If any generalization can be made about China-watchers, it’s that they are an optimistic bunch. They scour government data, energy-use tables and factory output, finding loads to smile about. China can grow 10 percent a year forever.
Events on the streets of Beijing offer a timely reality check. There, economists can find ample evidence that China may be approaching the limits of its ability to grow sustainably. Inflation is among the forces unnerving the masses, a phenomenon not unlike the one inspiring uprisings in the Middle East.
China is plenty spooked by a smattering of domestic protests. Clampdowns on the Internet and the foreign media have been relentless. Yet it’s the increasing focus of Premier Wen Jiabao on inflation that serves as a warning to those used to nothing but good news from China. Overheating risks are rising before our eyes.
The economy may be at a dangerous turning point, one where jumps in asset and consumer prices derail an impressive run. It doesn’t mean China is about to crash. It does mean that the time for taking its boom for granted is over.
China is run by some talented policy makers. The question is whether the side effects of years of explosive growth are mounting too fast to count. Among the challenges China must juggle: slowing growth, surging oil and food costs, hot money zooming its way from the West, a widening gap between rich and poor and demands for greater openness.
Inflation is the most immediate concern. Wen pledges to tackle it as surging food and housing prices spark public anger. China’s 4 percent inflation target for this year was probably exceeded by almost a percentage point in February, and a growing number of China’s 1.3 billion people aren’t happy about it.
For a Communist Party obsessed with social stability, inflation is a clear and present danger. And it’s not obvious that Chinese officials get that point. If they did, they would be telegraphing big increases in China’s currency at least to get a handle on inflation expectations.
Such a move isn’t afoot, at least not yet. Neither did Wen, in a speech last week, set any lending target for banks. That leaves officials rummaging through their administrative toolbox for options, of which there are few. More interest-rate increases are a given, yet China lacks a functional bond market to bring about the multiplier effect that makes monetary policy so potent at containing inflation.
China is in a tough and unprecedented place. It must balance the need to slow overheating risks, keep growth as close to 8 percent as possible to create jobs and rein in pollution.
For all the talk of five-year plans, China is making things up as it goes along. Its rise differs from Europe’s and the U.S.’s. Aside from scale, the internationalization of finance creates control problems with which western powers don’t have to contend. Easy-money policies from Washington to Frankfurt to Tokyo are boosting Chinese real-estate values. As they climb, slums are emerging in cities including Beijing and Shanghai. Migrant workers and cash-strapped urban youth are hard-pressed to find affordable places to live.
An undervalued yuan doesn’t help. China’s $2.8 trillion of currency reserves is the most striking side effect of its state-capitalism model. It amasses ever-growing piles of U.S. debt to maintain a competitive exchange rate. While successful for now, the policy has three negatives: it inflates the money supply, creates trade tensions and prolongs an addiction to exports.
Rebalancing the domestic economy would be easier if the world economy were sound. A financial crisis prompted China to open the fiscal floodgates, starting in 2008 with a 4 trillion yuan ($609 billion) stimulus plan. In 2010, new loans exceeded a 7.5 trillion yuan ceiling.
What worries China skeptics is how things will play out when the proverbial music stops. The quality of growth matters as much as the pace. Massive investment is needed to sustain economic expansion, yet all too much of it is going to national champions whose returns might never materialize. Is China setting itself up for a bad-loan crisis?
No one can say for sure. Yet China’s growing inflation challenge complicates things. It means the gradualist approach favored in Beijing won’t work this time. The danger, say economists such as Glenn Maguire of Societe Generale SA in Hong Kong, is that inflation may rise as high as 10 percent by, say, the third quarter. That would cause households tremendous pain and fuel social discontent.
China has made it clear that it won’t tolerate the smallest of protests. It also is warning foreign journalists about covering these gatherings and blames reporters for causing trouble, not unlike leaders from Egypt to Libya. The latest chapter of the so-called Jasmine Revolution involves people showing their frustration by taking strolls in major Chinese cities on Sundays.
Blaming the media is rarely a promising sign. It suggests a government more concerned with spin than substance. China should redouble efforts to treat the underlying cause of the turmoil, not the symptoms.
China’s people want less inflation, more government accountability and greater egalitarianism. Its leaders want to blame the messengers. Not a good omen, as economic indicators go.
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