Anyone who has watched China for the past few years could see a bubble in the making.But how messy and damaging will the bursting bubble be—inside China and out?
Probably not as disastrous domestically as might be expected because China’s leaders have been reading the tea leaves properly and taking anticipatory action to avert the kind of sudden, deep recession that would immediately cause widespread social and political unrest.
What would a China slowdown mean for the rest of us? In the main, three things will become evident.
- First, China will remain committed to letting its currency, the yuan, rise in international foreign-exchange markets. A stronger currency will encourage companies to rely less on exports and more on goods and services consumed domestically.
- Second, Chinese products will no longer be the cheapest on the shelves in years to come because China’s inflation rate will rise along with its wages. This is natural when any nation climbs a rung on the development ladder, which is what China is now doing.
- Third, the Chinese market for raw materials and heavy equipment—cranes, bulldozers, factory machinery—will slow. This will occur directly in line with the slowing of average GDP growth rates. Imports for the third quarter were $155 billion, a 21 per cent increase from the year earlier, but that is down from a 30 per cent gain in the corresponding quarter of 2010.
In fact, a deceleration is already happening. The latest in a parade of figures issuing from the National Bureau of Statistics in Beijing, made public earlier this month, show that year-to-year economic growth is slightly cooler for the third consecutive quarter.
It was 9.1 per cent for the July-to-September period, down from 9.5 (year-to-year) in the second quarter. In the face of this trend, the International Monetary Fund has just lowered its China forecasts. The fund now anticipates GDP expansion of 9.5 per cent this year (down from 9.9 per cent in 2010) and forecasts 9 per cent for 2012.
These figures represent the softest of landings, of course. No one is warning of a loud crash for the Chinese. But as the past few weeks have made clear, China will be riding to no one’s rescue in coming years.
A large part of this picture is the result of recession in the West and China’s other important markets. China’s global exports for the third quarter grew 17 per cent, to slightly less than $170 billion. Again, it is healthy expansion, but it is also down from year-to-year growth of nearly 25 per cent in the corresponding quarter of 2010.
Beneath these figures lies a shift that is more important than any quarterly numbers might indicate. China has begun to wean itself from an economic model that was effective for 30 years—since its reform period began in 1980. But it was never destined to be eternally sustainable.
In essence, China during the Deng Xiaoping reform period adopted an economic strategy the rest of Asia used (greatly to its benefit) for much of the Cold War period. It rested on a few simple tactics: Keep credit cheap (and investment levels high), wages down, and the currency’s value low against the dollar. Oh, and export your way into double-digit GDP growth.
It has worked, almost to a fault. Last year the Chinese consumed only a third of what they produced; investment was an unusually high 50 per cent of GDP. Both of these figures represent a seriously skewed economy.
To put it simply, the Chinese are not consuming nearly enough of what they are producing, and credit has been too readily available to companies that may or may not qualify for it in a more balanced economic environment.
There have also been costs. An over-dependence on export markets, which is now obvious, is one. Environmental degradation is another. Anyone who has visited China even briefly knows that in industrial cities such as Shanghai, Beijing, and many others along the manufacturing belt on the Pacific Coast, air and water quality have reached the point where they are barely tolerable. Not surprisingly, protests in favour of a cleaner environment and better working conditions are sharply on the rise.
Increasing production costs and unsustainable levels of debt are another problem. The Financial Times recently reported that more than 90 factory owners have already abandoned their investments as large, cheap loans come due and sales drop because of diminishing global demand. And this is taking place while growth is still above 9 per cent yearly.
In short, China has been moving too quickly. The export-led model was popular in Asia for decades because it almost always produces unusually fast growth. But it makes nations that adopt it too vulnerable to external conditions and too prone to social and political unrest. We’re seeing shades of both in China today.
What is to be done? Beijing made this clear in the five-year-plan it unveiled last spring. It is reducing the supply of cheap credit and allowing wages to rise—the latter by more than 20 per cent a year in some areas. It is also dedicating the period from now until 2015 to turning the economy “green” and spreading industrial activity to rural areas to balance the growth geographically and raise incomes outside the main industrial belt.
What is expected to emerge from this is an economy less dependent on exports, less reliant on unsustainably high growth rates to maintain social and political stability, and able to consume more of what it produces instead of exporting it. As this new model takes hold, many private-sector economists expect growth in China to settle at around 8 per cent or even a little less during the current five-year plan.
A pessimist might say that the party’s over in China. The world will no longer live on the advantages of its export-led growth model. What is going to emerge in coming years is a more stable country, one less given to bubbles, hot money, shabby investments, befouled cities, and all else that goes along with an overheated developing economy. A more democratic China is another likely outcome, because the leadership will be less dependent on sustaining ridiculously high growth rates to maintain stability. In the end we will all be the better for the China that is to come.