Is China destined for a hard economic landing?
Economists worry that China's economy could suffer a sudden plunge in growth that would harm the economies of the U.S., Europe and small countries that need China to buy their coal, copper and other raw materials.
WASHINGTON—China’s high-flying economy is starting to lose altitude. The big question is whether the world’s economic superstar will shrink gradually—or so fast that it harms a fragile global economy.
China’s comedown is being engineered by its policymakers. They want to slow expansion just enough to cool inflation without sapping job growth.
It’s a delicate task. Can they succeed?
Developing countries grew much faster in Q2, according to the AP’s global tracker:
-China (9.5%), Argentina (9.5%) and Indonesia (6.5%) grew the fastest.
-The laggards were Japan (-1.1%), Norway (+0.3%) and Britain (+0.6%).
-Worldwide growth weakened in 19 of 26 countries that reported Q2 data.
“Nobody can say with any confidence,” says Barry Eichengreen, an economics professor at the University of California, Berkeley.
China’s explosive growth remains the envy of developed nations like the U.S. It grew faster than any other major economy in the April-June quarter, according to The Associated Press’ latest quarterly Global Economy Tracker. Only Argentina’s much smaller economy matched China’s 9.5 per cent annual growth rate.
By contrast, the U.S. economy grew at a 1.3 per cent rate in the April-June quarter, before expanding 2.5 per cent in the July-September period.
The AP’s Global Economy Tracker monitors economic and financial data in 30 countries representing more than 80 per cent of global output.
Economists worry that China’s economy could suffer what they call a “hard landing.” They fear that a sudden plunge in China’s growth would harm the economies of the U.S., Europe and small countries that need China to buy their coal, copper and other raw materials.
That threat comes as the U.S. is still struggling to recover. And an agreement last week to ease Europe’s debt crisis might not prevent the continent from sliding back into a recession that would ripple through the U.S. and other countries.
A hard landing wouldn’t just squeeze U.S. and European exporters. It could also destabilize Chinese society. And it could escalate global trade tensions.
Hampered by high inflation and declining exports, China’s growth is expected to decelerate from 10.3 per cent last year to 9.5 per cent in 2011 and nine per cent in 2012, according to the International Monetary Fund. The IMF expects the global economy to grow four per cent this year.
Exporters depend on China’s demand for raw materials and consumer goods. Mines in Australia and Chile supply it with coal, copper and iron ore. General Motors sells more vehicles in China than anywhere else. China was the No. 3 destination for U.S. merchandise exports last year, behind Canada and Mexico.
China’s economy must expand eight per cent a year just to keep enough people employed to “maintain its social and political stability,” economist Nouriel Roubini wrote in an August report.
Eswar Prasad, professor of global trade at Cornell University, puts the odds of a hard landing in China at 50-50.
Other analysts say they’re confident China’s policymakers will manage to reduce inflation gently without stifling growth too much.
The authorities “are well-aware of the risks,” says Bob Mark, who runs Black Diamond Risk Enterprises and has advised Chinese banks. “It’s not like they’re going to be blindsided.”
China’s central bank has raised interest rates five times since mid-2010 to try to shrink inflation. Even so, consumer prices jumped 6.2 per cent from August 2010 to August 2011. That was fifth-fastest among the 30 countries in the AP’s global tracker. In the U.S., by contrast, prices rose 3.8 per cent in the 12 months ending in August.
News that China’s growth dipped to 9.1 per cent in the July-September quarter from 9.5 in the April-June period was met with relief by some economists. Rajat Nag, managing director of the Asian Development Bank, says it suggests a soft landing ahead.
Eichengreen notes that Beijing’s communist authorities “have lots of levers they can pull, unlike U.S. authorities.”
Senior bureaucrats in effect run the economy. The government owns most of the biggest companies and banks. It controls the currency.
Officials can, for example, suppress the value of their currency, the yuan. A lower yuan makes Chinese goods cheaper overseas. Washington has long accused Beijing of keeping its currency artificially low to give its exporters an unfair edge.
Chinese policymakers can also order state-owned banks to lend if the economy slows much. They can command local governments to keep workers busy building roads and bridges.
Roubini, a New York University economist who runs a research firm, thinks China’s authorities will use all those tools to keep the economy growing briskly through 2012. They’ll want to ensure a smooth transition next year, when a new president and premier will come to power.
But Roubini and others think the outlook after that is bleaker. He expects China’s growth to sink to 5 per cent or less after 2013.
At the heart of the problem is how China has stoked its expansion. It hasn’t encouraged its consumers to drive the economy with their spending, as Americans do. Instead, it’s juiced growth by pushing exports and investing in factories, roads, railways and real estate.
Such investments account for about half of China’s output—a wildly lopsided share that suggests it’s investing in far more construction than it needs.
Behind the investment boom are bank loans that might never be repaid, because the projects aren’t expected to throw off enough revenue.
The recession worsened things for China. Exports fell. Beijing responded by passing a $600 billion stimulus program. Banks were pushed to lend. Local governments were nudged to invest heavily. Roubini’s research firm estimates that China has wasted $1.4 trillion since 2008 on investments that will likely end up as bad debts.
Optimists say China is merely planning for the future. A growing middle class will eventually occupy the new houses, ride the new trains, fly from the new airports and drive new cars on the new highways. The new factories will make goods to meet rising demand at home and abroad.
But demographics pose another problem. China is aging fast. Largely, that’s because of population control policies that limit most families to one child. This year, 8.9 per cent of Chinese were 65 or older. By 2021, it’ll be 12.9 per cent.