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Monday 15 March 2010
Bubble talk drowns out the champagne music
The bubbly enthusiasm that many analysts express about the Chinese economy reminds me of the old-time US variety show host Lawrence Welk, who banished worries each week with soothing sounds from his “Champagne Music Makers”.
The bubbly enthusiasm that many analysts express about the Chinese economy reminds me of the old-time US variety show host Lawrence Welk, who banished worries each week with soothing sounds from his “Champagne Music Makers”.
China watchers should turn off the music and listen to Premier Wen Jiabao, who has been surprisingly frank in warning that overinvestment and lack of domestic demand are producing an economic bubble in his country.
“The biggest problem with China’s economy is that the growth is unstable, unbalanced, unco-ordinated and unsustainable,” Wen cautioned at a March 2007 news conference during the National People’s Congress. That comment had about as much effect as former Federal Reserve chairman Alan Greenspan’s 1996 concern about the stock market’s “irrational exuberance”.
Wen again voiced concern last week to the NPC. “We still face a very complex situation,” he said, given the twin dangers of overheating at home and the global recession abroad. He pointed to a “precipitous rise” in housing prices in some cities and said that, because of the danger of over-investment, “the launching of new projects must be strictly controlled”.
The rise of China is one of the blessed miracles of modern economic history. But Chinese leaders know they cannot repeal the economic laws of gravity. As the economist Herbert Stein observed decades ago: “If something is ‘unsustainable’, that means it won’t be sustained.” That is surely true with the unbalanced, export-led growth that has powered China’s ascent.
“China’s dependence on export-led growth ... is unsustainable over time,” argues Robert Zoellick, president of the World Bank, in a forthcoming article in the journal The International Economy. He cites a recent International Monetary Fund analysis saying that, for China to maintain its trend of 8 per cent growth annually with the current pattern of trade, it would have to double its share of world exports by 2020. That isn’t going to happen. So the question isn’t whether the Chinese economy will change, but how. The optimistic view is that Chinese leaders will slow the investment and credit boom and, at the same time, make a transition to a consumer-led economy that doesn’t depend so much on exports.
My favourite analyst of bubble economies is David Smick, who predicted the US financial mess in the book The World Is Curved. He notes some worrying statistics: until the global financial crisis, China’s exports represented 43 per cent of its gross domestic product. To make up for collapsing foreign demand once the recession hit last year, China launched a US$1.8 trillion stimulus and lending programme - amounting to about 38 per cent of its GDP. This money was supposed to reach consumers, but Smick estimates that 85 per cent of the subsidised loans went to state-run companies and banks - pumping the investment bubble even larger.
Not to worry, say China enthusiasts: a country with more than US$2 trillion in foreign reserves doesn’t have to worry about debt problems. But those reserves (mostly in dollars) aren’t quite the safety net some imagine, since China couldn’t liquidate them without hurting itself badly, as economist Michael Pettis argues in his blog, China Financial Markets.
China has a larger problem of questionable loans on its domestic balance sheet. Smick notes that US$1.2 trillion of the Chinese stimulus package last year came in soft, subsidised loans. The most reassuring fact about China is that its leaders see the problem and are trying to put on the brakes, ever so gently.
For a country addicted to export-led growth, making the transition to a sustainable economy won’t be easy. People who assume that an ever-expanding China will inexorably replace America as the world economic superpower should take a close look at the numbers.
1 comment:
Bubble talk drowns out the champagne music
David Ignatius
11 March 2010
The bubbly enthusiasm that many analysts express about the Chinese economy reminds me of the old-time US variety show host Lawrence Welk, who banished worries each week with soothing sounds from his “Champagne Music Makers”.
China watchers should turn off the music and listen to Premier Wen Jiabao, who has been surprisingly frank in warning that overinvestment and lack of domestic demand are producing an economic bubble in his country.
“The biggest problem with China’s economy is that the growth is unstable, unbalanced, unco-ordinated and unsustainable,” Wen cautioned at a March 2007 news conference during the National People’s Congress. That comment had about as much effect as former Federal Reserve chairman Alan Greenspan’s 1996 concern about the stock market’s “irrational exuberance”.
Wen again voiced concern last week to the NPC. “We still face a very complex situation,” he said, given the twin dangers of overheating at home and the global recession abroad. He pointed to a “precipitous rise” in housing prices in some cities and said that, because of the danger of over-investment, “the launching of new projects must be strictly controlled”.
The rise of China is one of the blessed miracles of modern economic history. But Chinese leaders know they cannot repeal the economic laws of gravity. As the economist Herbert Stein observed decades ago: “If something is ‘unsustainable’, that means it won’t be sustained.” That is surely true with the unbalanced, export-led growth that has powered China’s ascent.
“China’s dependence on export-led growth ... is unsustainable over time,” argues Robert Zoellick, president of the World Bank, in a forthcoming article in the journal The International Economy. He cites a recent International Monetary Fund analysis saying that, for China to maintain its trend of 8 per cent growth annually with the current pattern of trade, it would have to double its share of world exports by 2020. That isn’t going to happen. So the question isn’t whether the Chinese economy will change, but how. The optimistic view is that Chinese leaders will slow the investment and credit boom and, at the same time, make a transition to a consumer-led economy that doesn’t depend so much on exports.
My favourite analyst of bubble economies is David Smick, who predicted the US financial mess in the book The World Is Curved. He notes some worrying statistics: until the global financial crisis, China’s exports represented 43 per cent of its gross domestic product. To make up for collapsing foreign demand once the recession hit last year, China launched a US$1.8 trillion stimulus and lending programme - amounting to about 38 per cent of its GDP. This money was supposed to reach consumers, but Smick estimates that 85 per cent of the subsidised loans went to state-run companies and banks - pumping the investment bubble even larger.
Not to worry, say China enthusiasts: a country with more than US$2 trillion in foreign reserves doesn’t have to worry about debt problems. But those reserves (mostly in dollars) aren’t quite the safety net some imagine, since China couldn’t liquidate them without hurting itself badly, as economist Michael Pettis argues in his blog, China Financial Markets.
China has a larger problem of questionable loans on its domestic balance sheet. Smick notes that US$1.2 trillion of the Chinese stimulus package last year came in soft, subsidised loans. The most reassuring fact about China is that its leaders see the problem and are trying to put on the brakes, ever so gently.
For a country addicted to export-led growth, making the transition to a sustainable economy won’t be easy. People who assume that an ever-expanding China will inexorably replace America as the world economic superpower should take a close look at the numbers.
David Ignatius is a Washington Post columnist
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