Why China Will Have
an Economic Crisis
By Michael Schuman | @MichaelSchuman
| February 27, 2012
Read more: http://business.time.com/2012/02/27/why-china-will-have-an-economic-crisis/?xid=newsletter-weekly#ixzz1oOyQdTsC
The view in most
of the world is that China is indestructible. Shrugging off the crises
multiplying elsewhere, China seems to surge from strength to strength, its
spectacular growth marching on no matter what headwinds may come. It appears
inevitable that China will overtake a U.S. mired in debt and division to become
the world’s indispensable economy. Those businessmen and policymakers looking
to the future believe China’s “state capitalism” may be a superior form of
economic organization in dealing with the challenges of the modern global
economy.
My answer to all
of this is: think again.
I don’t doubt for
a second that China will be a major economic superpower with an increasingly
influential role in the global economy. In many respects, it already is a
superpower. But that doesn’t mean the economy is free from problems, a good
number of them created by the very statist system lauded by pundits in the U.S.
and Europe. And in my opinion, if China doesn’t change course, and in a big
way, the country will experience an economic crisis.
(MORE: Are China’s Big
State Companies a Big Problem for the Global Economy?)
I’ve been thinking
about China’s economic future, and the likelihood it will face some sort of
terrible collapse, for some time, but I have until now been reluctant to come
out with my views so strongly. The reason is that it is very difficult to tell
what’s really going on in the Chinese economy. Data is sparse or unreliable.
And China is in certain ways unique in economic terms — has history ever
witnessed a giant of such massive proportions ascend so quickly in the global
economy? Valid precedents are hard to find. Then there is the issue of timing.
It is easy to say China will have a crisis; it is almost impossible to say when
that might happen. Next month? Next year? Next decade? The fact is China could
continue as it is for some time to come. So, in other words, when you make the
type of prediction I just have, you have a good chance of getting it just plain
wrong.
But the more time
I spend in China, the more convinced I am that its current economic system is
unsustainable. Yes, economists who specialize in China can give you all sorts
of reasons why the country is supposedly different, and thus the regular rules
of economics don’t necessarily apply. But one simple thing I always say about
economics is that you can’t escape math. If the numbers don’t add up, it
doesn’t matter much how big your economy might be or how fast it is growing or
how heavy a role the state might play. And China has lots of numbers that just
don’t add up.
(PHOTOS: China Celebrates
90 Years of Communism)
A big part of the
bad math is created by China’s state capitalism. China has adopted a form of
the Asian development model, invented by Japan and followed, to varying
degrees, by many rapid-growth countries around East Asia. The model, very
generally speaking, functions like this: 1) capitalize on low wages to spark
growth through exports and industrialize quickly with hefty amounts of
investment, 2) guide the whole process with the hand of the state, 3) employ
industrial policies and state-directed finance to progress into more and more
advanced sectors. This system generates fantastic levels of economic growth for
a while, but then eventually, it crashes. Japan had its meltdown beginning in
1990 (and it hasn’t escaped two decades later); South Korea, the country that
copied Japan’s model most closely, experienced its crisis in 1997-98.
What happens? The
model is based on what Alice Amsden, in her study of the Korean economy, called
“getting prices wrong.” To spur on the high levels of investment necessary to
generate rapid growth, the model depends on state-directed subsidization to
make investing in certain industries or sectors more attractive and less risky
than it otherwise would be. Cheap credit is made available for industry, or the
state outright orders money to be invested in certain preferred projects. The
exchange rate is controlled to encourage exporters. All sorts of subsidies, for
energy, exports and so on, are dished out. Banks are not commercially oriented
but act to a great degree as tools of government-development policy. All of
these methods funnel money, private and public, into industrialization,
creating the astronomical growth rates we see again and again in Asia.
The problem here
is that prices can’t stay wrong indefinitely. There is a good reason why
classical economists are always so focused on allowing markets to find the
correct price level. In that way, markets send the proper signals to potential
investors on where money should or should not go. If those price indicators are
skewed, so is the direction of resources. The Asian model, by playing around
with prices, eventually creates tremendous distortions, in which money is
wasted and excess capacity is generated. Subsidized companies don’t have to
generate returns in the same way as unsubsidized firms, and that leads them to
make bad investment decisions to build factories and buildings that are
unnecessary and unprofitable. As a result, loans go bad and banking sectors
buckle. That’s exactly what happened in both Japan and Korea. Though their
crises were tipped off in very different ways — the bursting of an asset bubble
in Japan, an external shock in Korea — the reason both countries collapsed was
the same: weak banks, indebted companies, silly investments.
(MORE: What the U.S.
Can Learn from Uniqlo)
China is indulging
in all of the same excesses as Japan and Korea, and then some. The level of
investment in China, at nearly 50% of GDP, is lofty even by Asian standards.
The usual argument made in defense of such astronomical investment in fixed
assets is that China is a large developing country that needs all of the
buildings and roads it is constructing. Qu Hongbin, the very smart chief China
economist at HSBC, made that very argument in a recent study:
There
is a popular view in the market that China has overinvested and therefore can
no longer rely on investment to sustain its growth. We disagree. China’s
investment-to-GDP ratio is indeed very high (46%) … [But] China is only half
way through the process of urbanisation and industrialisation. It still needs
to invest more to cope with the rising demand for rail, hospitals and
industrial plants. The recent infrastructure boom has boosted the country’s
transport capacity, but China’s railway network is still shorter than that of
the US in 1880 … In economic terms, we estimate that China’s capital stock per
worker is only about 8% of that of the US and 15% of that of Korea. In other
words, China’s capital accumulation is still far from reaching the stage of
having diminishing returns; we believe the country needs to invest more, rather
than less.
I completely
agree. Yet the issue is not whether China needs more investment. The issue is
whether China is getting the types of investment it requires. The fact that
investment levels can be so high and yet the economy is so deficient in certain
key aspects makes me think the answer is no. We can see that in the continued
problem of excess capacity in China, in which companies go hog wild building
too many factories in certain industries, often with borrowing from state
banks. That has happened in steel and solar panels, for example. The country is
investing hundreds of billions in high-speed railways even though ticket prices
are beyond the reach of most Chinese, while many major Chinese cities don’t
have subways.
(PHOTOS: China’s
High-Speed Rail)
A good part of
this misdirected investment seems to be headed into the property sector. Real
estate development has become the key driving force of Chinese economic growth.
In theory, China’s very rapid urbanization makes such construction a necessity
— but that depends on what is being built. In Wenzhou, a real estate agent
recently offered free BMWs to anyone who bought a high-end apartment — a clear
sign of overbuilding — while there is an obvious shortage of housing affordable
for most Chinese. On either side of my Beijing apartment building are three big
malls that hardly ever seem to see real shoppers. Rents for top-quality office
space in Beijing are now pricier than in New York City — despite the fact that
China’s capital is one big construction zone. Many of the buildings going up
are of a quality unsuitable for major corporations.
Even worse, much
of the investment in China is being financed with debt. The level of debt in
the Chinese economy has been rising with frightening speed. Rating agency Fitch
estimates bank credit in 2011 was equivalent to 185% of the country’s GDP — an
increase of 56 percentage points in a mere three years. Though that surge has
not yet had a significant negative impact on China’s banks, many analysts fret
that banks will eventually experience a rise in nonperforming loans. In an indication of what is to come, the Financial Times
reported recently that the government has ordered banks to roll over
the $1.7 trillion of loans owed by local governments. If true, this tells us
two key things: 1) these governments invested money raised from banks in
projects that are not generating the returns necessary to pay them back and 2)
the quality of loans on the banks’ books are more questionable than official
statistics suggest. On top of that, the fact that local governments amassed so
much debt in the first place shows a complete lack of rule of law in China’s
financial sector. Technically, local governments aren’t permitted to borrow
money at all. Meanwhile, as government entities run up loans they can’t pay,
many small companies, especially private ones, are unable to raise sufficient
funds and remain starved of capital.
So we can see the
pieces of a crisis falling into place: excessive, misguided investment,
including a giant property boom, propelled on by debt and the decisions of
government bureaucrats. Sound familiar?
A crisis, of course, is not inevitable — if China’s leadership takes action and
reorients the direction of the economy. The positive thing is that at least
some top policymakers understand the need to change. In policy pronouncement
after policy pronouncement, the government pledges to reform. The problem is
that China’s government is not taking its own advice. The economy needs to rebalance away from investment and exports to a
more consumption-driven growth model with a primary focus on quality of growth,
not high rates at any cost. That’s not happening, or not happening
quickly enough. Yes, the Chinese consumer is gaining in global importance, but
savings in China remains too high and consumption as a percentage of GDP still
way too low. Steps that the government could take to spur on the needed
rebalancing — reducing lofty taxes on many imported goods, for example — are
nowhere to be found. More importantly, the government is doing nothing to set
prices right. The currency remains firmly controlled, interest rates
unreformed. So investors within China are still acting based on the wrong price
signals.
(MORE: Friendly Rivals)
Why won’t China’s
policymakers pursue more fundamental reform? They are afraid that growth might
slip. Sure, the latest five-year plan targets 7% annual GDP growth, but it
seems to me that every time growth drops under double digits, the leadership
goes into panic mode and revs up the economy again. GDP surged 8.9% in the
fourth quarter of 2011, but that’s not fast enough for China’s leaders. They’ve
already started loosening credit again — slathering yet more debt onto the
economy.
When I bring up
these issues with China watchers, I’m usually scolded — Beijing’s policy
mandarins have it all figured out, I’m informed. It is true that China’s
policymakers have done a superior job managing the rapidly changing economy in
recent years. But as any stock investor knows all too well, past performance
does not ensure future performance. Back in the 1970s and ’80s, analysts in the
West considered Japan’s bureaucrats near supermen as well. Now the stodgy
Japanese bureaucracy is considered one of the main impediments to an economic
revival. Chinese bureaucrats today suffer from the same problem that led
Japanese bureaucrats astray — they believe the economy can be managed by fiat.
The tools of classical economics — getting prices right — are secondary. Why
guide an economy with abstract measures like interest rates when you can just
tell the banks what to do?
That attitude is
what killed Japan’s economic miracle, and now I see China slipping toward the
same fate. Japan could not escape the forces of basic mathematics. China can’t
either, no matter how brilliant its policymakers might be. When would a
meltdown happen? It is interesting to play with a bit of history. Both Japan and Korea suffered their
crises roughly 35 years after the Asian development model was switched on — the
early 1950s to ’89 in Japan, and 1962 to ’97 in Korea. That puts a China crisis
at around 2014-15 or so. I’m not predicting a firm date here.
What I am saying is that China is running out of time to fix the problems of
its economy.
UPDATE: For those
of you who don’t agree with my analysis, the World Bank issued a report today
warning that China could face an economic crisis if it doesn’t reform.
中國經濟危機四伏 台灣還能靠它生存？
馬英九總統就任第一年，是台灣經濟向下反轉的起點；如今第二任開始的一年也面臨嚴峻的挑戰。馬總統在二○○八年五月二十日就任時，遭其抹黑為鎖國，批判得一文不值的民進黨政府，留下來的是當年第一季經濟成長率七．五五％、第二季五．六六％。馬接手後經濟隨即下滑，二○○九年全球金融海嘯襲來，更創下台灣有史以來最嚴重的經濟倒退；如今他的第二任即將開始，台灣經濟也同樣陷入不斷下修的困境。今年對台灣而言，很可能是歹年冬的一年。
第一任時，有次貸風暴的餘震，以及雷曼兄弟高達六千多億美元債務破產所帶來的大海嘯衝擊，平心而論，經濟的萎縮，並不能完全怪罪執政者，乃「非戰之罪」，但如何應對史上罕見的風暴，政府的表現卻需接受嚴格的檢驗。因此，我們要問馬總統的是，面對金融危機，他做了什麼？做得對不對？坦白說，「看天田」一詞可以準確形容馬政府的施政特質，也就是什麼都不做，只等上天下雨，帶來甘霖的滋潤，期待稻作的豐收。試舉國人記憶猶新的例子，馬總統曾說「不救ＤＲＡＭ，就不配當總統」，至今卻一事無成，導致ＤＲＡＭ產業錯失起死回生的契機，如今猶在生死關口徘徊。
然而，批評馬政府什麼事都不做，也不公平，這個政權四年來確實做了一件重大的事情，那就是向中傾斜，與中國簽署ＥＣＦＡ，將中國當成解救台灣經濟的靈藥，只是這唯一所做的事情，卻是嚴重的錯誤。換言之，馬政府面對經濟乾涸的嚴峻形勢，並未檢修灌溉系統，尋找水源，只是向中國祈雨，想要依靠中國的雨水續命。這個如意算盤顯然失算了。中國二、三十年來經濟數據亮眼，其實只是在走一條亞洲四小龍、泰國、馬來西亞等新興國家的老路，它的表現並沒有更傑出，只因中國擁有十三億人口，才造成其經濟規模世界第二的表面形象。若以人均來算，中國只是一個中等的開發中國家。過去它的優勢在於勞力、土地的廉價，以及租稅優惠，台商遂以其為生產基地，以提升產品的競爭力，卻放棄企業的轉型。此一策略或許有短期效果，卻使台灣嚴重依賴中國，無法創造就業機會。
尤甚者，中國經濟多年來的快速增長，就像人為注射生長激素，揠苗助長，以致看起來體格強壯，其實百病叢生，漸失去免疫力，只要感染病毒，可能就會重病一場。令人憂心的是，現時中國經濟已經瀕臨病發的臨界點。首先，推動中國經濟成長的出口已經開始出現萎縮，二月份的貿易逆差達三百一十四億美元，創下一九八九年以來的最差紀錄。歐洲是中國第一大出口區域，卻陷入主權債務泥淖，需求不振，加上東協等新興國家崛起，使中國廉價商品的優勢不再，而美國的反補貼法案可能引發貿易摩擦，恐將重創中國的出口。其次，中國的房價泡沫，在政府的調控下，破裂是必然的結局。而房價的飆漲是中國地方政府稅收主要來源，若是房價崩跌，地方政府恐將失去償債能力，高達十多兆人民幣的地方政府債務恐將壓垮金融機構，引爆中國的金融危機。
中國經濟數據一向受到質疑，它可以每次都提出一個宏大目標，然後傾舉國之力去挹注，或者在統計數字作假，因此中國總理溫家寶在此次人大下調中國經濟成長目標值為七．五％，顯示中國經濟已經出現嚴重警訊，再也無力掩飾了。誠然，完全斬斷台灣與中國的經濟連結，不切實際，但將台灣的未來發展寄託於中國，則顯然是一個更嚴重的錯誤。在可見的未來，中國經濟走下坡的力道會愈來愈強，巨象倒下，將會壓死旁邊的小動物，馬政府若不修正向中國傾斜的政策，中國經濟一旦倒下，台灣將會成為第一個犧牲品。
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