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More Dismal Economic News from China: Is a Hard Landing Coming?

Gross Domestic Product, or GDP, is perhaps the most widely known economic statistic in the world. But just how useful is it? Li Keqiang, the man widely tipped to become China’s new premier later this year, has asserted that a country’s GDP figures are “man-made”, implying they are an unreliable indicator of economic strength. Li instead prefers to focus on electricity consumption, rail cargo volumes, and disbursement of bank loans as more worthwhile metrics.

If Li is to be believed then China’s economy could be heading for a dramatic slowdown. According to the Financial Times, rail cargo volumes and bank loans have dipped considerably, much to the surprise of policymakers. And while electricity consumption data for April is not yet available, output increased just 0.7 per cent last month from 2011. In March the corresponding figure was 7.2 per cent, and in April 2011 it was 11.7 per cent.

Meanwhile, China’s GDP growth has been decelerating for some time. The most recent data, from the first three months of 2012, indicated that China grew at 8.1 per cent, a robust figure but still well down from the gaudy double-digit performances of recent years. When those data were released, many analysts predicted that the Chinese economy would rebound strongly. It was an aberration, they said; China’s export-oriented growth model was running out of steam, but the country would comfortably settle into years of 8-9 percent growth.

Patrick Chovanec, a professor of business at Tsinghua university, begged to differ:

“China’s been riding an investment boom over the last three years that everyone recognised was unsustainable and now we’re seeing what unsustainable looks like,” Mr Chovanec says. “The unravelling of this investment boom is happening with nothing to replace it and that means China is in store for much lower GDP growth than we’ve become accustomed to.”

If Chovanec is correct—and this latest data supports his argument—then Chinese leaders are about to confront one of the most challenging periods of the post-Mao era. Political stability, not to mention the legitimacy of the Communist Party, is inextricably linked to the country’s economic performance. And as the fallout from the Bo Xilai saga reminds us, the Chinese political system is already under considerable strain. There are serious questions as to whether the system can withstand an economy that is unable to keep providing consistent, widespread improvements in living standards that have lifted hundreds of millions of Chinese into the middle class.

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  • Anthony

    Related article in Foreign Policy (Bear in China Shop) by Arthur Kroeber; questions raised by Quick Take considered with more context – China nearing a wall?

  • Jacksonian Libertarian

    “And as the fallout from the Bo Xilai saga reminds us, the Chinese political system is already under considerable strain. There are serious questions as to whether the system can withstand an economy that is unable to keep providing consistent, widespread improvements in living standards that have lifted hundreds of millions of Chinese into the middle class.”

    China’s real estate bubble is only now bursting nearly five years after America’s popped. China’s economy will go into recession for the first time in 30 years, and the economic stress from this is going to expose all the fractures in the Chinese culture. Some 500 public demonstrations per day occur in China now, and we can expect these to increase exponentially in both quantity and violence.

    The Biggest problem for China is that America’s Hamiltonian Strategy has both created a Chinese middle class and spread an understanding of the superior American Culture to every corner of China. When the already angry Chinese (despite 10% growth rates) are exposed to financial hardship it will be like throwing gasoline on a fire, the flare ups will not be minor. The Chinese culture will be forced to change. America wins!!!

  • thibaud

    China’s real estate market has very little in common with ours. Transactions are settled in cash. There’s certainly a fair amount of overbuilding, but you won’t see the ripple effects in the form of foreclosures and underwater banks on the US model because the Chinese aren’t leveraged as we are.

    The problems of misallocation of capital, eg toward unneeded infrastructure and heavy industry that benefits corrupt party/military insiders, is another story.

  • Corlyss

    I started listening to CNBC, the most anti-Obama network on the air today, during the House vote on the first TARP package. From that time until about Feb this year, I listened to them almost 24/7, particularly Jim Cramer’s and Larry Kudlow’s programs. I stopped finally this winter after Cramer declared for the 5th or 6th time that a Eurozone collapse was off the table. Every time he’d say that, I’d mumble, “. . . but they haven’t fixed the underlying problem yet and they aren’t showing any signs of taking a plan B seriously. What about ?”

    I probably could say the same thing about Cramer’s repeated preditions of a soft landing in China . . . . “Wait for it . . .”

  • Mrs. Davis


    We’ll still be having electioins with the same old hacks.

  • Luke Lea

    Thanks to China’s hukao system, the Leninist Party has things well under control. The question is, why are American workers expected to compete with serfs?

    “”What is unique about migration in China is that the two aspects of internal migration (movement and citizenship) can be totally disparate; i.e., one can move to a new place (for example, because of a job change) but can be permanently barred access to community- membership-based services and welfare. People who have moved to a new place but do not possess local citizenship (hukou) are referred to as the non-hukou population, meaning that they are not de jure residents even though they are de facto residents. . . The situation of Chinese migrants without citizenship, of course, is not unique in the international con- text of migration. Many so-called “guest laborers” working in foreign countries, sometimes for years, without local citizenship, fall into this category. But few countries have applied such a system to their own citizens in modern times. In China, this group is commonly called the “floating population” or “mobile population” (liudong renkou). Its size has grown rapidly from a few million in the early 1980s to the present level of about 150 million (Chan, 2009a). . .

    “In the cities, in addition to the lack of access to many basic social ser-vices, these migrant workers also face many formal and informal obstacles to securing jobs other than low-skilled ones (Chan, 1997; Solinger, 1999; Li, 2003). The lack of local hukou for migrant workers, combined with other unfavorable conditions such as the plentiful sup-ply of labor and lack to access to legal information and support, has created a huge class of super-exploitable, yet highly mobile or flexible industrial workers for China’s new economy, now closely integrated into global trade networks (Lee, 1998; Alexander and Chan, 2004). The “China price,” mainly due to its low labor costs, was the lowest among major developing countries (Chan and Ross, 2003).24 Even the low wages promised are often not paid for months or years.25 Many of these workers are vulnerable, and often subject to exploitation and labor abuses (A. Chan, 2001). Their “temporary” nature and lack of local citizenship also make them easily expendable. The current global financial crisis has hit seriously China’s export sector, leading to unemployment of about 20 million migrant workers (Bradsher, 2009), which is widely believed to have contributed to a much larger volume of “Spring Movements” this year (2009 nian, 2009). . .

    “The new approach of “freeing” peasant labor has served very well China’s economic growth strategy of being the world’s low-cost producer. Effectively, this has helped defer the arrival of the critical “Lewis turning point”26 so that China can continue to draw labor from rural to urban areas and export-processing zones at rural-subsistence wage rates. Du Runsheng, one of the most respected and experienced central officials overseeing the rural economy, has remarked that for two decades since 1980, there has hardly been any real increase in the wages of rural migrant workers in the coastal areas, despite rapid economic growth (Sanyi, 2009).”

  • Douglas Levene

    You are correct that there is less leverage in the Chinese real estate market than in the US. But there is something on the order of 60-80 million unoccupied apartments built on speculation in China currently. Many real estate developers are highly leveraged even if private speculators are not. The Chinese hope is to grow out of these problems – after all, there are still hundreds of millions of Chinese looking for their first modern apartment. The question is whether the economy will keep growing fast enough to bring tens of millions of people into the middle class and fill up those apartments. Stay tuned.

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