China’s Boom or Bust

By S.P.SETH

Having earned praise for keeping its economy chugging at an impressive rate, China is now the cause of concern for its overheating economy.

Indeed, the Chinese government seems concerned too, having taken some steps to tighten the free flow of credit, like raising the reserve ratio of banks, and by raising interest rates a little bit.

But things appear to have raced ahead of the policy makers to create serious danger of inflationary pressures.

The primary reason for over-heating of the economy is that, spooked by global recession and its adverse effects on China’s economic growth, the government went on an easy lending spree.

The banks were encouraged to make credit available for all sorts of enterprises.

The most to gain were the stock market, property developers, construction projects, and the local and regional level government instrumentalities.

The result has been a booming stock market, high property values, construction projects with little utility, overstocking of inventories and materials, and local and regional governments making merry with easy money.

Such profligate spending has created more avenues of corruption, which is already a national malady.

In some ways, China has been following the development model that Japan initiated in the sixties and continued successfully through the seventies and into the eighties.

Which owed its success to government’s strategic guidance, and allocation of funding through banks to selective export-based industries.

This way Japan ran ever-increasing trade surpluses, particularly with the United States, creating serious friction at the time in their bilateral relationship.

When Japan revalued its currency in mid-eighties, thus constraining its export potential to a degree, the Japanese economy found an additional outlet in stock market and real estate.

Which led to the bursting of the resultant economic bubble in December 1989, and the subsequent lost decade.

When one looks at the way China is heading, it has uncanny similarity with Japan’s economic trajectory, with its economic bubble and resultant economic and social problems.

The important difference, though, is that Japan cannot remain impervious to popular opinion as reflected in periodic elections.

Therefore, the government of the day is required to try all sorts of political and economic permutations and combinations to deal with the situation.

The coming into power of the new Yukio Hatoyama Government to replace the Liberal Democratic Party (LDP) is an example of this.

In other words, unlike China, there are safety valves in Japan’s political system to let off steam by punishing its non-performing political leaders.

In China, on the other hand, if things go too badly, the danger of the entire structure of the Communist Party crashing down is quite real.

If China’s bubble economy develops serious cracks, which seems plausible, the government might find it hard to control the situation.

There are reports of serious social and economic unrest in China’s rural and regional areas, which has been subsidizing urban industrial economy. Which has kept the rural economy depressed.

The situation only gets worse because the Party apparatchik and bureaucracy in rural and regional China is even more arbitrary and corrupt that its urban cousins.

Therefore, China’s “harmonious society” is not doing terribly well, more so when the country’s economy is going haywire.

And it is not only the urban-rural divide that is economically and socially polarizing China; even the urban middle class is starting to increasingly feel the pressure of an unequal society.

Take, for instance, the Shanghai’s property market. The house prices there have reportedly jumped by 68 per cent in a year, making it beyond the reach of most of its residents, apart from the mega-rich.

At the same time, apart from the usual arbitrary demolition of houses to clear way for fancy development projects, the Shanghai authorities have demolished houses from the World Expo site to prepare China for showcasing its wares to the world.

This led about a 1000 middle-class Shanghai citizens (traveling in small groups to avoid detection by the authorities) to descend on Beijing to stage a very uncharacteristic public protest.

As one of the protesters, Han Zhongming, said, “It was the largest protest ever from Shanghai. Something like this has never happened before.”

Because of the unusual nature of the protest from China’s booming commercial capital of Shanghai, the protesters were given 20 minutes to voice their grievances to the State Council.

However, as with other public protests voicing citizens’ grievances, the authorities simply ignored the participants, and sent half of them to a detention centre.

And the other half were taken to the station to board their trains back home.

The upshot of this is that the stimulus package has overheated the economy, generating inflationary pressures and creating bubbles with the danger of an economic bust.

The entire country, irrespective of rural, regional and urban sectors, is under severe pressure.

And this has created a combustible convergence between social and economic factors.

And when you add the widespread corruption factor, heightened with greater opportunities from stimulus money at all levels, the picture is not pretty—to put it very mildly.

How and when the economic bubble might burst is anybody’s guess. But China’s overheated economy is in for some severe tests.

And if the economy undergoes severe jolts, the very basis of the Communist Party’s perceived legitimacy, based on healthy economic growth, will be undermined.

And this could become the basis for the aggregation of all the socially fragmented, but widespread, frustration and discontent with the regime.

China’s ruling oligarchy is aware that the country is passing through “a period of marked social conflicts.”

And there is also acknowledgment that the present path of ever-increasing statistical economic growth, without corresponding social equity and justice, is not “sustainable”.

But China’s rulers have a sense of entitlement, regarding themselves as the makers of modern China. Which makes them intolerant of any criticism and dissent.

Indeed, they regard themselves as symbolizing the Chinese nation.

Hence, any criticism of the Communist Party and its political monopoly is considered treasonous.

Since criticism and protests are growing anyway, they are resorting increasingly to repression.

With China’s over-heated economy, creating the danger of an economic bust, its rulers might find out that people want accountability, especially when things start turning upside down.