Chinese officials gathered in Beijing for the National People's Congress are congratulating themselves for creating the world's fastest-growing major economy.
Left unsaid is how their efforts are imperiling its outlook.
Outgoing Premier Zhu Rongji (朱鎔基), for example, used much of his annual speech last week to defend his five-year tenure, and to call for the state to continue pumping massive resources into the economy. Otherwise, China won't grow at the annual 7 percent or more needed to maintain social stability.
Yet that's just the problem. Beijing plans another massive fiscal stimulus package this year and is directing state-owned banks already plagued with bad loans to keep lending. It also is steering credit toward huge public works projects like dams -- resources better spent on supporting the private sector.
There are some disturbing similarities in the problems facing China's economy, and Zhu's prescriptions to fix them, and Asia's 1997 financial crisis. China, as Beijing loves to remind the world, avoided Asia's financial dustup, thanks to the closed nature of the economy back then and its pegged currency. Is Beijing brewing its own Asia-crisis-like meltdown? It's hardly the most likely scenario, but the risk can't be ignored. Investors also are worried about the quality of China's growth. Many fear that lost in the hype and excitement about China's boom is the fact that it's powered by public spending. In other words, there's nothing self-sustaining about China's expansion. Asia had the same problem in 1997.
The kinds of overcapacity in industries and unproductive investments at the root of the Asian crisis abound in China. So do the lack of investment returns that plagued Asian economies.
Though investors were aware of the problem they ignored it, figuring future returns would make up for losses. When the roof fell in, investors realized the folly of that strategy.
Investors in China may have similar blinders on. Corporate executives are dazzled by China's 8 percent annual growth and the fact it's pulling in more foreign direct investment than even the US. To them, it's China's 1.3 billion people who matter.
It's the world's most exciting consumer market, and multinational companies such as Carrefour SA, General Motors Corp and Sony Corp are scrambling to get a piece of it.
Perhaps they should wonder why so few institutional investors are taking the plunge. Fund managers are worried about dodgy corporate governance, creative accounting techniques and gross domestic product figures that seem too good to be true.
Even if companies are making operating profits in China, many investors are concerned China's challenges will slam their returns.
Investors also are worried about the fragile financial system underlying it all and deflation. Multinationals figure deflation can't last forever, so why sweat the small stuff now? A similar mentality pervaded investors' view of East Asia in the mid-1990s.
It took currency devaluations and plunging stocks to change their minds.
What's fascinating about China's rise is how it's all good.
It's the place to be, and anyone who isn't rushing to Shanghai and Shenzhen is a fool. But there are myriad risks.
Japan's bad-loan crisis gets all the headlines these days, but China's debt problems also are mounting and casting a shadow over its near-term role in the global economy. Rising non-performing loans could cause a credit crunch and undermine growth.
And if Beijing doesn't act, it will face Japan-like financial woes. That's a problem because Chinese households lack the vast wealth of the Japanese.
China seems short on new ideas about how to fix the problem.
Government officials still think they can grow out of their problems, especially if they can get households to spend more. As Japan's experience demonstrates, it's easier to talk up the merits of increased consumer spending than engineer it.
Zhu wants banks to focus lending on consumers, public-works projects and small businesses -- areas of the economy most likely to produce jobs in a nation with unemployment at a 22-year high.
But the attempt to dictate lending flies in the face of efforts to free banks from the government-directed loans of the past.
It also ignores the dire state of the banking system. Beijing wants banks to be more discerning in lending if they want to compete with HSBC Plc, Citigroup Inc and other foreign lenders entering the country. The growing share of bad loans sitting on banks' balance sheets may discourage banks from issuing new credit, slowing the economy.
China needs to move further away from so-called fixed-asset investments such as schools, roads, manufacturing plants and bridges, in favor of stimulating consumer spending. Such investments are expected to climb 12 percent this year, versus 16 percent last year.
At the moment, spending on such projects only adds to the nation's industrial overcapacity. That's intensifying deflation, crimping corporate profits and exacerbating the bad-debt problem slamming banks.
Deflation increases the burden of debt, boosting the already crushing debt load at the four biggest state-run banks. Bad loans are estimated to be 40 percent or more of gross domestic product.
Lost in the hype and excitement about China's boom is its fragile financial system. The blame for that goes to the same people congratulating themselves in Beijing right now. If they don't act soon, they could have a crisis on their hands.
William Pesek Jr. is a columnist for Bloomberg News. The opinions expressed are his own.
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