Sol Sanders Archive

World's most irresponsible power is coming in
for a landing

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But events in China might prove to be the most threatening for a world scene already crowded with danger. Not the least is Beijing’s refusal to cooperate with Washington and the Europeans and Japan in reining in the prospect of the erratic tyrannies in North Korea and Iran moving toward nuclear weapons.

China at once has become the poster child for economic development and the chief miscreant in producing disequilibrium in world’s finances. All this comes as the Beijing leadership heads into a dangerous transition to a new generation of leadership with its rapidly strengthening military increasingly publicly 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 insure political stability among its 1.3 billion people. That’s because the Communist Party is now devoid of all its mystique and dependent on suppression of any dissent.

The magic number to keep the bicycle economy moving forward without toppling has been the always notoriously inadequate gross national product of 8 percent minimum growth. According to official figures, China is nowhere near that now.

But the good news in China is often bad news — long term. For example, Beijing’s trade surplus grew to $28 billion plus in July, adding to its staggering hoard of more than $2.2 trillion dollars. A big chunk of that was a reflection of the U.S. June trade deficit of almost $50 billion. But more than anything else, it 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 .08 percent to the dollar, with each month Beijing does not move making any adjustment more and more catastrophic for its domestic economy.

At the same time, Beijing says it is pulling in its horns on its massive 2008 “stimulation”, a defense against the world financial crash. One reason is that it did nothing to boost consumption, only a third of China’s gross national 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 one in four new apartments is standing empty because prices are beyond the means of any but China’s most prosperous. Yet construction is continuing both by private builders, the huge government companies, and some local and regional governments.

This speculation is explained by a recent Credit Suisse study that says 30 percent of China’s gross national product is hidden, 80 percent of that by the wealthiest, further exacerbating the growing disparities of income, between urban and rural, and within the urban centers. The speculators are apparently counting on the leadership, in the crunch choosing continued backing of artificially high rates of growth rather than suffer more of the growing disputes over wages and land seizures — and increased unemployment and under-employment.

But threatening that “solution” is the increasingly precarious banking situation. It turns out Chinese banks have been removing debt, placing it in “securitized” packages and selling it as investments. Have you heard that story some place before? Fitch Ratings estimates new loans in the first half of the year were nearly 30 percent more than the official figure at a time when regulators already expressed public concern about bad loans in record-breaking lending. Beijing regulators have ordered the banks to suck it back in, but they have continued to sell the products. Furthermore, if they “reabsorbed” these loans, they would be violating their reserve requirements and would, presumably, have to go to the market for more funds which could unnerve savers and investors.

In instance after instance, pronouncements by President Hu Jintao or Prime Minister Wen Jiabao have taken account of massive problems — for example, a new edict to close down the worst energy despoilers. But there is growing questioning of the announced proposed reforms as empty rhetoric. A fawning foreign media adds to the confusion often created by equally superficial expert analysis. [A recent Carnegie Endowment article gives former Maximum Leader Deng Xiaoping insights that once were only attributed to The Great Leader, Mao Tsetung.]

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