WASHINGTON – What’s really happening to the Chinese economy? The answer is that we do not know for sure. But the signs that we get are not that good.
Housing crisis
This year home sales are down. Home prices are way down. The price of steel, a key construction materials, is also down. According to the WSJ, Zoomlion Heavy Industry Science & Technology Co., a major construction equipment manufacturer, “expects a 65% to 75% decrease in net income in the first nine months this year due to..[…]..the slow down in the growth of real-estate investment”.
Beyond that, there are plenty of stories of real estate developers going bankrupt, of buyers who had paid in advance left with nothing when developers disappeared, leaving behind half built condos.
Plenty of Chinese cities have huge areas filled with brand new and largely empty developments. This large housing bust also suggest heavy losses for lenders, particularly unconventional financial institutions.
No crash
So, what do we make of all this? Most analysts agree that this is bad news. Still, to keep things in perspective, this is not the beginning of a Chinese economic crisis.
China has $ 3.8 trillion in foreign exchange reserves. That’s right: $ 3.8 trillion. This is a formidable financial cushion. Clearly the Chinese government has the means to bail out many if not all distressed companies, especially if they are State Owned Enterprises. Do not expect Western style dislocation following well publicized bankruptcies.
What about growth?
This is good, but not perfect. Plenty of cash is useful in any effort to save companies in trouble. But cash alone will not trigger innovation, competitiveness and vibrant growth. And going forward China needs genuine growth based on real competitive advantages. Hard to see where that will come from. Much of China’s growth was based on the spectacular growth of labor intensive manufacturing, due to the extraordinary advantage of low labor costs. This is largely over.
Where are the new Chinese high-tech, globally competitive sectors? Sure, there are a few recognized Chinese brands, (for instance Lenovo, Huawei, Haier). These are major global companies. But that’s not enough to sustain 1.3 billion people.
Right now, if we put together the deep housing crisis, diminished nationwide electricity use, and the significant import cuts of key commodities and raw materials, we get a picture of significant economic slow down.
Slow growth and its political consequences
What we do not know is how deep a slow down. Is this just a bad patch, a temporary correction, or the beginning of a “new normal ” of slower growth?
Some analysts believe the latter, pointing out that based on their calculations Chinese official growth statistics are routinely inflated. By this they mean that China is not growing at around 7% a year. The real number may be 5% or even less.
Assuming that they are at least in part right, the emerging picture is that China, after its incredible 30 year journey fueled by rather exceptional circumstances, is reverting to “normal” growth.
Nothing wrong with that, except that the Chinese people have been told that rapid growth year after year was the normal trend for China. An entire generation came to maturity having known only spectacular growth.
If the longest boom in modern economic history is over, at some point there can be political repercussions. Do keep in mind that the Chinese Communist Party’s legitimacy rests in large part on its role as chief architect of the economic expansion of the last 30 years. If the economic sputters, would there be resentment? Who knows, really.
Wealthy Chinese want to emigrate
But we know about a few signs that indicate widespread uneasiness, at least among the elites. There is plenty of evidence that large numbers of wealthy Chinese emigrate, or try to emigrate.
Those who can move to Canada, to the US or Europe. Chinese students flock to universities in English-speaking countries. Wealthy Chinese apply in record numbers for “Investor Visas”. By paying huge sums of money, they get on a fast track for US resident status.
Why leave China?
Now, all this looks incredibly counter intuitive. According to the established orthodoxy, China is doing very well. It is the emerging, self-confident super power, poised to overtake America in just a few years.
Then, given these solid fundamentals, why is it that those who benefited the most from China’s incredible growth are trying to get out?
Is it possible that they know something we do not know?