Great Wall of Unknowns
By Robert J. Samuelson
Wednesday, May 26, 2004; Page A27
The question about China's economy is no longer what it will do to China but what it will do to the rest of the world. It may invigorate the global economy -- or destabilize it. We don't know. Until recently, China's movement away from a Stalinist and backward society was mainly a story about what kind of country it might become and what political role it would play in the world. Now China's size and relentless economic growth (averaging 9 percent a year since 1978) have combined to create a global goliath. It's having huge and barely anticipated economic spillover effects elsewhere.
Here, for doubters, is an excerpt from the Asian Development Bank's annual economic report:
"[China] is the world's biggest consumer of copper, tin, zinc, platinum, steel, and iron ore; second biggest of aluminum and lead; third largest of nickel. . . . It is now the world's second-largest oil consumer [after the United States], and accounted for 35 percent of the global rise in oil demand in 2003." China also produces 50 percent of the world's cameras and 30 percent of air conditioners and TVs, reports the ADB.
China's thirst for oil contributed to the price jump to more than $40 a barrel. Just last week the Wall Street Journal reported that cement shortages in the United States threaten construction projects. It attributed the scarcities to China (so many ships are tied up in the China trade that U.S. cement imports are shortchanged).
The point is not that China's economic expansion automatically harms everyone else. It doesn't. In 2003 Chinese imports rose a hefty 41 percent. Asian countries particularly have benefited. They've become major suppliers of components (often assembled in China for re-export) and machinery. The point is that the very magnitude and speed of China's growth have made it an unpredictable X factor in the world economy. Good and bad surprises will multiply -- unpredicted gains, losses, threats and opportunities.
China's current outlook seems especially dicey. In 2003 the economy expanded by 9.1 percent, according to official statistics. Many economists think actual growth was much higher. The fear is that loose bank lending is leading to vast overinvestment in basic industries such as steel and aluminum. Nicholas Lardy of the Institute for International Economics in Washington reports the following: In 2003 China's bank lending rose almost 3 trillion renminbi, or about 24 percent of gross domestic product, and investment rose 27 percent. Another possible danger is a runaway residential construction boom, driven by speculative purchases of apartment units around Beijing and Shanghai. Writes economist Andy Xie of Morgan Stanley in Hong Kong:
"The perception of instant riches has triggered massive purchases by local people with very limited income. Chinese banks lend on collateral [the apartments] and rarely check cash flow seriously. [But] many property buyers in China do not have the income to pay off their mortgages and need rental income to do so. However, the supply has severely depressed rental yields." Xie fears the worst. Borrowers will default, real estate prices will collapse and "many developers [will] leave buildings unfinished."
This could be too grim, however. Jonathan Anderson, chief Asian economist of UBS Securities in Hong Kong, thinks that worries of a "crash" -- a sharp fall of economic growth and millions of layoffs -- are overblown. China's leaders are trying to tame the boom. They've raised banks' reserve requirements, which (in theory) ought to curb new lending. They've also instructed banks to restrict new loans for projects in potentially glutted industries such as steel and aluminum. Anderson expects a tolerable "soft landing" of slightly slower growth without a major economic or political crisis.
Whatever happens will reverberate elsewhere. A modest slowdown might be good for almost everyone. It could relieve price pressures on oil and other raw materials. A deeper slump would be less benign. "Of Japan's increase in exports in 2003, close to 80 percent went to China," says economist Pieter Bottelier, former head of the World Bank's office in China. "If you get a sudden leveling off, then maintaining Japan's economic recovery will be harder." The same is true of some other Asian economies. The most dangerous possibility is that, facing a deep slump, China would try to export its way out of trouble. The result could be a flood tide of steel, cement, aluminum and consumer goods onto world markets that depresses production, jobs, prices and profits almost everywhere.
All we know for certain is that we really don't know. With a country as big as China undergoing so much dramatic change -- moving from a "command and control" economy to a market system -- the chances that anyone has a complete picture of what's going on are slim or nonexistent. In a smaller country, our ignorance wouldn't matter much. But in China, it's slightly terrifying.
© 2004 The Washington Post Company