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
