All eyes are on China, watching whether the economic giant with $3.4 trillion of forex reserves will step up to bail out Europe. On the other hand, China faces major internal challenges despite such cash-pile with predictions that it may trip?and if so, how hard will be the fall.
Many stories have stoked such anxiousness. The IMF, in a report based on stress tests of China?s 17 biggest state-owned lenders conducted with Chinese regulators, said, ?Despite ongoing reform and financial strength, China confronts a steady build-up of financial sector vulnerabilities.? China?s economy cannot grow as it has in the past decade at 9-10% a year. China?s National Bureau of Statistics (NBS) shows that GDP growth rate has fallen to 9.1% in the third quarter, down from 9.7% in the first quarter and 9.5% in the second quarter of this year. According to Chinese Academy of Social Sciences (CASS), China?s annual average growth rate is likely to slow to between 8% and 8.5% in the next decade, while expecting the country?s annual trade surplus to account for less than 2% of its GDP this year.
The debt crisis in Europe with Italy and Greece on the verge of bankruptcy, Japan recovering from March 11 tsunami and America still recovering compound such fears?the largest export markets have shrunk. China?s CPI index (consumer price index, a gauge of inflation) is still over 6% after reaching a high of 6.4% year on year, earlier this year. People are already feeling the squeeze of rising food prices and there is anger?recent spate of riots centred on such discontent.
Much has also been said about China?s demographic time bomb (due to its one-child policy) as its dependency ratio (ageing population) is expected to reach 40-50% in the next two decades. China?s second generation of migrant labour (born in the 1980s and 1990s) who constitute the bedrock of China?s cheap labour force are increasingly aspiring for better wages and living conditions. It appears that China has arrived at a Lewisian turning point (wages rise when surplus tapers, i.e. the era of cheap labour is over). Minimum wages have been adjusted twice in 2010 and 2011.
Take the downside, beginning with the Wenzhou dream (a place in Zhejiang province where manufacturing firms have ?developed from below? through a self-organising process; consequently, entrepreneurs have earned the sobriquet ?Jews of China?) going bust. Media has drawn attention to ghost-cities in China?s lesser-known provinces such as Kangbashi in Inner Mongolia province?a spanking new city of sky-rise, shiny infrastructure but virtually a ghost town of unoccupied, empty spaces?largely because of a combination of reasons: speculation or investment, owning of multiple properties or even because the process in itself was to create jobs rather than a real need for housing in such locations. This phenomenon is also increasingly noticeable in big cities such as Shanghai, where the evening lights reveal vacant apartments, despite the troops of security guards that man them. According to reports, this reaches almost 20% in real estate projects.
China?s credit-fuelled investment-led growth has spearheaded infrastructure growth and real estate among others. But the vicious cycle and nexus of land-alienation/developers/real estate boom cuts a familiar story?and one that we in India can relate to. Today, prices have cooled after the government launched what has been called ?New Deal? (fangdichan xinzheng) so as to prevent speculative buying, putting brakes on second ownership of property and banks raising down payment. Today, stories of real estate going cheap and fluctuating prices have apparently enraged previous buyers (who bought apartments at a premium not long ago) to riot. The government has taken an unprecedented step of flagging of low-cost housing (subsistence housing or baozhangxing zhufang) as well as introducing a trial property tax in Shanghai and a few other big cities for the first time.
The manufacturing dream (? la Wenzhou) has also considerably unravelled. A couple of years ago, I had visited the famous Anji County (Zhejiang province, where Crouching Tiger, Hidden Dragon had been filmed). Surely enough, besides the Hollywood stamp, the county was bustling with clusters (spatially concentrated networks of small- to medium-scale enterprises with localised industrial networks) humming with economic activity. Anji?s deputy county head, a remarkable woman called Ye Haizhen, took pride that clusters in China such as in Zhejiang were the stars of China?s success?that manufactured everything from ties to T-shirts, underwear to outwear, baskets to bags ? and mostly for the export market. Ye Haizhen would not have foreseen that, as China Briefing notes its shipment growth to Europe has more than halved from 22% to 9.8% today. Sinologist Chen Shaofeng points out that the producer price index (raw materials) has also touched a high from 1.7% (December 2009) to 7.5% in July 2011.
Understandably, there is a lull in Wenzhou?s estimated 2,000 enterprises, symptomatic of the fact that exports have slowed down. The orders have turned a trickle, leaving enterprises and entrepreneurs in places like Yiwu (a large wholesale market in Zhejiang, popular with Indians), Anji and Wenzhou in the red. Banks have favoured state-owned enterprises (SOEs) over the clusters. Many of the smaller entrepreneurs who had borrowed from the networks of informal financing, that sinologist Kellee Tsai terms ?back-alley bankers? (banias of India) at high rates of interest, ranging from 6% interest a month to 200% are now absconding with unpaid employees and ballooning debts?in short, the so-called boomtowns are tottering.
According to economist Sarah Tong of the National University of Singapore, enormous bank lending has helped China weather the economic downturn. Tong notes that the new loans of People?s Bank of China in 2009 amounted to RMB 9.6 trillion, almost doubling that of the previous year, and, in the first half of 2010, the Chinese banks further extended credit totalling RMB 4.6 trillion, around 61% of the annual target set by the regulators.
Martin Wolf of the Financial Times has alluded as to why China could yet fail like Japan, pointing out that investment has grown faster than GDP. Wolf notes that from 2000 to 2010, the growth of gross fixed investment averaged 13.3%, while growth of private consumption averaged 7.8%. Over the same period, the share of private consumption in GDP collapsed from 46% to a mere 34%, while the share of fixed investment rose from 34% to 46%. If this has to reverse, Wolf says the growth of investment must fall below that of GDP?which could translate into less jobs, tighter control over credit?and people could feel the pinch.
On the positive, none of the 30 eminent economists polled globally recently by Reuters foresee an imminent collapse. This appears to be a good opportunity for China to restructure its economy and trim its financial sector. Sarah Tong?s measured assessment is that not only banks and regulators have been acting promptly, but also China?s fiscal revenue is strong relative to the size of the problem. The rate of non-performing loans (NPLs) stood at 1.4% by the end of the first quarter in 2010. China?s financial sector suffers from the weakness of the party being the state and the state being the party?hence loans without credit appraisal or collaterals turn into NPLs.
Tong notes that China?s fiscal revenue has grown at an even pace, resulting in a rising share in the total GDP, from around 12% in the mid-1990s to around 20% in recent years?which has enabled the government to deal with risks associated with Urban Development Investment Vehicle (UDIV, de facto means local government) borrowing and reform the financial sector. Tong also notes that recent recapitalisations by some banks also helped in covering the capital holes created by the credit surge.
According to China Daily, the government has a gradual broad-based easing policy on the anvil. There is no doubt that boosting internal consumption will be a priority?with measures such as export tax and higher minimum wage already being implemented. There are further proposals to cut taxes and give the businesses in the red (such as in Wenzhou) a helping hand, following Wen Jiabao?s high-profile visit to Wenzhou. Analysts such as Wang Jian (a researcher at the National Development Reform Commission) say, ?If the economic slowdown is more serious, China will probably cut interest rates or roll out new stimulus packages worth trillions of yuan.? Economists at Barclay Capital have said that banks may cut the required reserve ratio (RRR), predicting, ?an RRR cut for smaller banks could happen first.?
Fortunately for China, domestic demand remains strong. According to China Daily, industrial production remained upbeat with a 13.8% increase from a year earlier, retail sales are buoyant with a year-on-year increase of 17.7% this September. Areas such as the Pearl River Delta region have already started to flag off reform aimed at regional integration with an eye on boosting internal demand.
So, despite major challenges, it appears that China will be able to manage the slowdown in the short term.
The author is a Singapore-based sinologist and is currently visiting fellow, Institute of Chinese Studies, Delhi. Views are personal