5/21/2012 8:04 PM ET|
China's growing pains could hurt
It's inevitable that a growing nation will suffer serious ups and downs. But will China slide softly into a needed dip or suffer a hard landing?
The panic of 1873 and what is often called the Long Depression. The panic of 1896. The panic of 1907, with the run on the Knickerbocker Trust, which built momentum for the creation of the Federal Reserve.
That's just a short list of financial and economic crises in the United States during the country's rise to global economic power in the latter half of the 19th century.
It would be extremely surprising if China didn't suffer a few bumps on its rise to a similar position of global economic power. And it has. In the aftermath of the 1997 Asian currency crisis, for example, the official growth rate for China's gross domestic product dropped from 9.3% in 1997 to 7.8% in 1998 and to 7.6% in 1999 before recovering to 8.4% in 2000. The growth rate for China's exports dropped to 0.5% in 1998 from 20% in 1997.
And now the worry is that China is looking at something like that 1998-to-1999 growth recession this year or next. Economists outside China are looking for an official GDP growth for 2012 of something like 8.1% for the full year, and for the economy's official growth rate to bottom during the second or third quarter at 7% to 7.5%.
Is the worry justified? Could China be headed for a drop to something less than the expected 8.1% growth rate for 2012? Or to something like the dreaded "hard landing," a vague term that I think means 7% growth or less. Or could it drop to something even worse, say, 6%?
The current data are ambiguous, to say the least. In my opinion, they point to three possible interpretations:
No. 1: The Chinese government blew its resources in overstimulating the Chinese economy after the global economic crisis and now, having stepped too hard on the brakes, doesn't have the money to stimulate again.
No. 2: The ruling Communist Party is immobilized by an internal power struggle and the purge of Bo Xilai, formerly a candidate for the nine-man standing committee of the Politburo that effectively runs China, and the Beijing government is letting a chance to address the slowdown slip away.
No. 3: The Chinese government meant it when it said it wanted to rebalance the economy away from infrastructure investments and exports and toward consumer spending, and it is willing to risk some growth in order to achieve that end.
No. 3 strikes me as the most likely -- although I can see elements of all three scenarios at work. Let me tell you why I think that, and what it means for China as a short- and long-term investment.
Crunch go the numbers
Those growth numbers -- 8.1%, 7.5%, 7.1% and even 6% -- don't seem like crisis numbers, and they certainly aren't low enough to send global financial markets into a tizzy. That is, until you consider three things.
First, many economists are highly suspicious of China's official GDP numbers. Those economists look to less-easily manipulated numbers as a check on the official rate. And those figures suggest a much slower growth than the official numbers. For example, electricity consumption, a frequently used check, recorded something between a 0.7% decline and a 3.7% increase in April, compared with the official 8.1% GDP growth rate in the first quarter.
Second, many observers believe that China needs a minimum of 7% economic growth to avoid more unrest and protest. China's official unemployment rate always seems to come in near 4%, but a better estimate of urban unemployment, which includes unregistered workers, is at least twice that. Rural unemployment is somewhere near 20%.
That's led to a continued increase -- even in official statistics -- in protests, riots, mass demonstrations and mass petitions. The number of such events rose to 127,000 in 2010, according to the China Police Academy, from 90,000 in 2006. That's a 41% increase. Citizens' satisfaction with their own lives is also in decline, according to Horizon, a Beijing polling company. Confidence in the Chinese government has dropped by about 10 percentage points to 60%. These trends are certainly not what a Chinese Communist Party negotiating a transfer of power wants to see.
Third, an economic slowdown in China, even if just to a growth rate that most developed economies would envy, could be a huge negative for China's stressed banking system. The official estimate of bad loans in the portfolios of China's big banks was just 1.15% in 2011, down from 1.34% in 2010. But nobody believes these figures, and even if they did, the country's big banks aren't where the worst problems are. Those are in lenders associated with local governments. Moody's Investors Service estimated back in July that local government debt was underestimated by $540 billion in official figures and that nonperforming loans could reach 12%. If the economy slows more than expected, the percentage of nonperforming loans would climb.
This last point is crucial to those who believe China is headed for a hard landing because the government doesn't have the resources to stimulate the economy that it had in 2008. In that year of the Lehman Brothers bankruptcy, official stimulus came to a whopping $586 billion. But not all of that money came from the national government in Beijing. The actual total was much higher, as local governments pitched in with spending and as banks ramped up their lending. Local governments announced $1.4 trillion in stimulus spending in November 2008 -- although that included projects already budgeted. Banks made a record $1.4 trillion in new loans in 2009. There's no way China's local governments and banks could match that stimulus total this time -- even if they wanted to.
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