Few views of China’s spectacular economic growth could be more impressive than the one offered by the property company Tomson Riviera in Shanghai. From the top floor of its sleek, luxury apartment blocks in the Pudong development zone you can, say the brochures, look out across the Huangpu river at one of the world’s most futuristic skylines.
The panorama does not come cheap. At 180million yuan (about $22million) for a penthouse, this is the most exclusive residential complex on the mainland. Unfortunately for the developers, it is also the emptiest.
Since it opened in October last year, the waterfront development has failed to attract a single buyer for any of its 74 apartments. The situation is so desperate that Tomson has decided to put a second block out to global public tender.
Even so, analysts say, the price is unlikely to rise for several years. They blame it on an optimistic initial valuation of $15Â 500 a square metre. Others blame a housing market swamped with swanky apartment blocks and luxury villas. In a single week last month, residential prices in Shanghai fell by 10%.
But there is another, darker explanation doing the rounds: that Tomson Riviera is the victim of a Chinese economy that is out of control. Unbalanced, overheated and wobbling on the shaky foundations of a debt-ridden banking system, the economy, say some doomsters, is heading for a fall.
It is not the first time such predictions have been heard. Since the start of the opening and reform policy in 1978, pessimists have intermittently warned that an average annual growth rate of 9% was unsustainable and would end in collapse. So far they have been wrong.
China has not only maintained stable growth, it is also accelerating. Recent government figures reveal that the number of cellphone customers in the country, already the world’s biggest telecoms market, had grown to more than 431million in the past year, up 45%.
But how fast is too fast? The question is once again being asked — and not just by the perennial pessimists. In a survey published last month in the respected Caijing magazine, 56% of Chinese economists saw signs of overheating, up from 15% in April.
After the latest quarterly, gross domestic product (GDP) figures revealed an 11,3% surge. Even President Hu Jintao, who usually avoids economics, joined the fray. He warned of tough measures, including credit curbs and restrictions on land development, to “restrain blind growth in high energy-consuming and polluting industries”. After being fixed for a decade, interest rates have been raised three times in a year, albeit slowly, to cool the economy.
Bubble
But even though the Chinese economy is growing more than twice as fast as Japan’s did during its “bubble” heyday in the late 1980s, Beijing’s problem is one of balance more than speed. Developing countries tend to grow rapidly as they catch up with rich countries. With a huge population that is still extremely poor by global standards, China has plenty of ground to make up.
China is unusual in many ways. It is the largest ever developing country; it is the largest country to make the transition from a command economy to a market. It is also ageing fast, and it exports capital to the rest of the world rather than importing it. Where it is similar to other developing economies in the past is that there are distinct signs of overinvestment and wasted resources on a colossal scale.
The United States industrialised rapidly in the 19th century, but it suffered periodic, painful and relatively short-lived boom-bust cycles as investors speculated wildly on often unÂeconomic projects. China, it is feared, could be on the brink of something similar: a savage but temporary slowdown that will not affect the country’s long-term growth prospects.
The national development and reform commission, the pilot of China’s economy, recently noted with alarm that fixed asset investment increased 29,8% in the first six months of the year. In the car and textiles sectors, the increase was more than 40%.
The trigger for a crash could be a period of weakness in the US, the main customer for low-priced goods from Chinese factories. Exports and fixed investment account for more than 80% of China’s GDP, and any sudden fall in US demand would feed through into factory closures and higher unemployment in China. The initial shock would, it is feared, be compounded by a financial crisis as it brought to light numbers of under-performing bank loans.
In the short term, the government would throw money at the problem by expanding public spending. In the longer term, the solution would be to expand consumption — the mainstay of developed economies, but a poor third behind investment and exports in China.
According to the Commerce Ministry, domestic supply exceeds demand for about 70% of consumer goods.
The mismatch between what the economy can produce and what it consumes has resulted in a big current account surplus and trade tensions with the European Union over items such as bras, shoes and pullÂovers, and with the US over everything from textiles to steel.
In June, China’s monthly trade surplus hit a record $14,5billion, putting the country on course to surpass last year’s record $100billion annual trade surplus. With money flowing in from all over the world, China recently overtook Japan as the country with the world’s largest foreign exchange reserves. By the end of the year, its holdings are expected to pass $1trillion.
The government is worried that the flood of money washing into an already loose credit system will add to the glut of villa developments, shopping malls, steel mills and car plants. It has ordered banks to tighten their lending policies and instructed local governments, a major driver of investment and development, to slow the allocation of land for new projects.
Wild speculators
Most analysts believe these measures will have to be supplemented by an appreciation of the yuan exchange rate — which was partially unpegged from the dollar last year — and still dearer borrowing. But the impact of monetary policy is uncertain.
Far more important and difficult is the task of reining in local authorities, which are addicted to expansion. These municipalities are the wildest speculators in China’s economy. Free from electoral pressures, provincial leaders are judged on the size and growth of their economies. Many also have the incentive of kickbacks to push development projects, whatever the impact on the environment and local people’s rights, and often regardless of central government instructions.
Chinese policymakers argue that the problems of growth are best solved by more growth. So far, this simple formula has worked. For more than 25 years, Beijing’s mandarins have proved impressively adept at steering the economy away from major ruts. But navigation is becoming more difficult as the economy picks up pace and adds bulk. With China now more important than ever to the global economy, the rest of the world must hope that they can maintain control, or the damage will be felt far beyond the odd Shanghai luxury apartment complex or Beijing mega-mall. — Â