ECONOMIC AFFAIRS: by Patrick J. ByrneNews Weekly
China's growth is unsustainable
, June 25, 2011
The next major shock to the world economy could come from Europe (see “Could global tsunami bring down the Eurozone?”, News Weekly, June 11, 2011), or, as New York University Professor Nouriel Roubini argues, it could come from China.
Europe’s strategy is to hold off the PIIGS (Portugal, Ireland, Italy, Greece and particularly Spain), from defaulting on their debts until the European banks are strong enough to withstand the shock from a major default.
Meanwhile, Martin Wolf, economics commentator for London’s Financial Times (June 7, 2011), says that the world economy remains weak. A major weakness is the possible period of “prolonged semi-stagnation” and high unemployment in the major economies, following the global financial crisis (GFC).
He observes that, three years after the start of the GFC, of the six largest economies in the world: Japan, the United Kingdom and Italy are 4-5 per cent smaller; France is about 1 per cent lower; Germany is on par; while the USA is only about 1 per cent higher.
Powerful headwinds are hindering recovery. When credit-fuelled economic bubbles burst, it takes years for asset prices (such as property prices) to stabilise and for banks to recapitalise. Government budgets also suffer as tax revenues fall while welfare bills rise.
When soaring commodity prices are added to this mix, forecasts are that the world economy will remain weak and vulnerable to further shocks.
A second major crisis could be triggered by one of the European PIIGS defaulting, or by a collapse in China.
Following recent visits to China, economist Nouriel Roubini argues that the most populous nation on earth “is poised for a sharp slowdown”, most likely by 2013.
He says that China’s rapid development over the last few decades has relied on export-led industrialisation. But the GFC saw China’s net exports collapse from 11 per cent of GDP to 5 per cent.
Beijing’s response was to raise the fixed-investment share of GDP from 42 to 47 per cent. To date this has staved off a major recession, but for how long?
Roubini says that this huge commitment to fixed investment means that “China is rife with over-investment in physical capital, infrastructure and property”.
He explains: “[T]his is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminium smelters kept closed to prevent global prices from plunging.
“Commercial and high-end residential investment has been excessive, automobile capacity has outstripped even the recent surge in sales, and overcapacity in steel, cement and other manufacturing sectors is increasing further.
“In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors.”
No country can reinvest around half of its entire GDP in new capital without creating “immense overcapacity and a staggering non-performing loan problem”, which threatens China’s banking system. (Project Syndicate, April 14, 2011).
This threat has also been noted by China-watcher and economist Will Hutton, who told the ABC’s Lateline program (April 18, 2011) that already “the Chinese financial system is many times more fragile than the American and British and Western banking system was in the run-up to the financial crash in 2008”.
He said: “[I]t’s lent many times more than GDP now. Many of those loans, there’s no interest paid or principal ever repaid. [T]his is an accident waiting to happen.”
Hutton was editor-in-chief of The Observer for four years and is a governor of the London School of Economics and author of The Writing on the Wall: China and the West in the 21st Century (2006).
The Chinese have a very high savings rate. Households save around 30 per cent of their income, comparable to the household saving rate in Hong Kong and Taiwan.
The big difference is that in China, only around 50 per cent of GDP goes to the household sector. Lower relative household incomes leave little margin for consumers to purchase and absorb the massive overproduction of Chinese industry.
Most of the rest of the nation’s GDP goes to state-owned enterprises, the elites and government.
Roubini says that while the economy has been growing at double-digit figures in recent decades, “there has been a massive transfer of income from politically weak households to politically powerful [state-owned] companies”.
Transforming China from being investment-export oriented into a “consumer economy” won’t be easy. There are too many powerful, vested interests at stake, and the latest Beijing five-year plan offers no policies for change.
Beijingmay be able to maintain high growth rates for now, but at “a very high foreseeable cost”, warns Roubini.
This is also a warning to Australia. High government debt, a carbon dioxide tax and no real plan for the future will leave our economy vulnerable when the economic chickens come home to roost in China.
Patrick J. Byrne is vice-president of the National Civic Council.
Nouriel Roubini, “China’s bad growth bet”, Project Syndicate, April 14, 2011.
“China fears people’s revolution: analyst”: Will Hutton is interviewed by Ali Moore on ABC television’s Lateline program, April 18, 2011.
Martin Wolf, “The road to recovery gets steeper”, Financial Times (London), June 7, 2011.