Another one for you Mr.TJ
China's economic storm clouds gather
MARCUS GEE
December 12, 2007 at 6:07 AM EST
Jim Walker may be Asia's biggest killjoy. As others rush into the big China party, he stands by the door like the Ancient Mariner telling tales of woe. Or potential woe, anyway. Sure, China is going great guns now, but can the boom that is shaking the world really last? Mr. Walker, a hard-headed Scot who watches China from his skyscraper perch above Hong Kong harbour, has his doubts.
"There's a love affair with China just now in global financial circles," he said when I met him recently in the offices of Credit Lyonnais Securities Asia, where he has worked as an economist and resident skeptic for many years. "That will last until we see the first Chinese recession."
Recession? Even to utter that word in the same breath as China seems bizarre. This is, after all, the world's fastest-growing major economy. In the first three quarters of this year, China recorded growth of 11.5 per cent, even higher than last year's 11.1 per cent. The flood of Chinese exports flowing out to the rest of the world has widened its trade surplus to $238.9-billion (U.S.) for the first 11 months of the year, up by more than half from the same period in 2006.
Beijing's foreign exchange reserves, earned partly through those booming exports, have reached a staggering $1.46-trillion, enough to wallpaper the Great Wall of China with U.S. $1 bills, with a few left over to do the spare bedroom. A Chinese energy producer, PetroChina, became the world's biggest company by market valuation when it was first listed on the Shanghai Stock Exchange last month, another vivid sign, surely, of China's economic health.
Instead, say China skeptics like Mr. Walker, these are signs of trouble ahead. China is recording such high growth rates and such huge trade surpluses in part because it has set its currency, the yuan, at an artificially low rate. That makes Chinese goods cheaper for foreigners to buy and contributes to China's trade surplus. That in turn brings floods of money into China in the form of foreign exchange reserves, a subject I explored in last weekend's Globe.
When that money is changed into local currency, the money supply goes up like a balloon. That money, lent out by banks, fuels big investments by companies in expansion they may not need. It also sends stock and real estate values soaring and causes domestic prices to rise. It's an unhealthy cycle and it's terribly hard to break. China's leaders are terrified of inflation, which has often fuelled unrest in China throughout its history. They're equally afraid of doing anything to choke off job-breeding exports. Mass unemployment is just as scary as runaway inflation.
"It's very uncomfortable for them," Mr. Walker said. "They are really painted into a corner."
How do they get out of it? Beijing has been trying all sorts of halfway measures in recent months to cool the economy without letting the currency rise too high or slow exports. The government has boosted interest rates and raised bank reserve requirements several times this year to try to curb the growth in money supply, which is running well above official targets. Last week, China even took the extreme step of capping the growth of bank lending, an attempt to control credit expansion.
Faced with doing what's really needed, such as allowing the yuan to float higher, "they tend to back off," Mr. Walker says. "Instead, you get these inadequate measures to relieve the pressure." The interesting thing about authoritarian regimes like China's is that they find it hard to make tough decisions. Lacking democratic legitimacy, they fear the upheaval that might follow if they make a wrong step and make people angry. So, in a funny way, they are less decisive than supposedly namby-pamby democracies.
Sooner or later, though, China must act. Pressure from the outside world is mounting. The United States has recently formed a united front with Europe to make Beijing do something about its undervalued currency and huge trade surplus. The U.S. Congress is up in arms, with an election year approaching. Internally, Chinese inflation soared to its highest rate in 11 years last month, the latest sign of overheating. If the global economy slows in the coming year over troubles in the United States, China's huge investment-driven industrial expansion could be like a thundering train that suddenly runs out of track.
Mr. Walker - who is moving on to become an independent consultant - is not a harbinger of doom, just a sensible bloke with his head screwed on right. China's economic rise has been a marvel, no doubt, but "it's imprudent to wear rose-coloured glasses." No one could accuse Jim Walker of doing that.
mgee@globeandmail.com |
