The prospectus for China Green Holdings Ltd looks a little like a seed catalog. Color photographs show the corn, cabbage, pickled plums and other vegetables that the company exports, mostly to Japan. There is even a helpful list of the growing times for broccoli, cauliflower and sweet peas; it is tucked between tables showing that the company earned US$14.1 million on sales of US$31.2 million in its last fiscal year.
Though China Green's business literally involves small potatoes -- cubed and shipped in plastic bags -- its initial public offering in Hong Kong was anything but. Retail investors bid to buy more than 1,600 times as many shares as were available for sale, making it the most oversubscribed IPO ever in Hong Kong. The stock jumped 58 percent on Tuesday, its first day of trading.
PHOTO: AFP
Japan had its bubble in the late 1980s, when the Imperial Palace grounds in Tokyo became worth more than all the land in California. Thailand and Indonesia had their bubbles in the mid-1990s, when speculators and multinationals poured money into what seemed like a Southeast-Asian miracle. The US had its Internet and telecommunications bubble in the late 1990s, when stock prices looked as if they could rise indefinitely and unemployment kept hitting new lows.
Each of those bubbles ended badly, with millions of families losing their savings and many losing their jobs.
As the year begins, China's economy looks as invincible as the Japanese, Southeast Asian and American economies of those earlier times. But recent excesses, from a frenzy of factory construction to speculative inflows of cash to soaring growth in bank loans, suggest that China, too, may be in a bubble now, especially on the investment side of the economy.
Bubbles can last years before they pop, but they seldom deflate painlessly when they do. Nobody knows how the pain of a sharp economic slowdown would affect China, a country undergoing huge social changes, like the migration of peasants to the cities. The Communist Party rests its legitimacy on delivering consistent annual increases in prosperity.
The Chinese government itself is showing concern. In the last few weeks, the central bank has tried to dissuade banks from reckless lending while the government has bailed out two of the largest ones, to prepare them for possible hard times as well as planned stock sales. The State Council, China's cabinet, has warned that it will discourage further construction of new factories in industries like aluminum and steel, whose capacity has grown swiftly in the last three years.
Because China is now so important to the global economy and to global political stability, the possibility of economic trouble is starting to draw serious attention among economists and China specialists.
Huge billboards in Guangdong Province commemorate Deng Xiaoping's (鄧小平) decision a quarter-century ago to allow capitalism to gain a foothold in a few cities here in southeastern China. Practically ever since, China's astounding economic growth has provoked warnings that the boom may not be sustainable. Year after year, China has proved the worriers wrong, although there have been a few missteps along the way, most notably when inflation surged temporarily and foreign exchange reserves withered in the early 1990s.
But even by Chinese standards, things have been moving at a blistering pace of late. Official statistics, which the government tends to smooth so as not to indicate big booms or busts, show that the economy expanded 8.5 percent last year, despite growth coming to a virtual halt during the second quarter because of the SARS outbreak. According to independent economists the Chinese economy actually expanded at an annual pace of 11 percent to 13 percent through the second half of last year.
Strains are already showing. Blackouts have become a problem in a majority of China's provinces, as new air-conditioners and refrigerators compete with new factories for electricity. Chinese steel makers are building so many new mills that shipping executives say all the world's ports combined will not have the capacity to load enough iron ore for them. Auto sales soared 75 percent last year, as prices in a market protected from imports until 2001 drifted down toward global levels. Still, automakers are planning huge factory expansions in the hope that such growth will continue.
Most economists specializing in China predict that sometime this year, growth will have to slow, at least for the investment side of the economy -- the building of new factories, for example. That could prove painful. The US economy suffered severe weakness on the investment side in 2001 and 2002, when the market for telecommunications equipment became glutted. The upshot was tens of thousands of lost jobs in that industry, not to mention steep drops in the stock portfolios of millions of Americans.
But consumer spending is now strengthening in China, while household savings rates are high. China, like the US, is likely to rely on consumers to prevent any coming slowdown from becoming too severe. "We look for a hard landing in investment, a soft landing in overall economic growth and no landing in consumption," said Tao Dong, an economist in Hong Kong with Credit Suisse First Boston.
The risks to China, and indirectly to the world, fall into four broad areas. Those categories follow, starting with the most likely, a cyclical bust in the investment sector, and ending with what appears the least likely but also the most serious: political turmoil or some other loss of social stability.
Business cycle risk
A quarter-century ago, Dongguan, in the Pearl River delta region of southern China, was an impoverished farming village where residents struggled to survive on limited rice rations. Today, its 14,000 foreign-controlled factories make it the world's largest single site for the production of microwave ovens, and it is a huge producer of everything from computer cables to furniture and computer displays. The roads are jammed with freight trucks carrying boxes of components to assembly lines and the finished goods to ports in Hong Kong and Shenzhen.
Other domestic and foreign businesses have noticed the low wages and cheap factory space here and in many other Chinese cities. In fact, so many factories have been built that in industry after industry, from washing machines to cell phones, production capacity far exceeds domestic demand. Exports have not entirely absorbed the difference, so prices have plunged.
Many business executives and economists complain that factories are often built with little attention to whether similar plants are being constructed elsewhere, or to how low prices will fall if all of them start churning out the same products at the same time.
Many former farmers in Dongguan have profited from land deals. Instead of putting the money in bank deposits paying negligible regulated interest rates or risking it in mainland China's tiny and fraud-riddled stock exchanges, they invest it in factories in their hometown.
Domestic and foreign investors alike share that approach. Executives from multinational corporations in even the most crowded industries see China as such an important market that they have little choice but to continue investing, in the pursuit of ever-greater slices of the market.
The problem arises when too many companies make the same calculation and invest too much. Nearly half of China's economic growth is investment-related spending, an extraordinary figure that reflects public spending on highways and dams, as well as private-sector projects. Calculations by Smith Barney show that Japan in the 1980s, Southeast Asia in the mid-1990s and the US in the late 1990s each had a few years of investment spending well above historical averages. In each case, overcapacity accumulated in many industries and, eventually, a bubble popped.
China has developed a special disadvantage, in that its economy has become so ravenous for commodities that it is pushing up global prices for products like oil, for which China has become the second-largest market, after the US. With very low wages and real estate costs, factory managers find that materials are their biggest cost by far, and a sudden jump in their cost can leave businesses with no competitive edge.
The People's Bank of China, the central bank, has reported an acceleration in wholesale price inflation this winter. The big question is how quickly this will feed into consumer price inflation, which could antagonize politically important urban residents. If consumer prices start climbing significantly, the central bank will come under growing pressure to let interest rates rise, which could make more factories less competitive as loans become more costly.
China still has some advantages that, at least in the short term, may forestall a plunge in investment. One is a banking sector that is willing to lend heavily to even the most indebted companies, provided that they have political connections. But in postponing the final reckoning in the current business cycle, China may be making an eventual bust even worse.
Protectionism risk
China Green exports three-quarters of its fresh vegetables, and the prospectus for its IPO warns that it relies heavily on sales to several Japanese companies. If there were a prospectus for China's economy, it would need to warn of a high dependence on sales to America.
China exported US$125 billion worth of goods to the US in the first 10 months of last year and imported just US$22 billion. The resulting trade surplus equaled an extraordinary 9 percent of China's entire economic output during this period.
Rapid growth and a persistent imbalance in China's trade relationship with the US have turned Chinese exports into obvious targets during an American election year. In the last few months, US trade officials have begun to take the legal steps needed to impose steep tariffs on Chinese products as varied as color televisions, furniture and bras.
To avoid a full-scale trade war, Beijing has followed Japan's example in sending official buying missions to the US. Shopping for everything from soybeans to communications equipment, they have agreed in the last two months to buy US$11 billion worth of goods, by Beijing's calculations. Some of these deals might have happened anyway, like the one to import General Motors auto parts for assembly into finished cars here.
So far, American trade restrictions have covered a tiny percentage of Chinese shipments to the US. But any significant broadening could slow the Chinese economy in a hurry, and with it the economies of many Asian neighbors that increasingly send components to China for final assembly and reshipment to the US.
Financial risk
Lists of potential causes of a Chinese economic derailment tend to start, and sometime end, with a banking crisis. By plying borrowers with ever more loans, following lending criteria that credit ratings agencies contend are laced with corruption and political influence, Chinese banks have wound up with extremely high proportions -- as much as 45 percent -- of nonperforming loans.
The banks rapidly stepped up their pace of fresh loans last year. Exporters, foreign investors and speculators were depositing large sums of dollars. The central bank then exchanged the dollars for China's currency, known as the yuan or renminbi, at a fixed exchange rate, so as to keep the holders of those dollars from bidding up the yuan's value. The banks lent heavily from their expanding deposits, with loans rising 21.4 percent last year.
"The world economy is being kept afloat by the aggressive expansion of the US budget deficit and Chinese loan growth," said Ajay Kapur, the chief Asian equity strategist at Smith Barney. "Any reversal in these two trends has pretty serious outcomes for the rest of the world."
Most Chinese savers have few alternatives to the state-owned banks as places to park their cash, and the banks appear to have informal but total government guarantees of deposits. As a result, they have not experienced significant losses of depositors, although that could change as ever more businesses engage in trade deals that can be used to transfer money to safer banks overseas if hard times ever return to China. Lately, concern has gone beyond the stability of the banks themselves to the economic effects of all the extra money sloshing through the banking system.
Chinese officials have said they would try to sterilize the effects of their purchases of dollars, by selling bonds to the public for yuan that the central bank then cancels or destroys. If the central bank actually sold extra bonds as fast as it bought dollars for yuan, it could theoretically leave domestic banks with no more cash on hand than they had before, and prevent the risks of faster loan growth, a rising money supply and, eventually, inflation.
But financial experts say the central bank is no longer able to sterilize the effects of its currency activities. The problem is that the Ministry of Finance, a separate agency in charge of budget policy, has limited the interest rate that the government can pay on bonds, so as to hold down the cost of servicing China's national debt. With inflation starting to rise, the bonds have become less attractive and the central bank has been struggling to sell enough new bonds each month just to pay off old bonds falling due.
Political risk
To the West, the hallmark of the last quarter-century in China has been rapid economic growth. But for hundreds of millions of Chinese, it has meant something else: a respite from the wars and the domestic strife that had dogged the country for more than a century before, from the Taiping Rebellion of the 1850s to the Cultural Revolution in the late 1960s and early 1970s.
In the years immediately after the Tiananmen Square killings in 1989, China became relatively placid, perhaps in part from fear. But that calm seems to be fading now.
President Hu Jintao (胡錦濤) has gingerly tried to restrict some police powers -- like the ability to detain people without proper identity documents -- and is seeking slightly greater openness in Chinese society. Human-rights groups report a growing number of protests in China, mainly workers and retirees seeking unpaid salaries and benefits. At the same time, many on the mainland are acutely aware of the huge marches organized over the last seven months by democracy activists in Hong Kong, now an autonomous region of China.
Whether any of these forces become significant enough to rattle China's stability is anybody's guess. Peaceful change toward a more democratic system may still be possible, especially if it is fairly gradual.
But if the economy slows sharply, political instability could follow. And that would be a serious problem not just for China but also for the world.
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