China’s growth: How fast is too fast?
By David Lague and Donald Greenlees International Herald Tribune
Published: August 9, 2006
Wang Lijun, an engineer, had just arrived back in Beijing last month, tanned and invigorated after a long holiday in Thailand, when she learned from television that the mainland Chinese economy was expanding at its fastest pace in a decade.
Puzzled, she watched as government officials and economic experts warned that measures would be needed to rein in growth that had galloped along at an 11.3 percent pace in the second quarter.
For Wang, an ambitious 32-year-old owner of Beijing Sunbridge Engineering & Consulting, a small business supplying contract engineers to the petroleum industry, the sizzling Chinese economy is an opportunity - not a problem.
Her company is just five years old, but business is very, very good. Her casual conversation is a blend of deals she is cooking up and her increasingly plush personal life - her new inner city apartment, nights out at restaurants, European vacations and her plans to buy her first car, hopefully a BMW, but more probably a Honda.
"So far it is good for me," she said. "There are lots of projects going on. If I had more money, I could grow faster."
For plenty of Chinese, times have never been better.
But along with the prosperity, there are the worriers - the authorities in Beijing and experts in financial capitals - who say there are signals that the world’s fourth-biggest economy is in danger of racing out of control.
What really alarms them is an accelerating orgy of investment in apartment buildings, shopping malls, roads, steel mills, factories, mines, ports and theme parks. Much of the money is coming in the form of loans from mainland Chinese banks, whose balance sheets would make an examiner in the West blanch.
"When you have a period of rampant economic growth, as China has, there tends to be a pretty sharp correction at the end of that," said Jim Walker, chief economist with a Hong Kong research firm, CLSA Asia Pacific Markets. "China could see an extremely sharp slowdown." And with the huge amount of foreign investment in China, that slowdown would be felt around the world.
For those enjoying the party, it is hard to see what is wrong. But most agree on one thing: Growth fueled by that level of investment is unsustainable. It is like drinking too much from the punch bowl. The hangover could be severe.
Walker, one of the most pessimistic economists on China, has forecast that economic growth in China could slow to five percent at the bottom of the economic cycle in 2007, a relative depression for the mainland economy.
The consensus among economists is that growth will slow, but not that dramatically. Last month, the Asian Development Bank forecast a soft landing next year with growth slowing to 9 percent, on par with the average annual expansion in China over the past two decades.
Some dispute that the Chinese investment binge is a problem.
No one has quite seen anything like the Chinese economy and several experts say it is difficult to anticipate what might happen. They note that consumer prices rose a bare 1.3 percent in the first half of this year, hardly a sign of overheating.
"Investment is skewed towards fixed assets. That is where the problem lies," said Connie Leung, chief economist at Hong Kong-based ERA Economic Research Analysis, a research advisory business specializing on China.
"There are a lot of sectors where producers and suppliers can’t raise prices because there is lots of competition. An economy like that can’t be overheated," Leung said.
Since Beijing announced the 11.3 percent growth rate last month, China has not exactly withdrawn the punch bowl, but it is cutting back on the punch.
The Chinese government recently laid out a series of steps to slow the economy, including increased reserve requirements for commercial banks aimed at reducing the funds available for lending.
The government also imposed restrictions on foreign investment in property to curb speculation, and reduced incentives for exporters in a bid to narrow the trade surplus.
And, with two top Chinese leaders, President Hu Jintao and Prime Minister Wen Jiabao, calling for a brake on growth, most experts expect further tightening.
"Forceful measures must be taken to help resolve the striking contradictions that exist to prevent rapid economic growth from becoming overheated," Wen told the Chinese State Council on July 26, according to a report on a government Web site.
One of the biggest areas of concern is real estate, especially in the booming mainland cities.
Average property prices across 70 large cities increased 5.8 percent in June from a year earlier. At the same time, residential property prices rocketed 14.6 percent in Shenzhen, a booming city next to Hong Kong, and by 11.2 percent in Beijing.
With that kind of growth, the fear is that new spending on property and other investments will be wasted on ill- conceived projects. The Chinese National Development and Reform Commission ordered the provincial authorities and state-owned lenders to review every project that exceeds 100 million yuan, or $12.5 million, in investment, as well as steel mills, cement factories, vehicle assembly plants, power stations and aluminum smelters that exceed 30 million yuan in value.
With overcapacity in many industrial sectors, the fear is that borrowers will default, saddling banks with a fresh wave of bad loans.
"I think the consequences would manifest themselves first of all in the financial sector," said Frank Harrigan, assistant chief economist at the Asian Development Bank. "Bank balance sheets would deteriorate; non-performing loans would rise quickly."
Although there is an assumption that the government will bail out state- owned banks as it has in the past, the continued accumulation of bad loans increases the danger of a financial crisis.
However, Ren Zhiqiang, one of the highest-profile property developers in Beijing, dismisses fears of a debt explosion from residential property.
Ren, president of the Beijing Hua Yuan Group, flips through glossy brochures of some of his futuristic residential and retail complexes while sitting at his boardroom table. With a laugh he declared: "The banks are always asking me to lunch.
"Housing loans are the best kind of loans in China," he said. "Less than 2 percent of borrowers can’t pay their loans on time. Even for those that can’t pay, it doesn’t mean the banks can’t get their money back. They still have the house."
Some analysts said they believe manufacturing, the powerhouse of the Chinese economy, is also vulnerable to the side effects of overheating and is another potential source of loan defaults.
The cost of raw materials have been rising at phenomenal rates in recent months and there are signs that wages are now beginning to rise, at least in the manufacturing centers.
Yet other statistics suggest all is well with manufacturing. Profits were up 28 percent in June from a year earlier as exports continued to power ahead.
But some economists say the official profit data is misleading because the government keeps on increasing the number of companies included in the sample. Walker, the CLSA economist, said the sharp rise in salaries and commodity prices is putting a serious squeeze on profits. By correcting for the number of companies in the sample, year-on-year profit growth comes down to about 6 percent, he said, not 28 percent.
Whatever the case, there is no dispute among economists that the great challenge for Beijing policymakers is to cool the economy without causing a sharp downturn.
Despite the success of Chinese leaders in managing a complex economy in the past three decades, they face real risks of getting it wrong.
A big contributor to the runaway growth this year has been a spending spree by local governments, who control much of the country’s economic activity. It is far from certain the regions will follow the national government as it tries to rein in the economy over the coming weeks and months.
Acting belatedly, the People’s Bank of China, the country’s central bank, in late April raised interest rates on lending for the first time in 18 months by 0.27 percentage points to 5.85 percent.
Most analysts expect further rate increases, but there are doubts whether they will slow an economy awash with money.
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