Gordon Chang is not short on opinions about China's future, both economically and politically.  Speaking at the Cambridge House Investment Conference in Vancouver, Chang offered his opinions to Metals News after his debate with Frank Holmes. 

The future of China's economic and political status is critical to the global outlook.  Said Chang, “Frank has a more optimistic view about what is going to happen with China.  I have a more realistic view.”  Chang believes that China has recently hit a point at which there is beginning to be a shift.  He said, “I think the Chinese economy is really at an inflection point.  After 35 years of virtually uninterrupted growth, I think we are basically seeing the end of the upward cycle and the beginning of a downward super cycle.”  The result of this perceived shift is that China will begin to see additional challenges in the years to come.  Said Chang, “It is going to be a very difficult time for Chinese leaders as they navigate their way through this because essentially for the last 35 years, they have been propelled by a lot of trends.”

China's economic leadership has been a result of following global economic trends.  Said Chang, “Those trends either no longer exist or they are disappearing very fast.  For instance, the country is no longer reforming.  As a matter of fact, it is worse than that.  On balance, we see the reversal of reform.”  Another contributing factor to the change in China is world opinion and industrialization.  Said Chang, “China is no longer in this benign period of industry where countries wanted to integrate China into the system and therefore were tolerant of its mercantilist policies.”  Other changes are internal.  Chang said, “Now, of course, it is the end of China's demographic dividend.  We are seeing the workforce start to level off in a year or two and we can see the country start to level off in perhaps as few as eight years.  These are going to create real difficulties for the Chinese leadership.  So, going forward they are going to have to succeed in spite of trends, not be propelled by them.” 

Preventing the necessary changes to adapt is China's antiquated political views.  Chang said, “They are running into a historic political transition, so I don't see them taking the steps that are necessary to either transform their economy – either long-term steps or short-term steps.”  The political situation is causing challenges for their economy as well.  Said Chang, “When you step back and look at it, China has to balance its economy.  It is the most unbalanced in the world where the rule of consumption is under 30%.  That is the lowest rate in the world.   They need to move toward consumption and away from investment.  That's a big thing to do.” 

All of these factors have led Chang to believe that last September was a turning point for China's economy.  He said, “Since the end of September, a lot of the indicators are showing that the economy is starting to falter.  They haven't really done very much [to respond to global challenges].  What is really interesting is that in 2008 they reacted very fast to the global downturn.  Now they are reacting much more slowly.”  Chang believes that there are real reasons that China is slow to respond.  He said, “I think it is probably a result of two things:  One is the political transition, and second of all, they don't have the same flexibility they had in 2008 because their banks are not in good shape.  They have high inflation and they have other dislocations and imbalances like the property bubble that they have to navigate themselves around. So, I think they are in a real difficult situation right now.”   

One area that is really hampering China's economy is their focus on infrastructure.  Said Chang, “They have definitely been overbuilding.  In 2010, in the middle of the year, the State Grid reported that there were 64.5 million apartments that showed no electricity usage for six consecutive months.  That is an unprecedented  amount of housing for 200 million people.”  Despite the glut of housing units, construction has continued.  Chang said, “At the same time, government units and developers were building another 40-50 million units.  They have all these ghost cities.  How are they going to build any more?  That's really a problem, because yes, they can continue to build, but eventually this money has to be paid back.  They just have so many problems to deal with before they get to that point.”  

Chang believes there is an easy explanation to China's problems.  He said, “The real problem is the deteriorating economic fundamentals.  We have deteriorating economic fundamentals in countries across the world.  The problem is that China's political system is unstable.”  There are new trends in politics that are staggering.  Said Chang, “In 2010, there were somewhere between 180,000-280,000 protests.  That is up from the 60,000 we saw five years ago.  It is not just the number of protests, but their increasing volatility.  They've been much more violent.  So it's not just the number, but the volatility. We are starting to see little riots, insurrections and bombings.  The political system is having trouble mediating social discontent.  You put that together with a deteriorating economy and you have a real problem.”

The instability is due to many factors including rising expectations from the citizens – the Chinese people want justice more than anything else.  Unfortunately, the Communist party is not willing to give in, which is adding to the conflict.  Chang said, “It will be reconciled in favor of the people.”

Change is clearly on the horizon.  In November and December, China's foreign reserves declined by 92.7 billion, the first quarterly decline since 1998.  Eventually, Chang believes that this will weigh on commodity prices, though not in the next few months.  China is currently stockpiling copper, iron ore and other supplies, but that will have to stop at some point.  In addition, tensions over solar technology with the U.S. will have to be reconciled.  According to Chang, the bottom line is, “After 35 years of uninterrupted growth, they hit an inflection point in September.  We are going to see a very different Chinese economy in the future.”