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The global dominant
narrative about China is wrong, claims Gordon Chang. Don't expect it to be
the 'pocketbook of last resort' that will rescue world markets from their
current malaise.
And don't expect its
remarkable economic growth to continue. In fact, expect a "hard
landing" for China - and soon.
Forbes.com columnist and
international lawyer Gordon Chang has spent much of his time since the early
1980s working and living in China. His primary knowledge of the country and
his relationships there give him a superior understanding to how its economy
is actually faring than many analysts based in the West. And what he sees
today doesn't inspire confidence.
We are seeing the first real
signs of slowdown in China's economic growth looking at the year-over-year
numbers for the past several months. Car sales have decreased nearly 5% since
last year, and property values are beginning to plummet in key markets (30%
in October alone in Shanghai).
Gordon sees these as the
inevitable harbingers of a coming collapse in China due to excessive stimulus
policies the government undertook starting in 2009. The bubbles and
malinvestment created by this stimulus have not been addressed, and
increasing weakness and transitions inside the political system are making it
less likely they will be before market forces intervene.
On The Repercussions of
Excessive Stimulus
Inefficiency eventually
catches up with every economy. They have a semi-closed system so that they
are not necessarily subject to the principles of economics in the same way
that we are, but they can only delay the inevitable. They cannot prevent it
entirely, and that is really going to be their problem. Because they have
done a lot which just does not make economic sense. I mean it might make
sense in terms of rapid buildup of an economy, but they have to pay a price.
And they have not paid their price yet.
The one thing that people
say is "These Chinese leaders are so great at economic management
because they got through 2008-2009 and they had enormous double-digit growth
while the rest of us were suffering." Well yes, they did that but they
did that at great cost.
And so for instance in 2009,
the first full year of their stimulus plan, they dumped something like $1.1
trillion into a then $4.3 trillion economy. And so did they create growth?
Yes, they did, but they also created a stock market bubble, a
property market bubble, and inflation. And they have yet to deal with the
property market and the inflation problems. Those are dislocations that they
do not have the answers to. I would rather have our economic problems
than theirs any day of the week.
On Growing Political & Social Instability
Starting at the end of next
year, the Communist party is going to change the officers of their Politburo
Standing Committee, the apex of political power in China. We are going
to have a new General Party Secretary. And then in the early part of 2013,
the government officers change. And sometime after that, the all-important
Central Military Commission has a revamp of membership. And so at
this time of political transition, the important economic decisions are not
being made. But it is even worse than that, because corruption
indeed is engulfing the political system. It is causing so much friction in
society. The Communist Party is not able to mediate conflict and its only
answer is to increase coercion.
And that is why you have
survey after survey of the rich and the super-rich, they talk about leaving
China. It is not the poor who are going, which we have seen in many waves
throughout the last couple hundred years, now the rich are thinking of
getting out. They are getting passports, they are putting their families
offshore, and this is of concern because this is a leading indicator.
If you go about 25 miles
south of where I live, and go to Princeton, New Jersey, you will see a lot of
beautiful homes. I mean, they are all paid for, they have got a wife there,
they have kids, and they have one or two Mercedes in the driveway. It is the
perfect American family, except one thing is missing, and that is Dad. Dad is
a senior official in Beijing and he is stealing as much money as he can. And
at maybe not the first sign of trouble, but perhaps the second sign of
trouble, he is on the United flight to New York, because he is not going to
stay to defend a regime that is shaking. And that is one of the reasons why I
think we have to be concerned about the way the Chinese economy is going,
because the Chinese rich are starting to see the signs and are beginning to
bail out.
We are talking about the
people who have benefited the most from this system. And they can see the
problems at the top of society. We have now a weak General Party Secretary,
Hu Jintao, and he is going to be followed by probably by someone who is just
as weak, especially in his beginning years, Xi Jinping. This is a political
system that will not be able to make the decisions and to implement them that
everyone knows have to be made. And that is why, for instance, we have not
seen much in the way of reform over the last five years. In fact, we have
seen a reversal of reform. And most of the conditions that have given rise to
China's extraordinary growth either no longer exist or are disappearing fast.
And so this is an economy in trouble.
On The Popping of China's Real-Esate Bubble
There was just too much
money in the economy and so people then poured money into apartments. And
China has gone on a tear building ghost cities and all the rest of
it. And now the progression that you talked about -- skyrocketing prices
and then stable prices, selling volume, and then property price declines --
is what we are seeing in China.
In October, last month,
prices in places like Shanghai declined 30%, as we saw developers start to
offer these enormous discounts. And by the way, these discounts were so big
that people who bought at earlier stages in these same developments, where
these discounts were being offered have now taken to the streets complaining
if you are giving 30% discounts to these other guys, then give it to me as
well. And so we have not got a little bit of social unrest because of
falling property prices.
In Wenzhou, which is in
prosperous Zhejiang Province, which was perhaps the most prosperous province
up to about a year ago, developers are, one developer is now offering BMWs to
the first 150 buyers of apartments. And this is just a sign that property
prices have not only softened, but they are starting to fall quickly.
You know, every market has
to go to equilibrium. There are too many apartments in China and not enough
buyers and occupiers. And it was going to go to equilibrium in some fashion.
What is really surprising observers is that the rapidity at which we see this
move to equilibrium. Last year there were, in about I guess it was April or
May, the state grid in China reported there were 64.5 million apartments that
showed no electricity usage for six consecutive months. That is enough
housing for 200 million people, but yet Beijing was decreeing the building of
30 to 50 million more apartment units....
But at the end of the day,
there has got to be a correction. And what goes up fast comes down fast. And
what we are seeing is the down phase. The only issue is whether Beijing can
stop the down phase by administrative measures. But so far the Chinese
leaders, Premier Wen Jiabao, last Sunday said "nope, we are going to
stay with these tightening measures." And that has really created great
pessimism in the Chinese property market...
And so really what we have
is a government now that is really trying to bring the property market down.
And of course it wants to do so gradually, you know, orderly. But as you say,
it is a bubble, there is a pin and the problem is that Chinese leaderscannot
manage the process of bringing the property market down to
equilibrium....
When China's elite analysts
start talking about prices being 50% of where they are this year that means
that they are probably privately thinking that no, prices will not halve:
they might go down even further than that. And that is really a problem
because that mentality, once it gets embedded in people's minds in China
really means that, Chinese leaders then have very few tools in
which to prop up the property market.
Click the play button below to listen to Chris' interview with Gordon Chang
(runtime 40m:55s):
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