While the Obama administration struggles to jump-start the stalled U.S. recovery, policymakers in Beijing have an opposite but equally formidable task: putting the brakes on China’s speeding economy without triggering a slump.
How well they succeed holds enormous consequences for the world economy, where China has emerged as one of the few reliable engines of growth.
The government announced this week that China’s economy expanded at an annualized rate of 9.5% in the second quarter from a year earlier. That’s slightly slower than the first quarter, thanks largely to efforts by authorities to cut bank lending and hike interest rates. Their hope is to tame inflation that’s angering the nation’s consumers, and to let some air out of a worrisome real estate bubble that many fear could burst.
Although China’s gross domestic product growth is the envy of slow-growing industrialized nations, cracks are emerging in its economic model. China leaned heavily on housing construction, public works — and billions in government borrowing — to power through the global slowdown. You can see it in empty highways paid for with public debt, in vacant new apartment blocks in Chinese cities and in the faces of grumpy shoppers in the produce aisles where prices for basics are soaring beyond the reach of average households.
The worry is that this kind of stimulus has artificially juiced China’s economy, making it vulnerable to a hard landing. How severe the challenges are is open to debate. Many analysts are confident that China can slow growth without derailing its economy. But what’s acknowledged by experts both inside and outside of China is that the nation’s current path is unsustainable.
“They are at a crossroads, needing to shift to a new model,” said Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington.
Visitors to China can’t help but be amazed by the frenzy of construction taking place across the country, where shopping malls, office towers, apartment buildings, subways and bullet trains are being completed in record time. What isn’t as visible is the ocean of debt that financed this binge — and growing concerns about how it will be paid back.
In a bid to insulate China’s economy from the global financial crisis and weakened demand for China’s exports, authorities encouraged banks to lend, particularly for real estate development and public works that create a lot of local jobs. Fixed asset investment — the construction of infrastructure and buildings — doubled between 2007 and 2010 as developers availed themselves of cheap financing.
The result: Some Chinese cities are awash in vacant commercial space and unsold apartment units. In the first half of this year, home sales dropped 20% in Beijing, 26% in the western boomtown of Chongqing and 61% in the speculative hotbed of Haikou on Hainan island, according to the China Index Academy, a property research firm.
Local government debt has also skyrocketed. The careers of many Chinese local officials depend on creating jobs and economic growth, but the central government prohibits cities from issuing their own bonds to finance public works. To sidestep that prohibition, municipalities across the country have created off-the-books entities to do the borrowing. A national audit released in June found that local governments had amassed $1.65 trillion in loans by the end of last year — a sum equal to nearly a third of China’s GDP.
“China has developed a huge debt burden in the past two years due to the fiscal stimulus in the wake of the global financial crisis, on top of a post-crisis property bubble,” wrote Vincent Chan, an analyst for Credit Suisse, in a report released last month.
Although much of that investment will no doubt boost China’s competitiveness in the long run, billions have also flowed to make-work, vanity projects of dubious quality. Case in point: a portion of a twisting mountain road in the southern province of Yunnan collapsed a day after opening last month.
Analysts said China’s banks probably would have to restructure billions in loans. Authorities have been tightening credit standards and hiking interest rates.
But that’s making it tough for many small and medium-size private companies to get the financing they need to thrive.
“It’s very tough to get loans now,” said Huang Fajing, a cigarette lighter manufacturer in the southern city of Wenzhou who was recently told by his bank that his credit line was being trimmed. “I’ve had to scale back stockpiling raw materials.”
Meanwhile, Huang said, costs of supplies, wages and energy have been rising, cutting into his profits as China struggles with rising inflation.
Consumers too are getting socked by rising prices, a major cause of concern for Chinese authorities who are worried about the potential for social unrest.
Last month the price of pork, a staple of the Chinese diet, was up 57% from a year earlier. To minimize sticker shock, grocers have resorted to displaying the price per half kilogram rather than the usual 1 kilogram, hoping that customers won’t notice.
Lao Li, a 67-year-old retiree, was in disbelief as he carefully inspected the pork selection recently at a Beijing supermarket.
“It’s so expensive. What is this?” he asked his wife.
“Gold,” she replied.
The couple left with the cheapest thing they could find: half a kilogram of ground pork for about $2.
China’s leaders say they will have food prices under control soon. But economists said the country would have to wean itself from its dependence on public works and construction to ensure sustainable, long-term growth.
“The longer investment-led growth continues, the greater the risk that capital is misallocated and that overcapacity becomes a serious issue,” said Mark Williams, an analyst for Capital Economics. “In other words, while near-term risks have abated, the challenge of sustaining rapid growth over the long term has increased.”
Nicole Liu and Tommy Yang in The Times’ Beijing bureau contributed to this report.