China’s Growing Economic Crisis

By William Pesek
Aug 30, 2012

Policy makers around the world have long envied China’s ability to get big things done. A huge 4 trillion-yuan ($630 billion) stimulus plan as the global economy cratered in 2008? No problem. Marshaling banks to lend trillions more? Check. Enacting sweeping regulatory changes at a moment’s notice? You bet.

Ahhh, the good old days. Now, a once-in-a-decade leadership shift is getting in the way of the stimulus-happy policies to which investors became accustomed. The nimbleness that helped China steer around the worst of the global crisis is confronting political paralysis of the kind more often seen in Japan, Europe and the U.S. The upshot is that China’s 7.6 percent growth rate may fall more in the next 12 months than anyone expects.

It’s not that Wen Jiabao doesn’t get the extent to which the supposedly unstoppable China has hit a wall. Just as in 2009, the premier is visiting key industrial cities such as Guangdong and Zhejiang. Wen is facing dour looks from manufacturers surrounded by mounting piles of unsold goods, a rare experience for the main engine of China’s economic rise.

Factory warehouses are cluttered with excess stock, store shelves are filled beyond capacity, and dealerships are choked with cars that used to speed from showroom to road. And yet Wen’s team in Beijing has been eerily silent about how it plans to revive things. That may be because the short answer is, it doesn’t.

Obvious Ways

One problem is that China has run out of obvious ways to kick-start its $7.3 trillion economy. It was easy in 2008: Pump tens of billions of dollars into a sweeping stimulus project and 10 percent growth followed. China’s success gave markets the impression that its leaders could wave some magic wand and growth would be the result.

Magic is in short supply now. Local governments are cash- strapped and awash in debts that could turn bad. The euro zone seems locked into permanent-crisis mode while the U.S. is bogged down with debt, economic stagnation and political paralysis. China proved it can live for a few years without U.S. and European customers, but not forever.

The bigger topic is politics amid this year’s leadership shift. Instead of tackling the issues of growth and economic reform, officials are punting on big decisions. As such, we are now officially living in the “G-Zero” era that Ian Bremmer, the president of Eurasia Group in New York, described in his new book “Every Nation for Itself.”

At one time the weaker links within the Group of Seven nations were supported by the others. Those days are gone and now that China is sputtering, the G-Zero reality is upon us and manifesting itself in disturbing ways.

Take Asia’s surge of nationalism. Political scientists have loads of theories about why China, Japan and South Korea are suddenly at loggerheads: bad blood over World War II, energy needs, designs on controlling the Asian seas, the power vacuum left as the U.S. focused on two intractable wars. One theory that deserves more attention is how these countries deflect the blame for troubles at home.

In Japan, Prime Minister Yoshihiko Noda is spectacularly unpopular after raising taxes and restarting nuclear reactors that were shuttered following last year’s earthquake. Playing up territorial disputes allows him to change the subject and throw a bone to Japan’s influential right-wingers. In Seoul, President Lee Myung Bak has been embarrassed by corruption charges against his family. Fanning popular anger about South Korea’s status in Asia has shifted the national dialog.

The same strategy prevails in China. Unwelcome headlines focus on the widening gap between rich and poor, the Bo Xilai scandal, and charges that China fudges economic and pollution statistics. Turning the public’s attention to China’s former colonizers has been a political winner.

Asia’s Loss

The loser in all this is economic cooperation in Asia. (MXAP) Also on the losing side is vital economic change in China. Over the last decade, Wen and President Hu Jintao produced rapid expansion, but few of the structural reforms China needs for balanced growth in the decades ahead. State-owned enterprises and banks are more dominant than ever, producing huge misallocations of resources and priorities. Meanwhile, no effort has been made to build a market that promotes domestic consumption.

Rather than retool the economy, China is content to rely on the old fast-growth, export-driven model. The trouble is, the Wen-Hu era lulled markets into counting on the constant injections of stimulus spending that gave China a unique, yet unsustainable, foundation. If China isn’t a gigantic bubble economy, it’s one made up of many smaller bubbles — property, stocks, exports. These are the result of spending-induced growth and imbalances that might breed trouble down the road, including inflation and a bad-loan crisis.

Traders looking for another dose of stimulus are expressing their disappointment that none seems forthcoming. The Shanghai Composite Index (SHCOMP) is down 13 percent so far this quarter. Those declines may accelerate as China’s leadership transition distracts lame-duck officials from giving markets their fix. The same goes for a world economy more devoid of growth engines than ever.

  1. #1 by sheriff singh on Saturday, 1 September 2012 - 11:11 pm

    ‘….State-owned enterprises and banks are more dominant than ever, producing huge misallocations of resources and priorities. Meanwhile, no effort has been made to build a market that promotes domestic consumption. …’

    Sounds like what Najib and BN are doing too. This article has considerable similarities with what is happening in 1Malaysia.

  2. #2 by yhsiew on Sunday, 2 September 2012 - 1:27 am

    ///Factory warehouses are cluttered with excess stock, store shelves are filled beyond capacity, and dealerships are choked with cars that used to speed from showroom to road.///

    This is the price to pay for fast-growth, export-oriented economies (including Malaysia) which want to get rich in a short span of time.

    In the wake of rapid globalization, world economies are getting more and more intertwined and inter-connected. Should any of the economies falter, it will have serious repercussions on others. Hence, there is little wonder that the once envied China economy is weighed down by faltering economies of the West.

  3. #3 by raven77 on Sunday, 2 September 2012 - 4:15 am

    Maybe China needs the New Economic Policy more then Malaysia….that way …gap between rich and poor kept at narrow levels…ha ha …fat hope…..the real truth is it needs to get back being communist rather then more capitalist then the US or even Hong Kong…..

    Despite being communist, it doesnt have socialist policies to take care of its poor…..

  4. #4 by PoliticoKat on Sunday, 2 September 2012 - 11:25 pm

    Warning signs from China.

    What is Malaysia going to do about this? I believe all Malaysians should brace for another recession.

  5. #5 by waterfrontcoolie on Sunday, 2 September 2012 - 11:46 pm

    I think the Western Press, including TVs are all ‘praying hard’ for any Asian economy that may challenge US or EU to fail! They think the Creator has given them the roghts to be sucessful! How often have the US concluded that the housing bubble in China will implode? When it is a fact that Americans borrowed 110% of the housing loan before moving in and the Chinese have to pay 20 to 50% down payment! Anyway with their reserves all in US$ or Euros, it is better spent building houses rather than blindly spending it on bombs. Although should China drops in trade, we too will be affected as our trade with China is big and growing, in fact our Asian trade is much larger than the rest of the world. With such a large population, indeed even Mao and Deng told told the west, well we could send some to you, if you insist on giving them your kind of freedom! No doubt with population like China, India, Indonesia, Pakistan or Bangldesh, feeding the population will always be an issue. In our case, it had been wantonness on the part og the Gomen over the past 30 plus years; nothing more! With Change, we will be trailing many more countries by 2020!

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