The Mother of All Bubbles?

When Prime Minister Wen Jiabao trotted out his litany of promised reforms to the annual rubber-stamp parliament in early March, they reconfirmed growing suspicions of the Chinese economy’s fragility. Now more veteran observers are joining that little band [including this writer] who has predicted an implosion of the jerry-built system. Granted that some of us have been saying it for several years. But like most human and economic events, not only when but what would trip such a crash is rarely predictable [as was the case for the U.S. credit markets implosion].

Wen characteristically predicted the gross national product would grow by 8%. That is the magic number Chinese leadership – shorn of any other raison d’etre for the regime except rapid growth – has pulled out of the hat. Chinese and foreigners conventionally accept it as the minimum necessary to provide additional employment to ward off social instability. But like all GNP figures – but especially in China where “creative accounting” is a highly developed art form – it has limited validity.

I remember accompanying Prime Minister Jawaharlal Nehru many years ago to the old undivided Bihar, among India’s poorest states. Nehru, surrounded by thousands partaking of his darshan [“spiritual enrichment”], often oblivious to his stream-of-consciousness monologue, made a startling admission. He could not understand, he said, why he saw such poverty in Bihar while the per capita GDP statistics showed it one of India’s richest states. Common sense gave you the answer: Bihar by then already had India’s giant new steel mills. [Nehru called them “our modern temples”.] Not only was their product exaggerating the local per capita income count but its workers were recruited elsewhere nullifying benefit for local subsistence farmers and tribal hunter-gatherers.

Today China’s huge growing inequalities which Wen as always promised to eliminate are a function of what remains a still largely government-owned and mismanaged economy. Experts may argue over the extent China is an export-led economy. But three-quarters of those exports are from multinational companies assembling imported Taiwanese, Japanese, South Korean and other high value components. While producing jobs, they contribute minimally to the livelihood of most Chinese. For despite the vast migration into the cities – which regime policy rationalizes as strategy since it has no solution to a rural, agricultural sector it has shortchanged for more than two decades – no respite is in sight for growing regional and class disparities. And the highly publicized “Gucchi culture” of the coastal cities – increasingly the world’s largest market for luxury goods — represents only a small proportion of 1.3 billion Chinese.

Fewer world mainstream media maven are still pushing the idea Chinese growth would save the rest of the world from the continuing ravages of a universal recession. Since last fall when Beijing announced a somewhat bogus huge half trillion stimulus package [almost half was already committed funds to infrastructure projects decades out like the South-North Canal], there had been that hope. But the highly celebrated increase in intra-Asian trade depends on ultimate markets in the U.S. and the EU – both now deflated with stagnating if not increasing unemployment. China does rally the world commodities markets with energy and ore purchases albeit only as its steel inventories grow. [Beijing’s inexperience in negotiating with oligopolies is part of that mix.] Its vast foreign exchange holdings appear an unparallel asset – until it’s recalled they represent, largely, U.S. debt as counterpart for Chinese currency circulating in a rigidly protected and therefore limited consumer market.

After almost six months with foot on both gas and brake, Beijing has decided to slam the brakes, unable to “sterilize” stimulus funding even with the help of Chinese housewives’ phenomenal high household savings.

Not only are there signs of inflation, but the four major commercial banks – under political pressure from the semi-bankrupt State Owned Enterprises – were again tossing out vast loans likely never to be repaid. Instead of producing higher consumption over a broader market, estimates had 20% of the additional liquidity going into stocks despite unjustified dividend ratios. Real estate – including one infamous whole city in Inner Mongolia – for various reasons goes unsold and unoccupied. Like glorious Beijing Olympics white elephants, new skyscrapers were added to already untenanted silent towers a decade old in Shanghai’s Pudong “financial” district. Millions of motorcars have been sold with large government subsidies – but the cost of their operation including increasing imported energy is a calculation Beijing’s planners will soon have to face.

For all the talk of “capitalism with Chinese characteristics”, the economy remains run top-down in ghost-like Soviet fashion. True, the small private sector, even with its limited access to capital, produces most new jobs. But they are dependent largely on foreign markets which have not yet, and may not for the foreseeable future, return to their former glory.

Hang on for the Chinese to be mugged by reality. And the impact will hit its Asian trading partners hard too with unanticipated consequences for the West.



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