The landing: in your safety position, please – the WTO column

(Soon in Chinabiz)

Is China heading for a soft landing of its overheated economy or can we expect any day a ‘brace, brace’ as the machine hits the ground in a less sophisticated way?

“It is too early to say,” Professor Wu Jinglian told me last Friday when he spoke in Shanghai. When even this outspoken economist does not dare to give a prediction, there is reason enough not to sound too sure about what is going to happen in the next six months.
The sentiment is turning negative, so much is clear. Car sales hardly grew in June, for the first time in two years of double digit growth. The New York Times reported last week from Guangzhou a virtual buyers’ strike. A growing row of financial scandals keeps on hitting confidence in the domestic banks.
Since a financial crisis has as much to do with economy as with psychology it is important to note those signals. When people start to lose their confidence that will add greatly to whatever economic problems there might be.
During a conference on financed co-organized last week by the China Europe International Business School (CEIBS) in Shanghai Professor Lester Thurow of MIT noted that the Chinese government was very busy in preventing financial crises. He warned, that would not be enough, since financial crises are unavoidable and it is important for a country to have the tools in place to “clean up the mess”, as he described it, after the crisis had happened.
Japan was his example of a country that is already for twelve years in an economic crisis because its culture does not allow people to go bankrupt. That failure to “clean up the mess” allowed the crisis to fester on much longer than needed.

Is then China on the brink of a collapse, five years after it entered the Word Trade Organization (WTO), as the lawyer-turned-author Gordon Chang predicted a few years ago?
Although there are rough times ahead of us, I believe there is a fair possibility the unavoidable short-term crises can be contained. With few exception crises in China have had always a limited nature. Shanghai has about 19 different real estate markets, I was taught by a real estate agent. When the top end of the market tumbles, some of the more wealthy owners might end up with a negative equity. But that does not mean that the real estate in the whole city ends up in shambles. Other real estate markets still see a shortage and might continue to boom.
Maybe the New York Times is right and there is a buyer’s strike going on in Guangzhou. But that does not mean that buyers in Shanghai and Beijing will do the same.
China is internally very diverse, even divided, and that makes any crisis almost always a limited crisis that would not hit the nation at large. Since most of the domestic media are still controlled by the government, a nationwide panic could also be prevented.

Much more threatening is the long term crisis, as also Wu Jinglian pointed out. Each dollar earned in China costs eight times more energy than the same dollar in the United States. Plans to urbanize 200 million farmers and other large scale projects will cause fallout that will hit not only China, but the world, as the prices for oil, steel and other construction materials over the past few years have illustrated. The current economic growth is not sustainable and that is bad news, for example for the automotive industry that is just betting 10 billion USD on the sustainability of China’s growth. The developed world used the 1960s and 1970s to change their economies into more sustainable ones. China might not have that much time.

Fons Tuinstra