Real Clear Politics
January 9, 2012
China's Coming Slump?
By _Robert Samuelson_
(http://www.realclearpolitics.com/authors/?author=Robert+Samuelson&id=14456)
WASHINGTON -- Even China? Could the world's economic juggernaut, having
grown an average of 10 percent annually for three decades, face a slowdown or
what for China would be a recession? Does it have a real estate "bubble"
about to "pop"? What would be the global consequences? Treasury Secretary
Timothy Geithner visits China and Japan this week. These questions form a
backdrop. With Europe's slump and America's sluggish economy, a sizable
Chinese
slowdown would be bad news.
China inspires ambivalence. Its policies -- especially its undervalued
exchange rate -- are skewed to give it an advantage on world markets. This has
cost jobs in the United States, Europe and developing countries. Still,
China is now such a powerful economic force that an abrupt slowdown would
ripple beyond its borders. Trade would suffer. China's protectionism might
intensify to offset job loss. If surpluses of steel and other commodities were
dumped on world markets, prices and production elsewhere would fall.
There are warning signs. Economist Nicholas Lardy of the Peterson Institute
cites three. First, Europe's slump has weakened China's trade; Europe buys
about a fifth of its exports. Second, housing is showing signs of a bubble
and is deflating. Finally, China's government will have a harder time
deploying a stimulus than during the 2008-09 financial crisis. Government debt
rose from 26 percent of gross domestic product in 2007 to 43 percent of GDP
in 2010.
How all this affects China's growth is controversial. "Most likely, China
will have a soft landing," says Justin Yifu Lin, the World Bank's chief
economist. "Growth goes to 8 percent or 8.5 percent." That's down from about 9
percent in 2011. Government debt is still low enough to permit ample
stimulus, Lin thinks. Many forecasts agree.
But skepticism is mounting. The Japanese securities firm Nomura sees a
one-in-three possibility of a "hard landing" -- a drop in growth to 5 percent
or less. To Americans, now experiencing annual economic growth around 2
percent, this may seem fabulous. But for China's modernizing economy and huge
labor force, a 5 percent growth rate would raise unemployment and social
discontent. The adverse GDP swing would roughly equal the U.S. decline in the
2007-09 recession.
Housing may settle who's right. China has vastly overinvested in housing,
argues Lardy in a new book ("Sustaining China's Economic Growth After the
Global Financial Crisis"). The main reason, he says, is that financial
policies prevent savers from realizing adequate returns on their money. The
stock
market is seen as rigged. Government regulations keep interest rates on
bank deposits -- the main outlet for savings -- low. From 2004 to 2010, they
were less than inflation. Frustrated savers invest in housing, where prices
are not regulated.
The result seems a classic speculative bubble. People buy because they
believe prices will go up; and prices go up because people buy. A 2010 survey
found that 18 percent of Beijing households owned two or more properties;
another 2010 survey of all cities found that 40 percent of purchases were for
investment. Many units, Lardy reports, are vacant because rents in
Beijing, Shanghai and other major cities are low.
Unfortunately, booms breed busts. Buyers ultimately recognize that rising
prices reflect artificial demand. Purchases slow. Prices fall. New building
declines. The process feeds on itself. With modest imbalances, the result
is a correction. Otherwise, there's a crash.
Which does China face? A popped real estate bubble could exert a big drag.
Housing construction exceeds 10 percent of GDP. That's historically high,
says Lardy. At a similar stage of economic development, Taiwan's housing
investment was 4.3 percent of GDP. In the recent U.S. real estate boom,
housing peaked at 6 percent of GDP. In China, housing stimulates much consumer
spending (furniture, appliances) and accounts for 40 percent of steel
production, notes Lardy. Land sales are also a big revenue source for local
governments. All would suffer from a housing bust.
There are mitigating factors. Outside Beijing and Shanghai, it's unclear
that housing prices are "out of line with household income growth," says
economist Eswar Prasad of Cornell University. Chinese buyers also typically
make large cash payments for their properties. Compared to United States, a
housing bust is less likely to become a banking crisis as mortgages sour.
Whatever happens, China's economic model is reaching its limits, as Lardy
argues. It has relied on exports, promoted through the controlled exchange
rate, and investment, including housing, subsidized by cheap credit.
Meanwhile, Chinese savers have been punished by the low returns on deposits.
This
dampens their incomes and consumption spending. The trouble is that the
global slowdown threatens exports and housing's excesses threaten investment.
Unless China can switch to stronger consumption spending, its economy will
slow -- or it will achieve growth by becoming even more predatory toward
other countries.
Copyright 2011, Washington Post Writers Group
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