If economic success is leading the country to more open, enlightened behavior, Shambaugh doesn't appear convinced that it has stuck. He is troubled by the leadership's regular anachronistic parade of advanced weaponry, its censorship of President Obama during his recent visit, its harsh treatment of dissidents, its unhelpful posture in climate control discussions in Copenhagen, its inadequate help in curbing the Iranian pursuit of nuclear arms, its open fight with Google and, finally, its reliance on a dollar-linked currency, which has unfairly tilted global trade in its favor. This is fueling adoption of retaliatory trade tariffs and anti-dumping duties between the U.S. and China. According to Shambaugh, Chinese relations with the European Union, India and even Russia are suffering as well.
Does any of this worry Malkiel?
"Certainly," he says. "In terms of asset prices, when anything grows fast, bubbles occur." But China has had real estate bubbles in the past, he adds. "The country is going through intense urbanization, and I think that real estate bubbles are more likely to be temporary as migration and increasing wealth catches up with where jobs are being created."
China has also known banking crises. Since many borrowers and banks are partially state-owned, officials have simply forced banks to keep lending to financially broken companies rather than restructure or close them, which would throw thousands of people out of work.
This sends the number of nonperforming loans soaring. When banks' balance sheets deteriorate, the government does what governments all over the world do: They bail out their banks without necessarily addressing the underlying problems. The Chinese government can do this because the costs, relative to GDP, are small. "The Chinese are, however, slowly shutting down the poorest state-owned businesses," Malkiel notes.
The Princeton professor does question the smoothness of the Chinese economy's high annual growth rate of nearly 10%. He cites anecdotal contradictions: a disconnect between automobile production and gasoline sales, and another between power generation and GDP growth. And there is competition among local governments to meet imposed growth goals-so much so that it's doubtful the results always are what these governments say they are. "But even if one doesn't completely trust the numbers," says Malkiel, "visiting Shanghai every year tells you that something quite real is happening."
He thinks Beijing has to alter its export-led growth policies for both geopolitical and economic reasons. China's trading partners are waking up to the internal costs they're paying for such trade imbalances. China could have the largest consumer market in the world, Malkiel says. But consumption has been stuck at under 40% of GDP for the past decade. In the U.S., the ratio is about 70%.
Consumer demand in China is so low because there are virtually no government safety nets. Workers need to save. And the one-child policy makes it very difficult for children to adequately care for their parents.
What worries Malkiel most is the divide between the haves and the have-nots. "There are seismic income gaps in China, especially between the affluent east and the impoverished central and western regions." This has already led to unrest, and the potential for instability is great. "But this is why the government is developing infrastructure, education and a nascent social safety net," observes Malkiel.
As for China's future, Malkiel thinks columnist Thomas Friedman of The New York Times said it best: If you think education, hard work and the worth derived from human capital will determine who the big winners are in the coming century, don't be so quick to sell China short.
"Even if we are in a bubble now," says Malkiel, "the Chinese economy will not collapse. It will correct, and then restart because of the strength of the underlying story."