Having earned praise for keeping its economy chugging along at an impressive rate, China is now cause for concern because its economy may overheat.
The Chinese government seems concerned, too, having taken some steps to tighten the free flow of credit, including raising interest rates and banks’ reserve ratio.
However, the situation appears to have raced ahead of the policymakers, creating a serious danger of inflationary pressures.
The primary cause of the overheating economy is that, spooked by the global recession and its adverse effects on China’s economic growth, the government went on an easy lending spree. Banks were encouraged to make credit available for all sorts of enterprises, with the stock market, property developers, construction projects, and local and regional level government instrumentalities gaining the most.
The result has been a booming stock market, high property values, construction projects with little utility, overstocking of inventories and materials, and local and regional governments making merry with easy money. Such profligate spending has created more avenues for corruption, which is already a national malady.
In some ways, China has been following the development model that Japan initiated in the 1960s and continued successfully through the 1970s and into the 1980s. This model owed its success to the government’s strategic guidance and allocation of funding through banks to selective export-based industries. This way Japan ran ever-increasing trade surpluses, particularly with the US, creating serious friction at the time in their bilateral relationship.
When Japan revalued its currency in the mid-1980s, constraining its export potential to a degree, the Japanese economy found an additional outlet in the stock market and real estate. This caused the resultant economic bubble to burst in December 1989 and the subsequent “lost decade.”
When one looks at the way China is heading, it bears an uncanny similarity to Japan’s economic trajectory and resultant economic and social problems. The important difference, though, is that the Japanese government cannot remain impervious to popular opinion reflected in periodic elections. The government must try all sorts of political and economic permutations to deal with the situation. If they fail, they are replaced. Japanese Prime Minister Yukio Hatoyama’s government replacing the Liberal Democratic Party’s (LDP) decades-old rule is an example of this. In other words, unlike China, there are safety valves in Japan’s political system to let off steam by punishing non-performing political leaders.
In China, on the other hand, if things go too badly, the danger of the entire structure of the Communist Party crashing down is quite real. If China’s bubble economy develops serious cracks, the government might find it hard to control the situation.
There are reports of serious social and economic unrest in China’s rural and regional areas, which has been subsidizing the urban industrial economy, keeping the rural economy depressed. The situation is worsened by a party apparatchik and bureaucracy in rural and regional China that is even more arbitrary and corrupt that its urban cousins.
China’s “harmonious society” is not doing terribly well and it is not only the urban-rural divide that is economically and socially polarizing China; even the urban middle class is starting to increasingly feel the pressure of an unequal society.
Take Shanghai’s property market for example. House prices there have reportedly jumped by 68 percent a year, making home ownership beyond the reach of most of its residents.
At the same time, along with the usual arbitrary demolition of houses to make way for fancy development projects, Shanghai authorities have demolished houses to make way for the World Expo this year so China can further showcase itself to the world.
This led about 1,000 middle-class Shanghai citizens (traveling in small groups to avoid detection by the authorities) to descend on Beijing to stage a very uncharacteristic public protest.
As one of the protesters, Han Zhongming (韓宗明), said: “It was the largest protest ever from Shanghai. Something like this has never happened before.”
Because of the unusual nature of the protest from the booming commercial capital of Shanghai, the protesters were given 20 minutes to voice their grievances to the State Council. However, as with other public protests, the authorities simply ignored the participants, sent half of them to a detention center and the other half to the station, putting them on trains and sending them back home.
The upshot of this is that the stimulus package has overheated the economy, generated inflationary pressures and created asset bubbles.
The entire country, irrespective of rural, regional and urban sectors, is under severe pressure and this has created a combustible convergence of social and economic factors.
When you add widespread corruption, heightened with greater opportunities from stimulus money at all levels, the picture is not pretty.
How and when the economic bubble might burst is anybody’s guess, but China’s overheated economy is in for some severe tests. As the economy undergoes severe jolts, the very basis of the Communist Party’s perceived legitimacy, based on healthy economic growth, will be undermined. This could form the basis for the aggregation of all the socially fragmented, but widespread frustration and discontent with the regime.
China’s ruling oligarchy is aware that the country is passing through “a period of marked social conflicts” and there is also acknowledgment that the present path of ever-increasing statistical economic growth, without corresponding social equity and justice, is not “sustainable.” However, China’s rulers have a sense of entitlement, regarding themselves as the makers of modern China, which makes them intolerant of any criticism and dissent. Indeed, they regard themselves as symbolizing the Chinese nation.
Hence, any criticism of the Communist Party and its political monopoly is considered treason. Since criticism and protests are growing anyway, they are resorting increasingly to repression. However, as China’s economy overheats, creating the danger of an economic bust, its rulers might find out that people want accountability, especially when things start turning upside down.
Sushil Seth is a writer based in Australia.
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