For several years, China’s economy has achieved one milestone after another: world’s largest automotive market, biggest energy consumer, No. 1 exporter, and leading manufacturer.
It has catapulted past Japan to become No. 2 in gross domestic product. Some say it’s a matter of time before it leapfrogs the Uunited States to become the world’s largest economy.
All of that was powered by China’s phenomenal GDP growth — 10 per cent annually for the last three decades, unmatched in recent history.
But now, China may be on the verge of a big slowdown, as its leaders and lenders squeeze the liquidity out of a system that has produced one asset bubble after another in the last few years. Inevitably, that will spill over into China’s stock markets, making them less hospitable for investors than in years past.
There are signs of big changes ahead from the highest levels of the Chinese government. In a March 5 speech to the National People’s Congress in Beijing, Premier Wen Jiabao laid out what’s ahead in the government’s next five-year plan.
Wen said the government’s two top priorities were:
--Maintaining price stability
--Increasing consumption
The second, of course, has been the biggest concern of the U.S. and other developed countries, which have run huge trade deficits with China and have urged Beijing also to let its currency, the renminbi, rise.
It’s a huge change. In previous five-year plans, economic growth was routinely the top priority, said Michael Pettis, a China expert at the Carnegie Endowment for International Peace who teaches finance at Peking University.
End of an Era
Significantly, the leaders also trimmed their growth targets to 7 per cent annual GDP increases, from 7.5 per cent in the last plan.
Of course, China effortlessly racked up double-digit growth and then some, year after year. But in an interview, Pettis said those days could be coming to an end.
“I think there’s a growing concern in the more sophisticated economic circles that something is going to change,” he told me. “Some people say the 7 per cent [target] will be optimistic.”
In fact, Wen himself told reporters in March: “It will not be easy for us to achieve 7 per cent GDP growth with quality and efficiency.”
Why? Because China has been performing way above the norm for years. The country has been in an investment-led boom since Deng Xiaoping unleashed free-market forces in the late 1970s.
“Certainly countries have grown rapidly in the past, but such growth has generally abated in time; 30 years is a very long run,” wrote David Beim, a former investment banker and now a professor at the Columbia Business School.
In an important new paper, “The Future of Chinese Growth,” Beim argued that China’s hypergrowth cannot continue.
Japan, he said, also racked up double-digit percentage growth rates from the mid-1950s to the mid-1970s, then growth tapered off and reached the 5 per cent to 7 per cent range by the mid-1980s. Pretty strong, but not spectacular. Korea followed a similar path.
But Japan’s growth was artificially pumped up by banks’ “massively overlending,” which led to the great stock and real-estate bubble of the late 1980s, when the Nikkei Composite index nearly hit 40,000. This week, more than 20 years later, the Nikkei traded below 10,000.
China, too, is using massive over-lending to keep the growth engine going.
“There is ample reason to believe that China’s growth is being artificially sustained by financial excesses,” wrote Beim. “Its response to the…recession of 2008-2010 has been overlending by the Chinese banks, leading to substantial inflation of wages, equity values, and real-estate prices much as happened in Japan. The longer this continues, the more painful the comedown is likely to be.”
