CHINA: by Ian H. McDougall (reviewer)News Weekly
China's economy at risk of debt crisis
, May 14, 2011
China’s high-speed rail system is a high tech-miracle. When it is completed, passengers will be able to travel from one end of China to another at speeds that will make air travel obsolete for most journeys.
Although some foreign observers claim the high-speed trains travel empty, spare seats in economy class are rare. The service is so superior to other forms of transport that travellers are prepared to pay the high prices for the tickets, which are sometimes the equivalent of a week’s pay for a factory worker, for a two-hour trip.
The high-speed rail is astonishingly smooth and comfortable, especially for veterans of China’s chaotic train network, where, at major transport hubs like Zhengzhou in Henan Province, literally thousands of people might be struggling to board ancient and dilapidated “slow” trains.
However, all is not well with the “tall iron”, as the Chinese call the high-speed rail. The railways ministry has told drivers to reduce top speeds, which are now in excess of 200 kilometres per hour, due to “severe” safety problems.
Those blinded by China’s status as “the world’s factory” often fail to realise that in many ways China is still a command economy, where political factors are more important than economic ones. Although it sounds idiotic to any economically rational person, things like “meeting the plan” and “completing the project in world-record time” are often more important than doing the job properly, hence the safety problems.
Second, the high-speed rail network has absorbed enormous amounts of capital. The network has debts of $276 billion, almost entirely borrowed from China’s banks. Whether the high-speed rail network can repay the debt, or indeed whether it is a fundamentally sound business proposition, is not yet clear. If it can’t service the debt, it will cause big problems for China’s banks.
Quite frankly, the top officials in charge of the high-speed rail don’t care if it makes money or not. As far as they are concerned, it’s a prestige project. The high-speed rail will stimulate demand for other goods and services. It will prove China is a world leader in modern transport.
China already has the world’s only operational maglev (magnetic levitation) train, which runs between Shanghai city and the airport at 500 km per hour. The railway workshops in Dalian in China’s northeast are constructing high-tech trains from scratch, while in Australia making suburban trains seems to be beyond our engineers’ level of competence.
But what happens to China’s banks does matter, whatever high officials with dreams of glory think. In any city in China, you will see dozens and dozens of high-rise residential buildings. These apartment blocks are impressive. The Chinese are, on the whole, good builders. The buildings are well finished and they don’t fall down. These aren’t small apartment blocks; frequently, they are quite massive. As an observer, one thinks that if China has a housing shortage, there’s no sign of it here.
But at night it is a different story. In one major Chinese city, I was out one night with a friend who was a long-term resident. He said, “Look at those apartment blocks and tell me what you see.” I stared at them for a while and then it clicked. “There are no lights on,” I replied. In every massive apartment block, there were only two or three, maximum six, apartments with lights.
“Do you know why?” my friend asked. “It’s because almost all those apartments are owned by speculators. They’re empty. They can’t — or won’t — let them out. Do you know why? Because Chinese apartments aren’t sold fitted out. No sinks, no light fittings, no wardrobes. Sometimes they don’t even have internal walls. The housing boom has got to the point where even middle-class people can’t afford housing any more, and yet there are millions upon millions of houses all over China sitting empty.”
These empty houses are mostly financed by the banks. The central authorities have tried (not very hard) to rein in property speculation, but lending standards are notoriously lax and in many cases, blatantly corrupt. Everyone knows it. To cool the boom the central authorities keep on ratcheting up lending ratios on the properties the banks are financing, so far to little effect.
The point is, if the economy goes bad, the speculators won’t be able to cover their holding costs. Most speculators own more than one property; some own dozens. They will dump their properties and prices will collapse. The banks will be left with assets that aren’t producing income and can’t be sold.
If the property boom in China collapses, it won’t be a gradual deflation like Japan’s or be localised as in the United States. It will be all across China.
If the banks falter, the authorities will try to bail them out. Even so, they can’t support the whole non-export sector of China’s economy. China could go down like a house of cards.