02-06-2004, 02:55 AM
<b>China is booming; bubble, anyone</b>?
IF IT POPS, THE EFFECT WILL BE GLOBAL
By Daniel Sneider
Business executives from Silicon Valley to Sydney are breathless about China. Its growth rate is nearing double digits. Chinese factories are churning out the clothes and electronics that fill the shelves of Wal-Marts and Fry's. Chinese wealth is flowing into real estate, from high-tech parks in every city to mansions for the new rich.
Other economies feed off China's boom as it sucks in raw materials and machinery, as well as the parts that get assembled for export.
But the talk among those who watch China's economy closely is that a bubble economy is in the making. They see an economy overheated by unrestrained and speculative lending, akin to Japan's infamous ``bubble'' of the 1980s.
The growing fear is that the bubble will either pop in a banking crisis or prompt the Chinese government to deliberately slow the economy down to a soft landing.
If that happens, in this globalized world, the ripple effect could rapidly spread across Asia, into Europe and lap right up to American doorsteps. ``Slowdown in China will have a severe effect in the region,'' warns an international economic official dealing with China.
A new study issued by the RAND Corporation, and funded by the Defense Department, takes a look at potential ``fault lines in China's economic terrain,'' factors that could slow or even reverse China's runaway growth. Some of the major fault lines include:
⢠Unemployment -- official and hidden unemployment amounts to almost a quarter of the labor force, or about 170 million people, the RAND report says. As China is forced to modernize to compete globally, it could increase that rate, worsen rural poverty and trigger social unrest.
⢠Corruption -- worsening corruption, unchecked by the weak legal system, could weaken growth.
⢠Epidemics -- as we saw with SARS, and maybe now with bird flu, epidemic disease can spread rapidly in China. HIV/AIDS infection rates are also climbing, at great economic and social cost.
⢠Pollution -- China has massive air and water pollution problems and faces a serious shortage of water, particularly in the north, home to China's rust belt.
⢠Energy -- China's growth depends on imports of oil, gas and coal, making it vulnerable to sharp increases in world energy prices.
But the most immediate danger for RAND and other experts is the fragility of China's state-dominated financial system.
⢠Finance -- The four main state-owned Chinese banks, which together account for almost three-quarters of all lending and deposits in China, are sitting on a massive mountain of bad debt. Standard & Poor's estimate is that some $850 billion in non-performing loans are on the books -- well beyond the $175 billion it took the U.S. to bail out the savings and loans in the 1980s and more than twice official Japanese estimates of their huge bad loan problem.
China's banks are not banks as we know them. They exist to support government policies. When a local Chinese government wants an industrial park to attract foreign investors, it forces the banks to lend money to do it. Fearful of increasing unemployment, the government tells banks to lend money to state-owned factories that should be allowed to go bankrupt.
The Chinese government has recently pumped $45 billion from its foreign exchange reserves -- the fruits of its export boom -- into two of the big banks, with more coming. But this may be just throwing good money after bad.
``There is absolutely no assurance that the money is being used for efficient purposes,'' says Stanford's Nicholas Hope, a former World Bank official.
As long as deposits keep flowing into the state banks, this house of cards may stand for a while. And the Chinese government is trying to slow inflation and encourage bank reforms. But when Chinese are freer to move their money, including overseas, a crisis of confidence in the banks is not impossible.
``Once they start bolting for the exit,'' says Hope, ``that's when you get the problem.''
Economists warn that two things are now propping up the world economy -- the huge U.S. budget deficit and China's financial explosion. It may be a race to see which balloon comes down to earth first.
DANIEL SNEIDER is foreign affairs columnist for the Mercury News. His column appears on Sunday and Thursday. You can contact him at dsneider@mercurynews.com
IF IT POPS, THE EFFECT WILL BE GLOBAL
By Daniel Sneider
Business executives from Silicon Valley to Sydney are breathless about China. Its growth rate is nearing double digits. Chinese factories are churning out the clothes and electronics that fill the shelves of Wal-Marts and Fry's. Chinese wealth is flowing into real estate, from high-tech parks in every city to mansions for the new rich.
Other economies feed off China's boom as it sucks in raw materials and machinery, as well as the parts that get assembled for export.
But the talk among those who watch China's economy closely is that a bubble economy is in the making. They see an economy overheated by unrestrained and speculative lending, akin to Japan's infamous ``bubble'' of the 1980s.
The growing fear is that the bubble will either pop in a banking crisis or prompt the Chinese government to deliberately slow the economy down to a soft landing.
If that happens, in this globalized world, the ripple effect could rapidly spread across Asia, into Europe and lap right up to American doorsteps. ``Slowdown in China will have a severe effect in the region,'' warns an international economic official dealing with China.
A new study issued by the RAND Corporation, and funded by the Defense Department, takes a look at potential ``fault lines in China's economic terrain,'' factors that could slow or even reverse China's runaway growth. Some of the major fault lines include:
⢠Unemployment -- official and hidden unemployment amounts to almost a quarter of the labor force, or about 170 million people, the RAND report says. As China is forced to modernize to compete globally, it could increase that rate, worsen rural poverty and trigger social unrest.
⢠Corruption -- worsening corruption, unchecked by the weak legal system, could weaken growth.
⢠Epidemics -- as we saw with SARS, and maybe now with bird flu, epidemic disease can spread rapidly in China. HIV/AIDS infection rates are also climbing, at great economic and social cost.
⢠Pollution -- China has massive air and water pollution problems and faces a serious shortage of water, particularly in the north, home to China's rust belt.
⢠Energy -- China's growth depends on imports of oil, gas and coal, making it vulnerable to sharp increases in world energy prices.
But the most immediate danger for RAND and other experts is the fragility of China's state-dominated financial system.
⢠Finance -- The four main state-owned Chinese banks, which together account for almost three-quarters of all lending and deposits in China, are sitting on a massive mountain of bad debt. Standard & Poor's estimate is that some $850 billion in non-performing loans are on the books -- well beyond the $175 billion it took the U.S. to bail out the savings and loans in the 1980s and more than twice official Japanese estimates of their huge bad loan problem.
China's banks are not banks as we know them. They exist to support government policies. When a local Chinese government wants an industrial park to attract foreign investors, it forces the banks to lend money to do it. Fearful of increasing unemployment, the government tells banks to lend money to state-owned factories that should be allowed to go bankrupt.
The Chinese government has recently pumped $45 billion from its foreign exchange reserves -- the fruits of its export boom -- into two of the big banks, with more coming. But this may be just throwing good money after bad.
``There is absolutely no assurance that the money is being used for efficient purposes,'' says Stanford's Nicholas Hope, a former World Bank official.
As long as deposits keep flowing into the state banks, this house of cards may stand for a while. And the Chinese government is trying to slow inflation and encourage bank reforms. But when Chinese are freer to move their money, including overseas, a crisis of confidence in the banks is not impossible.
``Once they start bolting for the exit,'' says Hope, ``that's when you get the problem.''
Economists warn that two things are now propping up the world economy -- the huge U.S. budget deficit and China's financial explosion. It may be a race to see which balloon comes down to earth first.
DANIEL SNEIDER is foreign affairs columnist for the Mercury News. His column appears on Sunday and Thursday. You can contact him at dsneider@mercurynews.com