China boom a concern for global economy

The previous article explored the strategic initiatives adopted by China in moving towards a higher level of development. The process is being undertaken at great speed, which has produced both significant gains as well as potentially serious problems. A preliminary assessment by Zhihua Zeng outlined such achievements as the inclusion of a knowledge strategy in the 10th Five-year Development Plan, implementation of employment and social security system policies, doubling of tertiary enrolment ratio to 13%, increased R&D expenditure and enhanced value added from the information industry. Journalist Gwynne Dyer pointed out that China is experiencing an industrial boom with at least 250 million people moving from bare subsistence to middle class comfort in less than 20 years. One indicator of the boom is that vehicle sales rose 30% in the first nine months of 2003 with passenger cars accounting for 69% of the rise. However, a deprived rural population that continues to lose ground more than matches this new middle class.

Dyer believes that China may be on the brink of major civil disorder curtailing the boom that, in his view, only survives on cheap credit from state banks and huge exports to the United States. On the question of credit, the banks have had considerable experience with bad loans in the past when tight restrictions were introduced in 1993 but there is now mounting anxiety that there could be a new explosion in bad loans as overall lending doubled in 2003 over 2002. The boom extends to the construction of shopping malls, office buildings, apartments, and housing estates all being built by local and foreign companies. The Government is constructing six-lane expressways, bridges and tunnels, while factories are increasing production capacity to build more refrigerators, cell phones and DVD players. Many of the new loans are also going to state-backed projects ranging from office buildings to software parks such as Yunnan Province where local branches of state-owned commercial banks are providing millions in loans to major projects.

Another cause for concern is the investment in real estate and other huge projects without assurances of profitability. Real estate has been booming for years because of unsatisfied demand and the pace is increasing. However, the real estate boom has not escaped the experience of stalled expensive housing and commercial developments, an example being the Sunny Region Development in Beijing that comprises a luxury hotel, offices and a deluxe apartment building. Port-of-Spain’s equivalent, Wood-brook Place, is unlikely to encounter any such problems because of the excess demand for such facilities. Major projects include the expansion of car manufacturing fuelled by the introduction of the major Japanese manufacturers like Toyota, Nissan and Honda and the US General Motors. All that activity has produced huge demand for steel, aluminium, copper, and zinc driving world prices of those commodities to recent high levels. The general manufacturing sector in China is based on imports however, and China imports almost as much as it exports. The imports of consumer goods and food come from South-East Asia, iron ore from Australia, oil from the Middle East and a wide range of products from the US because of growing interconnectedness of the economies.

China’s exports go mostly to the US which has led to a US trade deficit with China of over US$100 billion resulting in “China bashing” by US companies and unions. The situation is complex in that US corporate giants, supported by its Government, see China as the new frontier with its huge population and unexploited resources, development of which can only add to the trade deficit because 65% of the rise in Chinese exports since 1994 come from foreign companies mainly US corporations. China is offsetting some of the potential problems by currently holding $125 billion of US Treasury securities, thereby infusing cash into the American system. “Business Week” asserts that China is producing so much so fast that it may prove impossible for the population to absorb it all. Already there are price wars in industries like automobiles, mobile phones and auto parts which are a consequence of the excess capacity and which can lead to a drop in corporate profits and investment.

With this scenario, China’s growth could slow dramatically damaging the country’s development thrust taking the increasingly dependent neighbouring countries economies with it. The rest of the world’s manufacturers can also be affected if these surplus goods are exported to other countries at even cheaper prices. “Business Week”  concluded that the bubble of overcapacity and reckless lending may already be too big to deflate gently and if the bubble breaks the sound will be heard around the world. While we cannot compare our own developments to those of China because of the scale difference, yet Trinidad and Tobago proposes to undertake relatively large scale projects over the next five  years and the initiatives for developing our human capital to accommodate the development activity and measures to protect against an overheated economy become issues to be addressed in our strategic planning.

(The first part of this column was published in last week’s Business Day)    
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