Has China Hit Its Own Wall?
In Saugatuck’s opinion, the situation in China may not be an imminent collapse, but it is certainly one that many economists might find very difficult to understand. But many outsiders (FDI in China is way down) and insiders (flight capital is way up) seem to know that there is something going on here. It is just not very well understood, and it might easily be the beginning of a major shift in the global economy.
Part of what is happening is a real slowdown (although GDP growing at 7.5 percent is not something that we in the US would call “slow”). Nevertheless, the Chinese are masters at masking these things, particularly during a “turnover year,” i.e., every 10 years when the top leaders change and the Politburo gains many new members.
What does undermine the very high GDP rate is the fall in electricity use, in rail shipments, etc. When estimated by the Dallas Fed, GDP in China should probably be 5.5 percent or so. Many outside observers, concerned about record stocks of coal and iron ore plus dramatic cratering of prices for these commodities, think that the actual growth rate should be/go even lower (OECD’s China office). The Chinese manufacturing purchasing managers’ survey has been indicating contraction for about the last 7 months.
The other really scary and most poorly understood part of this is what is happening to the Chinese financial system. Most of us would think, hey, they’re sitting on $3 trillion of assets, how could anything possibly go wrong? Well, many large cities are moving ahead with $200 billion stimulus programs for infrastructure, construction, etc. financed largely by borrowing money from the Central Bank. How many large cities are we considering here? Oh, maybe about 50 to 100, perhaps more. Ah, so we have $5 to $10 trillion or so going into a decentralized, New-Deal like program to stimulate the Chinese economy (an economy roughly 1/3 the size of ours and we had a stimulus of less than $1 trillion). That could wipe out the $3 trillion asset pile real fast.
Does this sound absurd? Well, it might be good to check the news stories to see all the cities and provinces involved. In addition, the Chinese Central bank has started to implement a series of repos, where it purchases bank loans to kind of sanitize the loans for all this pump-priming stuff. Ben Bernanke would marvel at what the Chinese Central bankers are doing in light of all the new liquidity being pumped into the system. In essence, China’s Central bankers are trying to keep a bubble from popping before it really blows up. Repeat after me: If the global economy recovers, all these loans can be repaid and everything will be ok. In simple terms, China is trying to pump up an economy to make sure it keeps looking good. Really pumping!
If you think this is ill-considered, just note that the crisis started in the US and massive unemployment was reversed by spending, rescues and very liberal financial policy – low interest rates not seen since the 1930s. The same type of crisis migrated to Europe. Europe, the US, and much of the rest of the world continued to buy Chinese goods, but in recent years, only the US has kept up. If demand elasticity figures for Chinese GDP today were what they were in 2008, China’s GDP should be near 0.
But China has kept growing at significant rates until now. Yet, trade with all of Asia and the BRICs is way off, and the Chinese role as the cog in the great wheel of international commerce – trade and finance – is coming unstuck. [Editor’s Note: See 23 Aug 2012 article in the New York Times entitled “China Besieged by Glut of Unsold Goods” – http://nyti.ms/PJbW4i].
It is hard to know where we will end up if the Chinese domestic economy keeps slowing down, plants declare bankruptcy and close, bad debts mount in Chinese banks, the real estate bubble pops and consumers have less to spend. Meanwhile, visions of “soft landings” dance in our heads. But it also might be constructive to consider that we could be witnessing the end of a long ascent of China to becoming the second largest economy in the world. An economy hobbled with a government that can’t admit there is an uncontrollable economic crisis at hand; a government oblivious to the harm of continuing to string out a crippled financial system that supports a manufacturing base that chokes if it isn’t the center of a vast global network of production.