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In China, golf courses are called "green opium," but not because the game is addictive. It's because mainland property developers seem unable to stop building them. China has an estimated 200 courses—not a lot for a nation of 1.3 billion, but hundreds more are planned or under construction. At least they were until recently, when China's Cabinet, the State Council, discouraged investment in new links as part of a broader effort to control what Beijing calls haphazard and redundant property projects. Across the mainland, developers now find themselves in a sand trap. "We're still working on due diligence to see if there will be any impact on our residential site," says Frederick Leung, executive director of Dickson Group Holdings, a Hong Kong construction contractor that delayed buying into a housing project adjacent to a golf course near Beijing after the restrictions were announced. "In the short term, the government is trying to cool down the economy. So that will affect everything in the residential and commercial markets."
More than golf courses are at stake. The central government is in the midst of the first comprehensive effort to restrain China's soaring economy in a decade, and whether the attempt is successful has global implications. Faced with overheating markets and rising inflation, Beijing wants to ease annual growth of gross domestic product (GDP) from the current rate of nearly 10% to a more manageable 7%. But China's policymakers may lack the monetary tools to engineer a soft landing, and the specter of a Chinese crash is contributing to fears that the global economic recovery—already under pressure from skyrocketing oil prices and rising interest rates—is in peril. Asian stock markets are throwing off storm warnings: on May 10, the region's bourses tumbled by as much as 5.7%, registering their steepest one-day declines since the Sept. 11 terrorist attacks, partly because of fears that a slowdown in China could damage regional economies.
An overreaction? Perhaps. Certainly there is an element of irrational behavior in the stock-market trembling that occurs every time the world's newest economic debutante adjusts her corset. China's $1.41 trillion economy is, after all, only the world's sixth largest (one-eighth the size of the U.S.'s and less than half of Japan's). But China's voracious demand for the world's raw materials and its burgeoning consumer markets means that the country has taken on outsized importance as an engine of global economic growth. Since 1995, China's GDP has doubled and its imports have tripled, making it an increasingly important trading partner for export-driven economies such as Japan, where trade with China accounted for 32% of export growth last year.
There's little doubt that a sharp economic contraction in China, such as the one the mainland experienced in the early 1990s, would cause severe withdrawal pangs in economies such as Japan and Taiwan, and could even plunge them into recession. But that fate would not be shared evenly or universally throughout Asia, economists note. Despite the euphoria about China as the Next Big Thing, many observers are quick to downplay the notion that Asia is as dependent on China (yet) as the conventional wisdom held even a few months ago. The mainland is still not nearly as key to the region as a whole as is the U.S., Europe or Japan. Merrill Lynch economist T.J. Bond, for example, notes that although 20% of Asia's recent export growth may have come from China, 22.7% came from Europe. Likewise, although exports to China from Indonesia, Malaysia, the Philippines, Singapore and Thailand may have grown 30% in 2003, they still accounted for only 10.7% of those countries' total exports. "Of course a slowdown carries the risk of reducing exports to China," says Susan Adams, senior resident representative of the International Monetary Fund in Vietnam. "But we don't see it as a major factor that would slow Vietnam's growth."
Moreover, most economists expect Beijing will successfully cool growth without major economic disruption. "I don't see a 'sky-is-falling' scenario," says Bruce Murray, country director for the Asian Development Bank in Beijing. "It's not like exports to China are going to crash. China will continue to grow at a significant rate" of 8.3% this year and 8.2% in 2005, he estimates. But that's not to say that some overheated sectors in which investment has been rampant will not suffer. Beijing has targeted a number of industries—among them aluminum, autos, construction supplies, real estate, steel and textiles—for special restrictions. Among other measures, the government is discouraging new projects by withholding necessary approvals, threatening punishment to those who ignore a prohibition on converting agricultural land to other uses and requiring entrepreneurs to risk more of their own money. For example, investors in steel mills previously had to put up only 25% of a project's value. Now they must kick in 40%.
Outside of China's main financial hubs, however, there is a risk that attempts to curtail overly optimistic investments by clamping down on credit will be ineffective, because local lenders may not heed Beijing's edicts. For a nation that was once completely command controlled, the central government has surprisingly few ways to compel regional lenders to obey orders. In Chengdu, for example, capital of Sichuan province 1,500 kilometers from Beijing, a branch of the China Construction Bank recently approved loans to upgrade a steel mill in the town of Panzhihua. Jiang Wen, chief of the bank's business-development department, says the mill already has local-government approval, so the bank is pushing ahead despite Beijing's jawboning. "We have had no change in lending," Wen says.
But anecdotal evidence suggests that bankers elsewhere in China are tightening up. In Shanghai, for example, rules that developers put up 25% of construction costs to qualify for loans "were never tightly enforced," says Shao Zhongye, finance director for Shanghai Longyuan Real Estate Co., which develops apartment buildings. That's changed. Shao's company just finished a development of 97 units, and he's worried about getting financing for his next project. "It definitely will be a lot harder to borrow now," he says. And although new remedies haven't taken effect yet, recent economic indicators are promising. Last week, Beijing announced that industrial output declined in April, the third monthly decline in a row; growth in production of both steel and cement also slowed.
Obviously, that's bad news if you happen to be in the business of selling, say, iron to China. But a slowdown would be welcome in many quarters. China's appetite for raw materials has been Brobdingnagian. The country consumed 40% of the world's cement, 31% of the world's coal and 27% of its steel last year, helping drive up prices for many commodities, such as metals, by 50%. But prices have been falling for several weeks, to the delight of many. Jeffrey Sheu, spokesman for Taiwan-based bicycle maker Giant Manufacturing, applauds China's efforts to rein in the economy, because rising materials costs have eroded profit margins. Not only that, Giant, which operates three factories on the mainland and sells to Chinese consumers, hopes that tougher lending rules will prevent additional entrepreneurs from entering the business. "The bicycle industry in China is overcrowded, with too may competitors and too much price competition," he says.
Even Japanese and Korean steel, basic-materials and capital-equipment manufacturers—the companies you'd expect to be most despondent about reduced demand from the mainland—are philosophical. China's big appetite resulted in supply shortages and inventory disruptions. A respite from the insatiable dragon will give them an opportunity to reload. Says a spokeswoman for POSCO, Korea's largest steel company, "These constraints will have a short-term negative influence, but long-term, this is actually progress." Likewise, Japan's and Korea's giant electronics conglomerates are sanguine. Toshiba, for example, sold $1.3 billion worth of goods in China last year, so "obviously we are concerned about a drop in sales," says Junichi Nagaki, a spokesman for Toshiba. But he notes that global operations, such as Samsung, Sony and Toshiba, are diversified internationally and can weather slower sales growth in China.
Still, it's far from certain that China has the policy tools needed to avoid a crash. Premier Wen Jiabao recently likened his country to a speeding car trying to slow down without skidding. "We cannot slam on the brakes," he said. "We have to press the brakes gently." But the country's rickety financial system may not allow gentle pressure, because it has yet to undergo a full capitalist transformation—for example, some bank loans are issued because the government orders them, not because careful analysis indicates that the borrower is a good risk. So Beijing resorts to administrative diktats that are ineffective if few obey them but could result in a too-sharp contraction if everyone does. "Too many people have a fantasy about China that bears no relation to reality," says Arthur Kroeber, managing editor of the Hong Kong-based China Economic Quarterly. "This is still a state-directed economy, and the government's latest steps have been a wake-up call." The alarm bells are getting louder. Consumer prices on the mainland jumped 3.8% last month, the highest year-on-year monthly spike in seven years. That is expected to increase pressure on China's central bank to raise interest rates for the first time since 1995.
Proponents of the soft-landing scenario note that Beijing has made great progress in modernizing its economy since 1994, increasing the country's resilience. China is now a member of the World Trade Organization, has more-diverse industries and markets, a more flexible industrial base and a better-trained workforce. Although the country's official growth target of 7% is thought to be difficult to achieve, the median prediction among economists tracked by Bloomberg holds that China's GDP growth will slow to 8.7% this year and 7.8% in 2005.
That level of easing does not pose a threat to the global recovery, says Val Koromzay, an economist with the Organization for Economic Cooperation and Development in Paris. The worst-case scenario, he says, is the simultaneous occurrence of higher oil prices, higher U.S. interest rates, lagging growth in Europe—plus a hard landing in China. "If you put all of these things together, that would be a cocktail that could be hard to absorb," he says, quickly adding that he sees it as a "low-probability event." But by itself, China "is not No. 1 on the list of risks to the global recovery." The world may be experimenting with China as a trading partner, but it has yet to develop a full-blown opium habit.
- Jim Frederick | Tokyo
- Even if Beijing fails to cool off its overheating economy, the fallout for the rest of Asia could be less damaging than feared