- The Washington Times - Sunday, August 15, 2010


There’s little good news these days for the world economy. The Federal Reserve is now warning of a slowed U.S. recovery, if not a double-dip recession. The euro is again under pressure from its debt-ridden members. Britain is undertaking serious but politically dangerous surgery on its welfare state. Germany continues to pump out subsidized exports as though there were no tomorrow. Although still growing rapidly, India faces increased inflationary pressures. And Dubai’s collapse may be the forerunner of other misadventures in the gluttonous Persian Gulf states.

But events in China might prove to be the most dangerous for a world scene already crowded with perils. Not least is Beijing’s refusal to cooperate with the U.S., Japan and the European Union in reining in the drive by the erratic tyrannies in North Korea and Iran to move toward nuclear weapons. But the economic situation is no less worrisome.

China has simultaneously become the poster child for economic development and the chief miscreant in producing disequilibrium in the world’s finances. All this comes as Beijing prepares for a dangerous transition to a new generation of leadership, with its rapidly strengthening military increasingly rambunctious.

In the welter of statistics, always particularly suspect with China, there are increasing anomalies. Foremost is growing evidence that China’s phenomenal growth rate is falling. Whether truth or fiction, a legend has arisen that only continued rapid expansion can ensure political stability among the country’s 1.3 billion people. That’s because the Communist Party is now devoid of all of its mystique and is dependent upon prosperity and the suppression of any dissent to hold on to power.

The magic number to keep the economic bicycle moving forward without toppling has been a minimum of 8 percent annual GDP growth. Even according to the always suspect official figures, China is nowhere near that now.

And even the good news in China these days is often bad news — at least in the long term. For example, Beijing’s trade surplus grew to more than $28 billion in July, adding to its staggering hoard of more than $2.2 trillion. A big chunk of that reflected the U.S. June trade deficit of almost $50 billion. But more than anything else, the Chinese surplus represents continued export subsidies and currency manipulation. On the eve of the last G-20 summit in June, China promised it would permit the yuan to appreciate. But the currency has gone up only 0.08 percent compared with the dollar, with each month that Beijing does not move making any adjustment more disruptive for its domestic economy.

At the same time, Beijing says it is pulling in its horns on its massive 2008 stimulus program, a defense against the world financial crash. One reason is that the program did nothing to boost consumption, a third of China’s gross domestic product. Instead, it has created — among other problems — an enormous real estate bubble. Residential real estate prices have risen 68 percent in the first quarter of 2010. More than 60 million urban apartments had no electricity bill for six months, indicating that one in four new apartments is standing empty because prices are beyond the means of any but China’s most prosperous citizens. Yet construction is continuing by private builders, huge government-owned companies and some local and regional governments.

This speculation is explained by a recent Credit Suisse study that found that 30 percent of China’s gross domestic product is hidden, with the country’s wealthiest going to great lengths to conceal their fortunes. That, in turn, only exacerbates the growing disparities of income, both between the cities and the countryside and within major urban centers. Speculators are apparently counting on a bailout by the political leadership, caught in the crunch between continued backing of artificially high rates of growth or risking increased unemployment, underemployment and possible political unrest.

But threatening any “solution” is the increasingly precarious banking situation. It turns out Chinese banks have been removing debt, placing it in “securitized” packages and selling the bundled packages to investors. Have you heard that story before? Fitch Ratings estimates new loans in the first half of the year were nearly 30 percent higher than the official figures, at a time when regulators already expressed public concern about rising bad loan portfolios and record lending levels. Beijing regulators have ordered the banks to cut back and recall the sold debt, but they have continued to market the products. Furthermore, if the banks did “reabsorb” these loans, they would be violating their reserve requirements and would, presumably, have to go to the market for more funds, unnerving savers and investors.

In instance after instance, pronouncements by President Hu Jintao and Prime Minister Wen Jiabao have taken account of massive domestic problems — for example, a new edict to close down the worst energy despoilers. But there is growing questioning of the announced reforms as so much empty rhetoric. Fawning foreign press coverage adds to the confusion often created by equally superficial “expert” analysis.

It’s been said that the main difference between a soft landing and a hard landing in economics is the extent to which the pilot is still at the controls. That may be the test in China as well.

Sol Sanders, veteran foreign correspondent and analyst, writes weekly on the convergence of international politics, business and economics. He can be reached at [email protected]

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