Are China's leaders worried?

File image of construction worker in Shanghai Chinese authorities are worried that the property bubble could be about to burst

This has been the week when China's economy suddenly looked vulnerable and its Communist Party leaders sounded worried.

That may sound hard to believe. China's GDP is growing at around 9% a year, its foreign exchange reserves are the biggest in the world and Western nations keep looking to China suggesting, perhaps implausibly, that it may be able to help them out.

But listen to what China's Vice Finance Minster Zhu Guangyao told a forum in Beijing on Thursday about the global economy. "The current crisis is grimmer and more challenging than the global financial crisis triggered by the Lehman Brothers bankruptcy in 2008," he said.

That's right - here in China, the place most people look to with economic envy, senior officials think things are "grimmer and more challenging" than the dark days of 2008.

So why the deep Chinese gloom?

Mr Zhu gave some clues when he went on: "At that time, the world economy maintained growth, and world leaders... rolled out a massive fiscal stimulus and monetary measures... so that the crisis was to a large extent contained and economic recovery was achieved in a relatively short time."

Start Quote

China stands at the peak of a bubble, while Europe and the US stand in the trough of a recession”

End Quote Professor Patrick Chovanec Tsinghua University

China's fear seems to be that the world economy as a whole could shrink, something it avoided three years ago in large part because China and others kept growing.

The problem is that now things are different. It is far harder for China and other nations to roll out new stimulus measures.

So China's senior Communist officials seem to be deeply troubled by what is happening in the world around them. The deepening debt crisis in the Eurozone and the anaemic state of the US economy, China's two biggest export markets, are already hurting China's own economy.

But I think what is probably worrying them even more is the difficult position they now seem to be in at home.

Housing market woes

The shock this week was the news that China's massive factory sector, responsible some say for 40% of GDP, is now contracting for the first time since 2008.

The reasons are revealing. The official Purchasing Managers Index showed a sharp drop in export orders was responsible for one part of the contraction, but there was also a fall in domestic orders too.

The unpleasant message had two components. First China has not "decoupled" from the rest of the world - its economy is still, in part, export dependent and vulnerable to what happens elsewhere.

Bra factory workers out on strike in Shenzhen on 16 November 2011 Strikes have been erupting in cities across China, as workers demand better pay

But crucially too, the idea that China's domestic economy is sailing ahead and can pick up the slack is also looking shaky.

While China's manufacturing is having a tough time, so too is another important part of its economy, the housing sector.

After 2008 China splurged vast amounts of money in a huge expansion of credit to keep the economy growing at 10%. House prices soared. That led in recent months to worries about inflation and asset bubbles.

So China had been tightening bank lending, trying to curb price rises and rein in property purchases.

The credit squeeze has had a visible impact. Businesses are hurting, while in October house prices in many cities started falling fast and the number of transactions is declining fast too. The OECD warned in a report that property price falls risk triggering the collapse of big developers.

That warning was repeated by the People's Bank of China on Friday after officials met representatives of commercial banks and property companies.

"Some banks think the banking system and developers can withstand home price falls of 20-30%," it said in a statement on its website. "But they are more concerned about whether a fall of 20% in home prices will trigger panic sales and whether the government can take effective measures to control chain reactions afterwards."

We have already, this week, had a signal of how worried Chinese officials are. On Wednesday the People's Bank of China cut bank reserve ratio requirements by 0.5%, basically meaning banks have to hold less cash and can lend more.

It was a surprise to many, and taken as a signal that all of a sudden China's leaders have shifted - over-riding their fears about inflation are now new fears about how to keep the economy growing fast.

Their problem is that inflation still stands at 5.5%, well above the government's target. So if they free up lending once more they risk fuelling new price rises and inflating the bubble again. More reason to be worried.

Shoppers select food at a supermarket in Anhui province (file image) Inflation is above government targets and food prices have been rising

Patrick Chovanec, professor at Tsinghua University's School of Economics and Management in Beijing, says the People's Bank of China had been resisting pressure to ease up for months but has reluctantly conceded.

"The PBOC resisted loosening because it fears - and I agree with them - that pumping more money into the economy will reignite inflation and reinflate the property bubble," he wrote on his blog this week.

"Chinese leaders were hoping that vibrant export demand would offset the need for a more substantive adjustment within the Chinese economy, and that hasn't materialised. So their sole - and highly problematic - alternative is to try to reflate China's investment boom through monetary easing. The PBOC, and China's more perceptive leaders, know this is not a sustainable solution, but they're stuck."

As he put it: "One-time Fed Chairman William Mcchesney Martin famously observed that the job of a central banker is to 'take away the punch bowl just when the party is getting started'. To put it simply, the PBOC just handed back the punch bowl."

Strike fears

China, like the West, Professor Chovanec says, is facing a domestic credit crunch, but they are crucially different: "China stands at the peak of a bubble, while Europe and the US stand in the trough of a recession."

So China's leaders have many reasons to be worried. Export markets are grim. Manufacturing is contracting. Inflation is higher than they would like. The central bank is warning about events that could "trigger panic" in the property market. They need to sustain growth but without inflating the bubble even more.

China's leaders are, of course, still in a much more enviable position than their Western counterparts. The central government has cash to spend and the economy is growing.

But there is one more reason why China's authoritarian rulers might be worried. All the economic concerns are having a very real impact and it can be seen in growing labour unrest.

Friday brought news of a new strike in Shanghai. Several hundred workers were striking outside a factory. Their employer Hi-P international, a supplier to the electronics, automotive and telecoms industries, was reported to be cutting jobs and shifting production elsewhere.

Hi-P's latest financial report on its website indicated that the costs of its labour and materials had gone up so its net profit margin had plunged from 10% to just 2%.

A group of the workers outside the factory was displaying a banner reading: "We want an explanation! We want truth! Where is Hi-P's truth? Where is the government's credibility?"

The Communist Party's credibility is now built on the idea it can keep the economy growing fast and keep creating jobs. These look like troubling economic times.

Damian Grammaticas Article written by Damian Grammaticas Damian Grammaticas China correspondent

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  • rate this

    Comment number 25.

    Not only China leaders are worried. I am very worried too because i don't see america helping EU. Just like world war 1 and 2, america's help came in very late. Just in time to save the world. So, don't expect america to help EU now. EU has to be very sick first before helps arrive fron america.
    In sum, i am not surprised at all why China leaders are worried. They knew that america will not help EU and this will affect their export tremendously. And this will kill China naturally.

  • rate this

    Comment number 24.

    Of course china leaders are worried. Their exports will be hit in the next few years for sure. We are not sure what other financial bombs america will surprised the world. Their gaint corporations are run by financial wizards armed with MBA. We will not know what other innovative accounting or products will be created to surprise the world like year 2008. Even the Queen of England asked why no one see it (2008 crisis) coming.

  • rate this

    Comment number 23.

    The west will survive. China will collapse. For instance, contrary to what many people think, in North America, most people buy made in Canada or USA products such as houses, condos, cars, food, medicine, vitamins, health products, home products, pianos, tools, christmas trees, heavy industrial products, soaps, water, etc which is roughly 90% of what we buy.....5% of our disposable income, we buy are from China such as toys, computers, ipad, and other disposable things, 5% from other countries.

    We are still supporting our economy. That's the difference.

  • rate this

    Comment number 22.

    Current global economic situation is very grim, especially in the First World zone. All sensible and sane people are worrying and of course they must do so. Under such circumstances who would not worry, unless one is total broke and is feeding on charity! Of couse, the PRC must be the one who worries most, because it has the biggest savings and lagest trades.

  • rate this

    Comment number 21.

    woh woh woh.. here comes jealousy minded cheap writer Grammaticas. lol. I let only thing for people like Grammatica - instead of expecting free money and mudslinging why not you folks wash dishes and clean toilets in the China town restaurants? Atleast there are jobs but you Europeans want to be managers with your semi-skilled brain. Europeans only need change in attittude - nothing else. If you don't have money, work to earn it. Blackmailing other nations is not the way.


Comments 5 of 25



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