Unidentified Chinese shoppers wait at a red light before heading towards Plaza 66, a mall in the citys most exclusive shopping area, West Nanjing Road.
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To optimists, the June data showed just how determined the Chinese government is to implement effective monetary countermeasures to fight the downturn. As Peking University finance professor Michael Pettis says, China is "throwing everything including the kitchen sink'' at the problem. There is no question that as a result of the flood of financing, a lot of Chinese have jobs they otherwise wouldn't. But, as Grant's Interest Rate Observer, an influential Wall Street newsletter, points out in its latest issue, "Massive injections of money and credit ... are always bullish before they are bearish." The newsletter draws worrying parallels between China's current credit boom and the gush of lending that produced the U.S. housing bubble, the collapse of which devastated the financial sector and triggered the global credit crisis and current recession.
There are certainly signs that some aspects of China's recovery are ephemeral. Part of the reason China's stock market has soared is that Chinese companies have received so much cheap financing that they have dumped proceeds into the equity market for lack of better alternatives. Andrew Barber, Asia strategist at Research Edge, a New Haven, Conn., investment-research firm, estimates that up to 30% of new bank lending this year has wound its way into equities. Why isn't the money going into new businesses? The evidence suggests that in key parts of the economy growth remains anemic, particularly the important export-manufacturing sector, which continues to suffer from the reduction in global demand. According to a report from Fitch Ratings in the U.S., Chinese lending continues to accelerate even though corporate profits overall are shrinking — suggesting that China may be incubating its own financial crisis that could be triggered when the adrenal rush of the stimulus wears off.
Little Big China
Those caveats are important. But China's technocrats are well aware of the risks they are running. "They came into this [crisis period] with eyes wide open," says Barber, recognizing that loans being granted in a relatively weak economic climate could start to go bad in droves. The country's once shaky financial sector was cleaned up several years ago — in 2007, nonperforming loans amounted to just 3% of total bank assets — and vehicles set up to deal with China's last banking crisis still exist. In other words, Beijing thinks its financial system is strong enough to handle the risks of its very loose monetary policy.
To be sure, even if darker scenarios never unfold and China's economy continues to power ahead, it will probably not, on its own, be enough to drag the rest of the world into a recovery. Size matters. The U.S. has a $14 trillion economy; China's is $4.4 trillion. The U.S. accounted for nearly 21% of total global GDP last year; China just 6.4%. Chinese consumption, in other words, is growing — but is still insufficient to lift the world's advanced economies out of recession. Consumer spending drives less than 40% of China's GDP; in the U.S. before the bust, the consumer accounted for almost 70%. With American shoppers now on the sidelines — the U.S. savings rate has soared from zero to nearly 7% in the past nine months as consumers have closed their wallets — the world desperately needs someone to step into that void.
China can help. But it remains a relatively poor country, with an annual per capita income of $6,000, compared with $39,000 in the U.S. and $33,400 in the E.U. To be solidly middle class in China's big cities is to have an income of about $12,000. Brisk though auto sales may be, most Chinese still can't afford a Volkswagen or a Buick, let alone a BMW. Even as China's consumers feel richer, their share of its economy may not change much until Beijing enacts reforms to the health-care and social-security systems, steps that would give people more confidence to spend rather than save. Last year, says Peking University's Pettis, China's consumption was about the equivalent of France's. No one is calling on France to save the world.
China faces enormous challenges — a massive shift of population from rural areas to cities, cleaning up decades of environmental degradation, continuing to provide the increase in prosperity that has underpinned political stability. Given their scale, it should surprise nobody that it is still most concerned with saving itself economically — not anyone else. Beijing is most unnerved by the prospect of labor unrest of the sort that resulted in the death on July 24 of a steel-company executive in northeast China at the hands of a mob.
But the resilience of the Chinese economy is no mirage. If Beijing can come through the global crisis without an economic meltdown of its own, its leaders' reputation and confidence will be boosted. An economic model that survives the worst downturn since the Great Depression will have undeniable appeal in the developing world, at a time when the Washington Consensus is thoroughly shot. Beijing, before the crisis, was already rising, its global reach and influence expanding. As the rest of the world falters, that is truer than ever. China is not yet the leader of the global economy. But it's getting there.
— with Reporting by Austin Ramzy / Beijing