden of the European adjustment, and the subsequent retaliation by the deficit countries will cause German growth to drop to zero or negative for many years.
* Trade protection sentiment in the US will rise inexorably and unemployment stays high for a few more years.
It is my view that even if this socio-economic and political crisis strikes China, Global awareness of the grave implications of continued reliance of carbon based energy sources will rise rise rapidly. Thus at the same time China may faces an economic crisis. Even if more conventional estimates of the developmental course of turn out to be correct, China will be faced with the problem of shifting its energy system to post-carbon energy technologies.
Thus what ever the course of the Chinese economy, the need to replace energy from fossil fuel sources, with energy from post carbon sources will start to become acute within the next ten years. Thus what ever its economic situation, China will require rapidly scalable energy technologies that can replace coal and other fossil fuels. At the moment, China appears committed to developing LFTR technology. On February 2, in the wake of the Chinese LFTR announcement I stated on Nuclear Green, I stated:
The potential promise of thorium and the LFTR technology can rapidly be brought into the effort to prevent further global climate change. China, perhaps more than any other country has realized the importance of energy in increasing the wealth of its citizens, and making life for its people better. At the same time, the Chinese have paid an enormous price for their reliance on fossil fuel technology. As many as 500,000 people die every year from fossil fuel related causes. Global Warming represents another large threat to the well-being of the Chinese people, and although China has made a large commitment to renewable energy sources, the Chinese leadership is aware that renewables cannot produce anything like the amount of energy that the Chinese people need to bring their standard of living to that enjoyed by people living in advanced Industrialized and post-industrial societies. At the same time, the Chinese leadership is far more technologically oriented than the leadership of the United States or Europe.What will appeal to Chinese leadership about MSR/LFTR technology during the next decade is its potential for rapid production in large numbers and at a low cost. Uranium fueled MSRs offer a technology that is almost ready for mas production today.
Thus, the leadership of China is far more open to promising new technology. In addition China has a large thorium supply that comes from its rare earth mines, and so far has not found any use for thorium. The LFTR allows China to kill two birds with a single thorium stone. First it offers a potential source of vast amounts of environmentally clean and safe energy at a low cost, and secondly it allows China to take advantage of an unused resource, which can easily replace coal. LFTR technology has the potential of providing China with abundant energy at a very low cost, and might solidify Chinese economic, cultural and political dominance of the world for a long time to come.
Thus by continuing its commitment to develop LFTR technology, Chinese leadership, either Communist or democratic, will almost certainly assure continued Chinese economic development, whatever short run national economic problems emerge in China.
Historically China has been economically self contained, and although Chinese economic development has focused on international trade, Professor Pettis offers the view that future Chinese economic development will focuse on the growth of internal markets. In addition the Chinese government is under great though largely hidden pressures to clean up environmental problems. Shifting from coal to Thorium would solve serveral environmental problems at the same time. A shife from trade to internal economic grown and increasingf environmental concerns thus point to a rational for thorium energy use as a matter of national policy.
The historic foreign policy of China has usually been to exercise hegemony over its neighbors but to not incorporate them into its empire. In addition, the Chines state has usually defended its territory rather than sought expansion. The present Communist government has acted to insure that traditional Chinese imperial territory remain part of China. The 1949 invasion of Tibet, and the continued Chinese insistence that Taiwan is part of China are evidence of that poi icy, The Chinese Government is also concerned about border defenses, and the 1962 war between China and India was motivated by Chinese desires to obtain defensible southern borders.
Finally China has cooperated with American Nonproliferation policies only when it is in Chinese interests to do so. China has in the past been willing to transfer of nuclear weapons technology and even weapons grade nuclear materials, when the development of nuclear weapons by other states furthered what Chinese leaders viewed as China's national interest. China has viewed India as a potential enemy, and thus its allied itself with another enemy of India Pakistan. China reportedly provided both nuclear weapons design and U-235.
Thus China appears wholly unwilling to adopt nonproliferation goals, that run contrary to its national interests, or the national interests of Allies that it might wish to see possessing nuclear weapons. Furthermore China is unlikely to prefer nonproliferation over national economic or energy policies. To the extent that American policy toward the thorium cycle as a proliferation issue runs contrary to Chinese trade or energy goals, China will be unwilling to give preference to American goals over its own.
Thus if American thorium related nonproliferation policies are contrary to Chinese interest, China can be expected to oppose and even undermine them. China may well regard its own internally developed LFTR as a legitimate trade item, even without proliferation controls preferred by the United States. The United States will have no choice except to adapt its nonproliferation policy to the sort of nonproliferation order that China is willing to accept. China, like India will most likely be willing to support a nonproliferation agreement that embraces thorium, but that order may be quite contrary to current US nonproliferation policy.
Thus both India and China have in the past been notably independent from American nonproliferation policies and goals, and can be expected to maintain that independence. There growing economic power will make that opposition increasingly difficult for the United States to impose its nonproliferation goals on the international community. Both India and China have interests in developing a Thorium cycle nuclear power technology, and it is very likely that any future nonproliferation order will conform to Chinese and Indian policy goals with respect to thorium fuel cycle technology.





