海角大神

Has the global economy recovered? Forecasters say there will be an uptick this year of 2.4 percent, but they鈥檙e forgetting something. China could fail soon, and, if it does, the world鈥檚 most populous state will drag the rest of us down.

At this moment, a Chinese crisis seems like the last thing we should be worried about. After all, last year China overtook America as the planet鈥檚 largest car market and passed Germany as the biggest exporter.

On Thursday, Beijing announced that growth for the fourth quarter of 2009 was 10.7 percent and 8.7 percent for the entire year. Some analysts said the numbers were so strong that the country zoomed past Japan to become the world鈥檚 second-largest economy. Stock markets, property prices, you name it: Everything Chinese is soaring.

Dubai was once soaring, too. Global markets therefore, shuddered in November at the news that Dubai World, Dubai鈥檚 state investment firm and biggest corporate debtor, had asked for an extension on its $59 billion of obligations. Troubles in the booming emirate had been evident for some time, but stock investors were nonetheless caught unawares, apparently thinking a default would not occur.

They were obviously wrong. Global markets, for the time being, got past the shock, in part because the emirate is small. China, on the other hand, is not. Legendary short-seller James Chanos, who predicted the failures of Enron and Tyco, calls the country 鈥淒ubai times 1,000 鈥� or worse.鈥�

Like Dubai at the beginning of last year, China is now reaching the peak of a bubble. At first glance, there is not much that connects the tiny city-state with the continent-sized nation. Yet both of them suffer from overexpansion.

China鈥檚 export-led economic model delivered spectacular growth in the post-cold-war period of seemingly never ending globalization and economic development. Yet global trade is now stagnant after dropping significantly last year. As a result of troubles abroad, Chinese exports declined 16.0 percent in 2009. There is little prospect for a sustained recovery this year.

Beijing, ignoring advice from Washington and other capitals, did not in the boom times try to restructure its economy to favor consumption. Instead, the Chinese government sought to take maximum advantage of then-surging foreign demand. The role of consumption, therefore declined 鈥� falling from a historical average of 60 percent of the economy to about 30 percent last year. No country has a lower rate.

To make up for slumping demand abroad and sluggish consumer spending at home, the State Council, the central government鈥檚 cabinet, announced a stimulus plan in November 2008. Beijing originally said it would spend $586 billion through 2010. In the first full year of the program however, it has directly and through state banks disbursed about $1.1 trillion in stimulus funds.

The plan, not surprisingly, is creating gross domestic product, but growth is an artificial 鈥渟ugar high.鈥� For one thing, Beijing鈥檚 stimulus spending last year was around a quarter of the total economy. Now, perhaps as much as 95 percent of China鈥檚 growth is attributable to state investment, as a Chinese analyst noted recently.

Despite the massive state spending, the country鈥檚 economy is not particularly robust. Power consumption statistics, a crucial indicator of economic activity, show the economy expanding at only two-thirds the announced rate.

Moreover, essentially flat consumer prices last year belie official reports of roaring retail sales. So does the full-year 11.2 percent decline in imports, another sign of sluggish domestic demand. And if the economy is really growing by double digits, why is Beijing insisting on continuing its stimulus?

Yet however fast the economy is growing, China鈥檚 policies are unsustainable. First, the central government will be hard pressed to find the money to continue the spending spree. Budget deficits are going up fast, a constraint on additional expenditures. More important, Beijing鈥檚 regulators are concerned that the state banks, the primary source of stimulus funds, are overextending themselves and accumulating bad loans.

New York Times columnist Thomas Friedman, however, thinks none of this will be a problem. Arguing that China is not the next Enron, he gives this advice to Mr. Chanos: 鈥淣ever short a country with $2 trillion in foreign currency reserves.鈥�

Yet Beijing鈥檚 record-setting reserves 鈥� now $2.4 trillion 鈥� are essentially unusable for this purpose. Why? China鈥檚 leaders need local currency, the renminbi, to deal with domestic needs. If they convert reserves into renminbi, they will cause the currency to zoom up in value and choke off the critical export sector. Foreign reserves have only limited uses in domestic crises.

Second, the state鈥檚 stimulus plan is taking the nation in the wrong direction. It is favoring large state enterprises over small and medium-sized private firms, and state financial institutions are diverting credit to state-sponsored infrastructure. Over the past three decades, China鈥檚 economy has expanded at an average annual rate of 9.9 percent because of the private sector, but now Beijing is renationalizing the economy with state cash.

Third, Beijing鈥檚 flooding of state enterprises with government cash will undermine their competitiveness, as a similar tide of money severely damaged Japan鈥檚 corporations during the bubble years.

Japanese managers discovered they could make more money managing cash than from anything else, and they therefore neglected their underlying businesses. Essentially the same thing is happening in China.

About a fifth of state bank loans have found their way into the country鈥檚 climbing stock markets, and another large portion is fueling property market bubbles. Worst of all, Macau casinos have enjoyed a recent boom, apparently attracting high-rolling Chinese cadres betting diverted stimulus money.

Finally, stimulus spending, as time goes on, becomes less effective in creating growth. The country already has one empty new city 鈥� Ordos in Inner Mongolia 鈥� and thousands of vacant facilities, especially shopping malls. New factories are underutilized.

For all its faults, the State Council鈥檚 spending program is just about the only thing generating growth at this moment. Unfortunately for the government, its plan is also creating imbalances and dislocations that will be difficult to handle this year.

Chinese officials, working in a state-led economy, once had the ability to defer problems. Yet the challenges they face have grown over time as they have pursued pro-growth policies instead of implementing structural change.

And that is why, when their growth policies run out of steam 鈥� as they soon will 鈥� China will become the next Dubai. Only bigger.

Gordon G. Chang is the author of 鈥淭he Coming Collapse of China鈥� and 鈥淣uclear Showdown: North Korea Takes on the World.鈥�

漏 2010 Global Viewpoint Network/ Tribune Media Services. Hosted online by 海角大神.

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