Last week, the World Bank adjusted its 2009 growth estimate for China to 7.2 percent, from an earlier estimate of 6.5 percent. With the U.S. in recession and expecting no or very little growth this year, the upward estimate suggests that China is on track to lead a global economic recovery.
It is not. Despite the burst of stimulus-led growth, other indicators are all sharply negative. The country’s export-led economy gave China-watchers little reason to cheer, with exports down by nearly 25 percent in May from the year prior (a new record). It was the seventh straight monthly decline. The People’s Bank of China reported in late May that the “the global financial crisis is still spreading and the impact on China is deepening.” It is a view shared by careful observers; according to an April Bank of America Merrill Lynch research note, “the foundation for recovery is not very firm.”
Other economic measures are off as well. According to China’s National Bureau of Statistics, the Consumer Price Index (CPI) fell by 1.6 percent in April, the third straight decline since February, which was the first drop since 2002. Unemployment, although official statistics for it are notoriously unreliable, is certainly rising substantially.
#ad#By the government’s own reckoning, every percentage point short of 8 percent growth equates to 8 million to 10 million people out of work. If so, then the PRC’s officially stated first-quarter growth rate of about 6 percent contributed as many as 20 million unemployed. By comparison, the economic recession in the U.S. since December 2007 has led to about 6 million jobs lost. Even using the (suspect) official data, China’s urban unemployment rate of 4.3 percent is the highest in nearly 30 years.
Despite the hopes the world vests in the PRC as an engine of growth, the Communist regime knows the truth: A troubling brew of declining economic growth, price deflation, and rising unemployment is a substantial long-term threat to the Chinese economy and society.
Still, the world wants — needs — to believe that China has avoided the worst of the economic decline that the United States and Europe have experienced since 2007. While the U.S. economy has contracted at an annualized rate of 6 percent or more in the past few quarters, China appeared to hit bottom with close to zero growth in the fourth quarter of 2008. As a percentage of GDP, the economic-stimulus spending working its way through China’s economy is nearly three times the $757 billion Obama stimulus package. Beijing’s spending is being mainlined directly into the large artery of state-owned banks and state-owned enterprises, a vastly larger distribution network than even the Obama administration’s growing network of insurance groups, auto manufacturers, financial companies, mortgage lenders, and other assorted clients into which the U.S. government is pouring capital.
But conventional analysis of the impact of economic stimulus and other tools doesn’t apply to China. Its size creates unique perverseness. China suffers from “economic gigantism,” unable to support its own mass (or, indeed, masses). The country may be sliding into an economic hole from which it will be difficult to emerge, precisely because the country is so large and starting from so low an economic base.
This is largely ignored by the governments and Western corporate strategists who see nothing but blue skies over Beijing and sunshine over Shanghai. Few look beyond the bustle of those metropolitan mega-cities and accept the reality of China: It is a massive, poor, and environmentally ravaged country.
In absolute terms, China is the third-largest economy in the world, after the U.S. and Japan. But because Japan’s population is roughly 10 percent the size of China’s, on a per capita basis Japan’s GDP is about ten times larger than China’s. America’s per capita GDP is 15 times bigger than China’s. Thanks to decades of a one-child policy and the absence of a social safety net, the burden for supporting China’s aging population of 1.3 billion people is falling to workers whose per capita income of about $3,300 is about 20 percent lower than that of Albanians.
The U.S. recession is likely to have a lagging effect on China. With both exports and foreign direct investment down sharply, Beijing’s stimulus is a chimera; in reality, it is more a government subsidy to state-owned enterprises, through state-owned banks, to prop up employment. It is creating a short-term spike in growth, but a falling CPI, declining exports and foreign investment, and rising unemployment are a potentially combustible mix. Indeed, even as his organization raised its growth estimate for 2009, World Bank economist Louis Kuijs noted that “this surge in government-influenced investment is unlikely to lead to rapid growth and a recovery in China in the current global environment.” Just as troubling, state media reported this week that there is a “Buy China” requirement for stimulus-related projects, a most troubling turn toward protectionism for an economy that depends vitally on foreign investment.
Further comparisons with Japan are worth noting. Both have export-driven economies. Both have statist industrial and banking sectors that dampen open, competitive economic activity. Japan two decades ago faced a real-estate boom that proved unsustainable. When it cooled, the banking system froze up, ushering in ten years of no or low growth. But Japan has absorbed its lost decade against a cushion of per capita GDP that is, again, more than ten times that of the PRC — nearly $40,000.
It is too early to predict a lost decade for China, but the margin for error is slim. Where else in the world is anything less than 8 percent annual GDP growth considered inadequate and potentially destabilizing? Even at the height of the credit/liquidity boom in March 2007, with China expanding at double-digit rates, Premier Wen Jiabao called the Chinese economy “unstable, unbalanced, uncoordinated, and unsustainable.”
By virtually every measure, the situation in China is significantly worse today. Several years of no or (relatively) low growth would be devastating to a country so poor and so large. Four quarters of even 6 percent or 7 percent growth could lead to a dangerous rise in unemployment. Twenty years after the Tiananmen spring, the regime could soon find itself tested at least as stringently.
– Therese Shaheen is chairman of U.S. Asia International, Inc., a consulting firm that does business in Asia. From 2002 to 2004, she was chairman of the American Institute of Taiwan.