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A Golden Age for China?


Global economic data continue to disappoint. The U.S. is skating on the thin edge of recession, Japan and Mexico may already have made the plunge, and Asian economies are reeling from sagging demand for high-tech goods. Even Europe is fading fast, with German business sentiment at a two-year low.

If there's a bright spot in the blizzard of generally negative news, says economist Chen Zhao of The Bank Credit Analyst, a Montreal-based investment publication, it's the data emanating from China. "The Chinese economy," he says, "appears to be in the early stages of what could be a very potent boom."

China's domestic economy is robust. Consumption is picking up steam, and retail sales are 9% to 10% above year-earlier levels in real terms. (Inflation is flat after several years of deflation.) Low interest rates, wage hikes, and rising stock prices have pushed consumer confidence to record highs.

More to the point, China's private sector, which accounts for over 75% of the nation's output, is thriving. Industrial production is up 20% or so. And while most Asian developing nations are suffering from a dearth of profits, earnings of Chinese private companies have been climbing sharply since early last year (chart).

Major stimulus is coming from foreign direct investment, which has been galvanized by China's impending entry into the World Trade Organization. It topped $40 billion last year, and contracts for new investment projects--which lead actual inflows--are up sharply this year.

None of this is to say that China's economy doesn't face problems. Some observers fear that the government's incomplete reform of the banking system will stymie growth. And many wonder about China's vulnerability to the sharp slowdown in global trade.

On the first issue, Chen is reasonably confident that the worst bad-debt problems have been dealt with. Moreover, the private sector is now reliant mainly on the stock market rather than bank loans as a source of capital.

As for the nation's trade exposure, Chen points out that China's exports are still concentrated in low-end consumer items that tend to hold up even during slowdowns overseas. With labor costs less than 10% of those of Korea and Taiwan, China continues to gain market share from its neighbors and now runs a larger trade surplus with the U.S. than Japan does.

True, China's exports were up only 3.5% in May after running more than 10% over year-earlier levels in prior months. But even if they level off for a while, China should be able to weather the storm--thanks to the stimulus from a massive $68 billion-a-year infrastructure-spending program now underway. If a U.S. rebound starts by the end of the year, says Chen, a new Chinese boom may not be far behind. It wasn't too long ago that the Congressional Budget Office was projecting budget surpluses of $281 billion this fiscal year and $313 billion in fiscal 2002. Forget it. The numbers will be far lower--and not only because tax cuts will reduce revenues by $74 billion this year and $38 billion the next.

The slack economy is shrinking tax receipts, notes economist Susan Hering of UBS Warburg LLC. Both withheld and estimated personal tax revenues are slowing significantly, with estimated payments in June running some 10% below their year-earlier pace.

More startling was the 26% year-over-year June decline in quarterly corporate tax payments on estimated profits. The June drop, notes Hering, was the largest since 1982, suggesting that companies are now taking a larger hit than they did during the last recession.

As things stand now, UBS Warburg believes the surplus could sink to $170 billion or less this year and will struggle to exceed $200 billion next year. Is there a relationship between the rise in abortions in the 1970s and the drop in crime in the 1990s? Not according to Ted Joyce of Baruch College and his new analysis, which questions the results of a controversial study by John J. Donohue of Stanford University and Steven Levitt of the University of Chicago released several years ago.

That study attributed as much as half of the sharp decline in U.S. crime rates in the 1990s to the Supreme Court's 1973 decision legalizing abortion. The authors argued that the surge in abortions among poor, young, unmarried mothers after 1973 affected crime rates a dozen years later by reducing the number of unwanted crime-prone youngsters being born and by freeing up family resources for remaining children.

As evidence, they cited data showing that overall crime rates dropped most in the 1990s in those states whose abortion rates rose most in the mid- and late 1970s. Further, crime rates fell earlier in the five states, including New York and California, which legalized abortion in 1970, before Roe v. Wade.

What Joyce has done is subject the same data to closer analysis. First he looked at the states that legalized abortion in 1970, analyzing the changes in crime rates specifically among teenagers and young adults born in the years before and after 1970. He then compared these changes to changes in crime rates among youths in the states that had not yet implemented legalized abortion--and found no significant difference.

Joyce concludes that the apparent link between rising abortion and declining crime is coincidental rather than causal. The most likely explanation, he says, is that "crack cocaine and its violent spillover effects which exploded in the early 1980s began to ebb in the early 1990s, just as the post-Roe v. Wade kids were entering their teenage years."


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