Is China the Next Bubble?
. . . Japan had its bubble in the late 1980’s, when the Imperial Palace grounds in Tokyo became worth more than all the land in California. Thailand and Indonesia had their bubbles in the mid-1990’s, when speculators and multinationals poured money into what seemed like a Southeast Asian miracle. The United States had its Internet and telecommunications bubble in the late 1990’s . . .Each of those bubbles ended badly, with millions of families losing their savings and many losing their jobs.
As 2004 begins, China’s economy looks as invincible as the Japanese, Southeast Asian and American economies of those earlier times. But recent excesses . . . suggest that China may be in a bubble now, especially on the investment side of the economy.
Bubbles can last years before they pop, but they seldom deflate painlessly when they do. . . The Chinese government is showing concern. In the last few weeks, the central bank has tried to dissuade banks from reckless lending while the government has bailed out two of the largest ones, to prepare them for possible hard times . . . China’s cabinet, has warned that it will discourage further construction of new factories in industries like aluminum and steel, whose capacity has grown swiftly in the last three years. . .
. . . Year after year, China has proved the worriers wrong, although there have been a few missteps along the way, most notably when inflation surged temporarily and foreign exchange reserves withered in the early 1990’s. But even by Chinese standards, things have been moving at a blistering pace of late. Official statistics, which the government tends to smooth so as not to indicate big booms or busts, show that the economy expanded 8.5 percent last year, despite the fact that growth came to a virtual halt during the second quarter because of an outbreak of SARS. According to independent economists, however, the Chinese economy actually expanded at an annual pace of 11 percent to 13 percent through the second half of last year.
Strains are already showing. Blackouts have become a problem in a majority of China’s provinces, as families with new air-conditioners and refrigerators compete with new factories for electricity. . . Most economists specializing in China now predict that sometime this year, growth will have to slow, at least for the investment side of the economy - the building of new factories, for example. That could prove painful. . .
“In China, overcapacity is not an issue that stops a businessman, because they always think they can do better,” Mr. Jaeger said. Domestic and foreign investors alike share that approach. . . The problem arises when too many companies make the same calculation and invest too much. Nearly half of China’s economic growth is investment-related spending, an extraordinary figure that reflects public spending on highways and dams, as well as private-sector projects. . .
China has developed a special disadvantage, in that its economy has become so ravenous for commodities that it is pushing up global prices for products like oil, for which China has become the second-largest market, after the United States. With very low wages and real estate costs, factory managers find that materials are their biggest cost by far, and a sudden jump in their cost can leave businesses with no competitive edge.
. . . Lists of potential causes of a Chinese economic derailment tend to start, and sometime end, with a banking crisis. By plying borrowers with ever more loans . . . laced with corruption and political influence, Chinese banks have wound up with extremely high proportions - as much as 45 percent - of nonperforming loans. The banks rapidly stepped up their pace of fresh loans last year. Exporters, foreign investors and speculators were depositing large sums of dollars. . . with loans rising 21.4 percent last year.
. . . Human-rights groups report a growing number of protests in China, mainly workers and retirees seeking unpaid salaries and benefits. At the same time, many on the mainland are acutely aware of the huge marches organized over the last seven months by democracy activists in Hong Kong, now an autonomous region of China.
Whether any of these forces become significant enough to rattle China’s stability is anybody’s guess. Peaceful change toward a more democratic system may still be possible, especially if it is fairly gradual. But if the economy slows sharply, political instability could follow. That would be a serious problem, and not just for China, but also for the rest of the world