It’s the 1 trillion yuan question: has China’s economic bubble finally
burst?
It’s an unnerving issue for the
global economy, particularly at a time when the presumed leader in waiting, Xi
Jinping, has apparently gone “missing in action” just a month ahead of the
once-in-a-decade leadership transition at the 18th Party Congress.
After clocking up an average 10
percent annual growth rate for 30 years, this year’s forecast for the Chinese
economy is 7.5 percent, its lowest expansion since 1990. In August, industrial
output growth dropped to its lowest level since May 2009, imports dipped 2.6
percent and steel output is expected to contract this year for the first time
in three decades.
The recent 1 trillion yuan ($160
billion) infrastructure package announced by China’s top economic planning
agency gave financial markets a brief bounce, but it was only a quarter of the
amount spent in response to the global financial crisis. Among the 60 projects
announced by the National Development and Reform Commission were urban rail,
highway and water projects, yet little detail was released concerning their
financing and the spending is expected to be spread out over a number of years.
An economy described previously
by Chinese President Hu Jintao as having a “lack of balance, co-ordination and
sustainability” is still overly reliant on fixed asset investment, which
accounts for half of GDP, as well as exports..
Writing in The Diplomat,
Professor Minxin Pei has warned of the “mother of all debt bombs” threatening
the health of the Chinese economy. In his September 10, 2012 article, he cites
figures which show that local government debt may account for up to 50 percent
of GDP (Beijing estimates a quarter), with potentially another 14 trillion yuan
owed by risky local government financing vehicles.
Chinese banks continue to report
low levels of non-performing loans, but Pei estimates up to 1 trillion yuan in
potential losses from wealth management products, on top of bad debts hidden in
the form of inter-bank loans, which represent nearly half the total amount
outstanding.
Beijing’s enforced real estate
contraction has hit developers as well as ordinary home buyers, with property
prices slow to recover. Manufacturers are also struggling with excess capacity,
while foreign luxury goods makers such as Burberry have reported a significant
slump in sales.
The consequences of China’s
slowdown are visible in its neighbors Japan and South Korea, which have seen
their exports fall from reduced purchases of intermediate goods by Chinese
factories.
While Chinese exports rose at a
2.7 percent annual rate in August, up from just 1 percent the previous month,
it is difficult to see a full-scale recovery until U.S. and European consumers
start opening their wallets.
In resource-rich Australia, the
end of China’s boom means lower prices for coal and iron ore that had
previously generated a windfall for both mining companies and the federal
treasury. The iron ore price peaked in 2011 at nearly $200 a ton but it
recently plunged below $90, forcing miners to slash costs and threatening the
Australian government’s projected budget surplus.
For foreign exchange markets, any
move by China to weaken its exchange rate may trigger retaliation from the
United States, with the U.S. President wanting to be seen as being “tough on
China” going into the November election.
Significantly, the absolute size
of China’s working age population is expected to peak in 2015, bringing an end
to its demographic dividend and threatening to make the Middle Kingdom grow old
before it becomes rich.
Yet China still has the world’s
largest foreign exchange reserves and a solid official fiscal position, along
with a low official debt to GDP ratio at 17 percent. Its urban population is
expected to grow by about 300 million over the next 25 years, providing a
sustainable boost to domestic demand.
At the end of the 1980s, Japan
was forecast to overtake the U.S. and become the world’s top economy. Its
unparalleled rise could not be halted, according to the experts at the time.
Is history repeating itself, or
will China’s new leadership prove capable of defying the doomsayers?
Anthony Fensom
Business & Investment Opportunities
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