The crisis is coming at a perilous time here. The Communist Party is approaching a once-in-a-decade leadership transition this year, and it is unclear whether the outgoing duo of President Hu Jintao and Prime Minister Wen Jiabao have the will or capacity to make wrenching policy changes in their final months. Social tensions also are rising. And the party is thought to be grappling with serious top-level turmoil after the ouster of prominent Politburo member Bo Xilai.
China’s problems also come as the global economy appears increasingly tenuous, with disappointing job growth in the United States, a banking and sovereign-debt crisis in the euro zone that is spreading beyond tiny Greece to much-larger Spain, and even worries in the developing world, where India is experiencing a dramatic slowdown.
Until recently, China was viewed as a bright spot in an otherwise gloomy global financial picture, along with India and Brazil — countries with continued rapid growth that could prevent the world from plunging into another recession while also signaling a shift in economic might from the West to the developing world.
Now there is concern that the troubles in China, the world’s second-largest economy, might serve to deepen the global economic downturn.
China’s problems are complex. Simply put, the country’s recent double-digit growth in gross domestic product has been fueled mainly by its massive investment — spending on infrastructure, skyscrapers and factories by local, provincial and central governments. Last year, investment spending accounted for roughly half of China’s GDP, with all that construction funded by a spectacular run-up in real estate prices. It works like this: The government sells real estate to developers, and then developers and state-owned enterprises use real estate as collateral to get bank loans.
Meanwhile, domestic consumption — which fuels economic growth in the United States and most other developed countries — has remained comparatively low in China, accounting for just a third of its GDP. And exports have always been a relatively small part of China’s overall economy, despite the country’s reputation as an exporting powerhouse.
China, however, is reaching its saturation point in investment spending, particularly after a major burst in 2009-10 to ward off the effects of the global recession. Real estate prices are cooling, which hurts local government coffers and banks dependent on land as collateral for loans. Exports are dropping precipitously, with the falloff in demand from recession-stricken Europe and the United States. And Chinese consumers — among the world’s biggest savers — still have not taken up the slack, despite a government push in recent years to encourage spending.