Europe and China have this much in common: the bad economic news just keeps getting worse. The latest headaches for Beijing: Growing numbers of analysts fear that a combination of slumping exports and overexposed loans could spell real trouble for the increasingly vulnerable Chinese economy.
First, the export problem. As Reuters reports:
The first quarter [of 2012] is shaping up to be especially tough because of slow European and U.S. demand, coupled with the normal spike in imports that comes with the celebration of Chinese New Year, which this year starts in late January.Zhiwei Zhang, a Nomura economist based in Hong Kong, expects China to import $28.8 billion more than it exports during the first three months of 2012, dwarfing the $1 billion deficit posted over the same period this year. That quarterly deficit was the first since 2004, and China has not recorded a full-year shortfall in two decades.Chinese Commerce Ministry officials have been warning for weeks that the trade outlook is “very severe.”
Perhaps even more troubling than falling exports are the conclusions drawn from this Bloomberg investigation into China’s real versus publicly acknowledged borrowing levels:
Bloomberg News tallied the debt disclosed by all 231 local government financing companies that sold bonds, notes or commercial paper through Dec. 10 this year. The total amounted to 3.96 trillion yuan ($622 billion), mostly in bank loans, more than the current size of the European bailout fund.There are 6,576 of such entities across China, according to a June count by the National Audit Office, which put their total debt at 4.97 trillion yuan. That means the 231 borrowers studied by Bloomberg have alone amassed more than three-quarters of the overall debt…The findings suggest China is failing to curb borrowing that one central bank official has said will slow growth in the world’s second-largest economy if not controlled. With prices dropping in China’s real estate market, economists warn that local authorities won’t be able to repay their debt because of poor cash flow and falling revenue from land sales they rely on for much of their income.
It is unlikely that anybody in China has any idea just how much of a mess they have on their hands. Local governments have every incentive to hide the full scope of their borrowing from central authorities — and local banks and businesses often have excellent reasons for helping the local authorities to hide their tracks and borrow and spend still more.Every growing economy must pass through the fire of a major financial crisis and economic crash — usually more than once. China’s new economy has not been tested by a truly wrenching crisis and downturn yet, but especially if the euro implodes, that could change. With the political system already under stress, an economic meltdown would lead to, um, interesting times.I hasten to add that China’s financial authorities are both talented and hardworking, but that is not the point. Nobody dodges all the bullets, and sooner or later it will be China’s turn to take a big hit.