By Paolo von Schirach
August 23, 2012
WASHINGTON – The economic numbers from China are bad. Manufacturing has been down for several months. There are mountains of unused coal sitting in large storage places, another indicator of diminished industrial activity. A protracted real estate frenzy has produced blocs and blocs of empty buildings across the country, while prices are still way too high for the average Chinese.
Over production, growing inventories
Car dealers are resorting to the most aggressive sales tactics in order to move vehicles out of show rooms, a clear sign of a glut due to over production. Wholesalers and stores across China are swamped with huge inventories of unsold goods. Soon enough, we shall see more businesses reducing production, purchases and staff.
Whatever the official growth numbers that still project a growth rate around 7.5% for this year, this does not look like a “soft landing”. If it is indeed a “hard landing”, then a big question comes up: is this just temporary, part of a cycle? Or could this be instead the beginning of a structural change? Could it be that the protracted era of fantastic Chinese growth is over?
Who knows, really. We do not have all the facts, because Chinese statistics are notoriously unreliable. Indeed, in China it is quite possible to conceal what is really going on for quite a long time, as huge chunks of the economy are still controlled and bankrolled by the state. State owned enterprises operate in their own universe and for the time being they can count on easy credit granted on political rather than economic grounds by state owned banks. By the same token, large real estate projects are largely political, as developers get land from local officials on conditions that may not reflect true market value.
End of a successful model?
But why should this extremely successful model be over? Because it has been over reliant on manufacturing for export and on infrastructure and construction. Right now Europe, a key export market, is doing very poorly. Of course, this may change. But in the meantime the traditional Chinese low cost advantage has been progressively eroded by higher wages. In the future, unless China can compete on value and quality rather than just low cost, it may face increasing difficulties in keeping all its foreign customers.
On a different level, infrastructure and construction can grow at 5% a year only for so many years. Then you reach a point in which there is no economic return on the investment, simply because there is a glut.
By the same token, much of the residential real estate boom has been and is speculative. Rich people invest in condominiums with the intent to hold these properties and then resell them at a higher price. But now there are just too many of such unoccupied investment properties. Yes, this is a Chinese real estate bubble.
From investment to consumption
Of course, the solution would be in shifting the economic drivers from investment and export-led growth to domestic consumption. But this will not happen soon enough. China is a country of savers. In the meantime, China is slowing down. And in China, more so than in other countries, a palpable economic slow down may have political repercussion.
Structural economic change will have political consequences
The entire legitimacy of the Chinese Communist Party is based on its proven ability to deliver superior economic growth, year after year, for more than three decades. This is a truly remarkable achievement. But, if this unprecedented growth is to be replaced by more modest rates, (say 5-6% a year), in tune with other emerging markets, then the Communist Party magic will be gone.
And, without the economic performance magic, a growing Chinese middle class may discover the need for more accountability and more transparency. Indeed there is already a growth of public protests that openly defy authority. If this trend develops, who knows what may happen next.