I left China a day before the World Economic Forum met in Dalian province in September, impressed with the country’s focus on growth but struck by the immense complexity of this challenge. This is a country which is slated to lead the world out of its worst economic contraction since World War II, and my visit to Shenzhen, Dongguan and Hong Kong revealed an economy obsessed with rapid growth.
China has just implemented a massive 4 trillion yuan stimulus package. A significant part has rightly gone towards infrastructure. Thus, the government, in a single stroke, is using its vast reserves to create useful future assets and, currently, jobs. It has prevented the possibility of mass unrest by millions of workers whose jobs were terminated by export factories.
Ironically, many of these export factories in coastal China are now finding it difficult to obtain skilled labour as workers find remunerative jobs in building bridges and railroads in the comfort of their home provinces. This will lead to a positive correction of the income imbalance which has existed between coastal and interior China.
Equally important, the government has ensured that a record 7.7 trillion yuan in bank loans has been disbursed rapidly. This is a steroidal injection of liquidity, and private firms have, perhaps for the first time, been assured far wider access to financing.
Both these measures have resulted in lifting GDP growth to 7.9% in the second quarter of 2009, up from 6% in the previous quarter. The message is clear: We will spare no effort to get back to double-digit growth. China’s primary motive remains its desire to become the world’s pre-eminent superpower, yet in pursuing this goal, it is likely to provide an important economic engine to a fatigued world.
While the single-minded pursuit of growth is laudable, the country appears to be nervous about sustained success because of four key factors. First, the insecurity about this being a jobless economic recovery, since short-term investment in infrastructure is unlikely to create long-term jobs. When the state stimulus is reduced, what will happen to these jobs?
Second, the fear that a significant proportion of bank loans will go to relatively inefficient state-owned firms which dominate large industries such as auto, steel and textiles —since much credit has been earmarked for these sectors. This may crowd out investments by entrepreneurial private firms, which are a far more reliable engine of growth.
Third, and most dangerously because of a lack of adequate controls, a lot of easy money from bank loans is feeding a bubble in real estate and equity markets rather than fuelling real growth. The Shanghai and Shenzhen stock markets have risen by 70% this year, and The Economist magazine estimates that up to half of all bank lending may have ended up in China’s asset markets. Therefore, when bank lending returns to normal levels, will these asset markets collapse, or will some banks collapse—triggering a repeat of what happened last year in the US?
Fourth, there is no clear evidence that domestic demand in China has been greatly strengthened by stimulus. This is critical for a country whose economy relies significantly on exports, which have collapsed. Strong measures to stimulate consumer demand are yet to appear.
These fears are expressed somewhat colourfully by a Hong Kong-based columnist who likens the stimulus package to an old Chinese idiom—“loud thunder but small raindrops”. Yet, Beijing appears rightly focused on a return to rapid economic growth. Most people I met during my visit were confident that the government would quickly evolve solutions to the four factors highlighted here before they irreversibly affect the economy.
Harish Bhat is chief operating officer, watches, Titan Industries Ltd. These are his personal views. Comments are welcome at firstname.lastname@example.org