China's zombie growth
鈥淭he world鈥檚 largest shopping mall is almost entirely empty,鈥� says a headline now making its way around the Internet. The mall is not one of America鈥檚 consumer emporia. It is not in the US at all. Instead, it is in the Middle Kingdom鈥nd twice as large as the 鈥淢all of the Americas.鈥�
The world did not end in 2009. Two things are widely reported to have saved it 鈥� stimulus in the West and China in the East.
Harvard economist Robert Barro, writing in The Wall Street Journal, considered the effect of stimulus spending on the US economy. The US government鈥檚 2009 program was originally expected to cost $787 billion. Now it is estimated to come in with a final price tag of $862 billion. What do you get for that kind of money, he wondered? The initial spending appears to work, since the government is spending money without raising taxes to pay for it. But the money has to come from somewhere. Tax receipts inevitably have to go up. Both spending and taxing are subject to 鈥渕ultipliers,鈥� says Barro. Mr. Barro calculates that each dollar of public stimulus spending has a net cost of $1.50 in foregone private spending. A 鈥渂ad deal鈥here鈥檚 no such thing as a free lunch,鈥� even in fiscal stimulus, he concludes.
Stimulus spending is a net negative in the US; what about in China? The China story is largely a stimulus story too. China鈥檚 stimulus, compared to GDP, is the world鈥檚 largest ever 鈥� four times the size of America鈥檚 stimulus program.
When bank loan volume is determined by central planners you are asking for trouble. But last year, faced with a downturn in demand from their main customer, the Chinese authorities put out the word to banks 鈥� increase loans. Loan volume approximately doubled 鈥� to $1.4 trillion 鈥� the greatest increase, in GDP terms, ever 鈥� equal to a quarter of the entire national output.
Investment spending has long been an oversize part of the Chinese economy. As Americans spent too much, the Chinese invested too much in factories in order to make them things they could buy 鈥� just as the Japanese had done before them. Investment spending in China increased 200% since 2001, making it the world鈥檚 biggest buyer of raw materials 鈥� by a huge margin. Chinese output is less than 10% of the world鈥檚 total but China consumes 30% of the world鈥檚 aluminum, 40% of its copper and 47% of its steel. Where does all this stuff go? Thanks to China鈥檚 visionary central planners, it goes just where it is not needed most 鈥� into more infrastructure and output capacity. Last year, 90% of China鈥檚 growth came from this fixed investment spending.
There are about five times as many rivers in the US and five times as many cars鈥ut China now has nearly as many bridges鈥hree quarters as much road surface. But with easy credit, the connivance of local officials, and the blessing of the central government, it builds more.
Last year, approximately one out of every four square feet of commercial office space in Beijing were empty 鈥� about 100 million square feet of zombie space. All over town are dark buildings鈥he Minsheng Financial Center鈥oncrete and glass towers on Financial Street鈥he China Life Plaza鈥he Bank of Communications.
This year, the vacancy rate will go up to 30%鈥ossibly 50%, depending on whose estimates you believe. In Eastern Beijing, officials are doubling the size of the Central Business District, even though the vacancy rate there is above 35% already. Overall, the city will add another 13 million square feet of commercial space.
Outside Beijing, the zombies are multiplying too. Whole cities are empty. And in the suburbs of Huairou, a mock alpine village鈥ith a 200ft clock tower鈥ises improbably in the industrial suburbs. Called the 鈥淪pring Legend,鈥� its publicists must be the same people who write fortune cookie forecasts: 鈥淭he air is so fresh it penetrates your heart,鈥� says the sales pitch. You would normally dismiss such descriptions as puffery. But in China鈥檚 industrial suburbs the air is often so acidic that it might penetrate the skull too.
National politicians determine the availability of capital. Local ones have a hand in 鈥榠nvesting鈥� it. Typically, development projects involve bankers, developers, and local politicians 鈥� much like Japan鈥檚 huge public works鈥� projects of the past 20 years. Local governments are deep in debt 鈥� with total local government debt equal to about a third of GDP. But they keep spending. In Huaxi, for example, they鈥檙e still planning to build the world鈥檚 second tallest building, a few feet shorter than Dubai鈥檚 pyrrhic monument. Huaxi is also the home of the New Sky Village鈥nother project that is lost in the toxic clouds.
Property prices are still spiking up. People are still speculating. Ships with dirt and rocks still head for Chinese ports. The capital spending boom goes on.
It looks like growth. But it is zombie growth. People build bridges to nowhere rather than working for profit-making enterprises. Concrete is used to put up cities where no one lives. Savings that might have been used to start a new bank is instead used to prop up an old one.
Japan has been doing it for years. Encouraged by government miscues in the 鈥�80s, private industry created Japan鈥檚 zombies. Then, after the bubble burst, the government kept them alive. They鈥檝e been sucking blood from the living ever since.
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