With Europe in an austerity mode, Chinese exports suffered; it registered a paltry 9.2 percent growth in the first half compared to an impressive 24 percent in the corresponding period last year. The domestic market doesn’t have the capacity to absorb the export surplus. So, there are bound to be production cuts and lay offs in the weeks and months ahead even as the Chinese Communist Party is gearing up for transition to a new leadership towards the year end.
This should be cause for worry because bulk of the work force, 60 per cent according to some estimates, is made up of people who have migrated to Urban China in search of livelihood. Urban job losses will therefore impact badly the money order economy of rural China. More than 20 million workers lost jobs in the first stages of the 2008-09 financial crisis.
It is possible that Beijing may come up with a stimulus package, like it did in 2008. Flip-side of such package will be heating up of the property market. Already, the liberal bank finance of several trillion dollars has created a real estate bubble, though it is not to the extent the US had witnessed some four-five years ago.
Noted economist Andy Xie opines that China has the biggest property bubble in the world. He estimates the value of ‘the empty and speculative homes’ at 100 percent plus of China’s GDP.
Economists also have a word of caution against adopting a stimulus package on the scale of 2008. Such packages would worsen the existing overcapacities, they aver; if their warning signal is not heeded, China will have more bad debts or what the bankers term as non-performing assets (NPAs). The bank data, released last week, showed that new loans in June reached 920 billion yuan ($144.3 billion), up from 793 billion yuan in May.
Economists steeped in the IMF-World Bank idiom are advocating a cut in benchmark interest rates and the reserves to be maintained by commercial banks. Last month, Beijing announced the first two interest rate cuts since the 2008 global financial meltdown. This may lead to more bank lending.
According to Andy Xie (South China Morning Post, July 11), the cutting of interest rates is no more than “doubling down a bad hand.” He firmly believes that the policy of cheap bank credit fuels bubbles, and it is a ‘wrong’ prescription.
Says the economist in his SCMP article: “The bubble has engulfed all financial activities since, not just the banking system (and real estate sector). There is a massive underground loan-shark industry at the bottom of the risk curve that is now bursting everywhere. Private equity funds are the latest to become a huge bubble. As overcapacity and surging input prices keep returns on capital low in the real economy, they have joined asset speculations directly or indirectly to stay in business.”
How China will grapple with the crisis gripping its real estate sector will be interesting to watch since a section of the Red Aristocracy is directly or indirectly involved with the ‘boom’ cycle propelled by speculation in real estate. Already, the land market is collapsing.
Between January and June this year, land sales revenues dropped by 60 percent in Beijing and Shanghai, while it was down by 72 percent in Hangzhou and by 84 percent in Wenzhou. Pumping more money to keep the bubble in tact or to moderate may appear desirable at some stage but it runs the risk of bursting the very bubble itself, which in turn could mean Yuan devaluation to the relief of the Americans though.
President Hu Jintao appears to be seeing a way out for the mess in ‘more free market’. If he manages to have his way, China is bound to lose its USP – cheap labour platform for the global industry. All this at a time the economy is clearly heading below the estimated 8 percent growth rate that is required to prevent unemployment, and social unrest, from rising.
– M Rama Rao
