Christian Science Monitor weights in on China bubble

Gordon Chang, author of “The Coming Collapse of China“, published in 2001. The book predicted the China would collapse by around 2005, or perhaps as late as 2010. He predicts that widespread unemployment, government corruption, inefficient state owned enterprises, and a lack of leadership would lead to the undoing. Publishers Weekly comments:

His invocations of the “power of the Chinese people,” or of an imaginary individual who will one day “end the Chinese state as it now exists,” read more like political soap opera than judicious analyses.

One of the Amazon commenters summarized Mr Chang’s POV as:

“The Coming Collapse of China” is an angry book written by the son of a man who “left China before the end of the Second World War and [the son] grew up hearing him say that Mao Zedong’s regime would have to fall.” The son returned to China to work as a lawyer in Shanghai. When he wrote this book – his first – it was a polemic in which he pounded away at the evils of Communism and predicted that Jiang Zemin’s regime would have to fall.

The Christian Science Monitor published Mr Chang’s “China: the world’s next great economic crash” article in the Opinion section this week. The truth is probably somewhere in between the current China Euphoria (rise of China is story of decade) and Mr. Chang’s China Collapse POV. For the record, I’m optimistic that China will be in a very strong position by 2050, with living standards in the largest cities (Beijing, Shanghai, Guangzhou) at parity with Taipei and Hong Kong. However there is a massive asset bubble in China that is hurting all but the wealthiest 0.5% (85% of families can’t afford basic housing). 40% of local gov’t revenues come from land sales (Professor Chovanec) and current GDP growth is fueled by real estate development.

The following is an [objective?] look at the current China situation:

Beijing, ignoring advice from Washington and other capitals, did not in the boom times try to restructure its economy to favor consumption. Instead, the Chinese government sought to take maximum advantage of then-surging foreign demand. The role of consumption, therefore declined – falling from a historical average of 60 percent of the economy to about 30 percent last year. No country has a lower rate.

To make up for slumping demand abroad and sluggish consumer spending at home, the State Council, the central government’s cabinet, announced a stimulus plan in November 2008. Beijing originally said it would spend $586 billion through 2010. In the first full year of the program however, it has directly and through state banks disbursed about $1.1 trillion in stimulus funds.

The plan, not surprisingly, is creating gross domestic product, but growth is an artificial “sugar high.” For one thing, Beijing’s stimulus spending last year was around a quarter of the total economy. Now, perhaps as much as 95 percent of China’s growth is attributable to state investment, as a Chinese analyst noted recently.

Despite the massive state spending, the country’s economy is not particularly robust. Power consumption statistics, a crucial indicator of economic activity, show the economy expanding at only two-thirds the announced rate.

Moreover, essentially flat consumer prices last year belie official reports of roaring retail sales. So does the full-year 11.2 percent decline in imports, another sign of sluggish domestic demand. And if the economy is really growing by double digits, why is Beijing insisting on continuing its stimulus?

New York Times columnist Thomas Friedman, however, thinks none of this will be a problem. Arguing that China is not the next Enron, he gives this advice to Mr. Chanos: “Never short a country with $2 trillion in foreign currency reserves.”

Yet Beijing’s record-setting reserves – now $2.4 trillion – are essentially unusable for this purpose. Why? China’s leaders need local currency, the renminbi, to deal with domestic needs. If they convert reserves into renminbi, they will cause the currency to zoom up in value and choke off the critical export sector. Foreign reserves have only limited uses in domestic crises.

Second, the state’s stimulus plan is taking the nation in the wrong direction. It is favoring large state enterprises over small and medium-sized private firms, and state financial institutions are diverting credit to state-sponsored infrastructure. Over the past three decades, China’s economy has expanded at an average annual rate of 9.9 percent because of the private sector, but now Beijing is renationalizing the economy with state cash.

Third, Beijing’s flooding of state enterprises with government cash will undermine their competitiveness, as a similar tide of money severely damaged Japan’s corporations during the bubble years.

Japanese managers discovered they could make more money managing cash than from anything else, and they therefore neglected their underlying businesses. Essentially the same thing is happening in China.

20 thoughts on “Christian Science Monitor weights in on China bubble”

  1. ????????????? : ?????????????????????????????????????????????????? ( ????? ) ?????????????????????????????????????????????????????????????????? ???????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Leave a Reply

Your email address will not be published. Required fields are marked *