By Michael Baxter 16 Apr 2010 [0 Comments | 939 views]
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The men and women who run China’s government are a savvy bunch. They know economics. In fact, a couple of years ago at the Davos conference, Chinese Premier Wen Jiabao was seen reading Adam Smith’s Wealth of Nations. (Apparently, or so he said, Mr Wen was rereading it.)
The real snag is that China is a massive country, its population enormously diverse. At the local and regional level, corruption is deeply embedded. China may think of itself as a communist country, but the boom has created a small minority of people who one can only really describe as filthy rich. And yet poverty remains a dreadful problem.
US politicians say the answer is for China to let the yuan appreciate. In reality they are both right and wrong. They are right, in the sense that for some areas of China the currency is indeed way too cheap. But they are wrong, too, because for some regions the effect of a rising yuan could be poverty on a scale Westerners can barely comprehend.
See China’s story through the prism of her latest growth figures and the data tells a stunning tale, and points to the inevitable bursting of a bubble. Then view China from the perspective of the Qinghai district, where an earthquake struck with tragic consequences earlier this week.
When Hong Kong was reabsorbed within China, the talk was of one country – two economic systems. The reality is, China is one country, one currency, and lots of economies.
At one level, China’s problems are like those we are familiar with from observing the eurozone. Some parts of the economy may be analogous to Greece – in that they desperately need a cheaper currency, improved access to funding, and low interest rates. (The analogy is not 100 per cent accurate by the way. Unlike Greece, these regions did not enjoy a boom based on borrowing, and poverty is massive.) Other parts of China are more akin to Germany.
The FT’s Martin Wolf has come up with the word Chermany, to describe the world’s two big surplus countries, China and Germany. In reality, Chermany describes Germany and a part of China. Chreece may be equally appropriate to describe another part of China and Greece. Or perhaps PCHIIGS would be a good word.
But there are other similarities with the West. Take the housing market, the Chinese housing boom is distorting the economy. Over the last year, Chinese house prices have risen by 11.7 per cent. That may seem high, but given China’s growth rate, maybe not so frightening. But in some regions the pace of house price inflation is virtually off the graph. Parts of Shanghai, for example, have seen prices rocket 80 per cent.
Wealthy Chinese investors see property as a safe refuge for their cash. Some have been hoarding land, to use as collateral to secure funding from banks.
And so it is that property prices surge, and bank lending becomes more focused on those areas where house prices are booming. It is not quite like the West; in China, a minimum deposit of 30 per cent is normally required when buying a home. But then again, if prices fall by more than 30 per cent, this would still leave property owners with negative equity.
In Q1, China’s growth was a stunning 11.9 per cent on the year before . But then again, this time last year the economic performance was poor, so one would expect the year on year comparison to be high. If, instead, one looks at recent quarterly growth, this has been falling.
Chinese inflation also fell back in March, dipping from 2.7 to 2.4 per cent. Hardly the kind of performance one would expect of an economy that is overheating.
And returning to that 11.9 per cent y/y growth rate, 6.9 percentage points came from investment, 6.2 from consumption, while net exports contracted 1.2 percentage points. Okay, 6.9 per cent investment growth is
high, but the fact that the contribution from exports fell is telling.
And yet while parts of China boom, the tragic effects of the Qinghai earthquake tell a different story.
The death toll is horrendous, although thankfully is likely to be lower than the 87,000 number of deaths and casualties from the Sichuan disaster. The two provinces are neighbours. GDP per capita is around $500. The earthquakes created such tragic havoc because buildings are too flimsy and too weak because there isn’t enough money.
So, on the one hand, you have an economy that is growing too fast, shows all the signs of a bubble, and desperately needs a more expensive currency, creating more prosperous consumers.
On the other hand, you have an economy that desperately needs more growth.
Money flows into those areas where property prices are surging, and a bubble is stretching to an unbearable extent. And yet money misses those areas where the potential for growth is much greater.
So why doesn’t the government do something about it? Why not channel money into the poor areas?
Answer, because it can’t. It has adopted free-market principles, because decades of central control created poverty. But the free market is pumping up some areas and ignoring others. Add to the mix corruption at the local level, and all of a sudden the government is left looking impotent.
For more on China, the yuan versus dollar, and sino versus western culture see:
The Great Bubble of China
China and the West: the lesson of history
Truth or myth, free trading yuan is answer to our ills
Will the emergence of China mean more unemployment in the West?
Why China’s real opportunity gets overlooked: the parallel with Japan
What went wrong with China and what went right?
China and the West – The difference is cultural
China in our hands and the currency row
China solves economic crisis, with cunning plan
China heading for recession, and the yuan myth
The great imponderable
China: the government is not omnipotent – it is impotent; and that’s where the West has got it wrong
