For nearly two years, China’s turbocharged economy has raced ahead with the aid of a huge government stimulus program and aggressive lending by state-run banks.
However, a growing number of economists now worry that China — the world’s fastest growing economy and a pillar of strength during the global financial crisis — could be stalled next year by soaring inflation, mounting government debt and asset bubbles.
Two credit ratings agencies, Moody’s and Fitch Ratings, say China is still poised for growth, yet they have also recently warned about hidden risks in its banking system. Fitch even hinted at the possibility of another wave of non-performing loans tied to the property market.
In the late 1990s and early this decade, the Chinese government was forced to bail out and recapitalize these same state-run banks because a soaring number of bad loans had left them nearly insolvent.
Those banks are much stronger now, after a series of record public stock offerings in recent years that have raised billions of dollars from global investors.
However, last week, an analyst at the Royal Bank of Scotland advised clients to hedge against the risk that a flood of cash into China, coupled with soaring inflation, could result in a “day of reckoning.”
A sharp slowdown in China, which is growing at an annual rate of about 10 percent, would be a serious blow to the global economy since China’s voracious demand for natural resources is helping to prop up growth in Asia and South America, even as the US and the EU struggle.
And because China is a major holder of US Treasury debt and a major destination for US investment in recent years, any slowdown would also hurt US companies.
Aware of the risks, Beijing has moved recently to tame its domestic growth and rein in soaring food and housing prices by raising interest rates, tightening regulations on property sales and restricting lending.
At the end of the Central Economic Work Conference, a high-level annual economic policy meeting that concluded on Sunday, Beijing promised to combat inflation and stabilize the economy. Those pledges came just days after the central bank ordered banks to set aside larger capital reserves in a bid to slow lending, the sixth time it has done so this year. And the government reported on Saturday that the consumer price index had climbed 5.1 percent last month, the sharpest rise in nearly three years.
Analysts say more tightening measures are expected in the coming months, but that the challenges are mounting.
“There are so many moving pieces,” said Qu Hongbin (屈宏斌), the chief China economist for HSBC in Hong Kong. “It wouldn’t be honest to say things aren’t complicated.”
Optimists say China has been adept at steering the right economic course over the last decade, ramping up growth when needed and tamping it down when things get too hot.
However, this time, Beijing is not just struggling with inflation, it is also trying to restructure its economy away from dependence on exports and toward domestic consumption in the hope of creating more balanced and sustainable growth, analysts say.
China is also facing mounting international pressure to let the yuan rise in value. Some trading partners insist China is keeping its currency artificially low to give Chinese exporters a competitive advantage.
Beijing contends that raising the value of its currency would hurt coastal factories that operate on thin profit margins, forcing them to lay off millions of workers.
The most immediate challenge appears to be inflation, which some analysts say may be even more serious than the new figures suggest. Housing prices have skyrocketed. And prices for milk, vegetables and other foods have soared this year.
“The money supply is too large,” said Andy Xie (謝國忠), an economist based in Shanghai who formerly worked at Morgan Stanley. “They increased the money supply to stimulate the economy. Now land prices have jumped 20 times in some places, 100 times in others. Inflation is broad-based. Go into a supermarket. Milk is more expensive in China than it is in the US.”
In Shanghai, where the average monthly wage is about US$350, a gallon of milk now costs about US$5.50.
Wages have also risen sharply this year in coastal provinces amid reports of labor shortages and worker demands for higher pay. Many analysts expect more wage increases next year.
That may be good for workers, analysts say, but it will also change the dynamics of the Chinese economy and its export sector while contributing to higher inflation.
Beijing is now under pressure to mop up excess liquidity after state banks went on a lending binge during the stimulus program that got under way early last year. Analysts say a large portion of that lending was diverted to speculate in the property market.
In addition to restricting lending at the big state banks, Beijing recently moved to close hundreds of underground banks and attempted to restrain local governments from borrowing to build huge infrastructure projects, some of which may be wasteful, according to analysts.
Some economists say the real solution is for Beijing to privatize more industries and let the market play a bigger role. After the financial crisis hit, the state assumed more control over the economy.
Now, state banks and big state-owned companies are reluctant to surrender control over industries where they have monopoly power, analysts say.
“Inflation is not the most serious problem,” says Xu Xiaonian (許小年), a professor of economics at the China Europe International Business School in Shanghai. “The most fundamental problem we have to resolve is structural. We need more opening up and reform policies. Look at the state monopolies in education, healthcare, telecom and entertainment. We need to break those up. We need to create more jobs and make the economy more innovative.”
Zhiwu Chen (陳志武), a professor of finance at Yale, agrees.
“The state economy and the local governments will be where the future problems occur,” Chen said in an e-mail response to questions on Sunday. “They will be the sources of real troubles for the banks and the financial system.”
Though no economist is forecasting the end to China’s decades-long bull run, many have turned more cautious. And Fitch Ratings recently released a study it conducted with the forecasting consultancy Oxford Economics that examined the effect a slowdown in China would have on the rest of the world.
Fitch expects China’s economy to grow at an annual rate of 8.6 percent next year, down from about 9.7 percent this year. However, the report, which was released a few weeks ago, said that if growth slowed to 5 percent, the economies of many other Asian nations would suffer seriously. Steel, energy and manufacturing industries around the world would also be hard hit, it said.
Fitch analysts are careful not to forecast a sharp slowdown in China. However, if one comes, they say, it is “most likely to stem from a combination of property crash and banking crisis.”
Two sets of economic data released last week by the Directorate-General of Budget, Accounting and Statistics (DGBAS) have drawn mixed reactions from the public: One on the nation’s economic performance in the first quarter of the year and the other on Taiwan’s household wealth distribution in 2021. GDP growth for the first quarter was faster than expected, at 6.51 percent year-on-year, an acceleration from the previous quarter’s 4.93 percent and higher than the agency’s February estimate of 5.92 percent. It was also the highest growth since the second quarter of 2021, when the economy expanded 8.07 percent, DGBAS data showed. The growth
In the intricate ballet of geopolitics, names signify more than mere identification: They embody history, culture and sovereignty. The recent decision by China to refer to Arunachal Pradesh as “Tsang Nan” or South Tibet, and to rename Tibet as “Xizang,” is a strategic move that extends beyond cartography into the realm of diplomatic signaling. This op-ed explores the implications of these actions and India’s potential response. Names are potent symbols in international relations, encapsulating the essence of a nation’s stance on territorial disputes. China’s choice to rename regions within Indian territory is not merely a linguistic exercise, but a symbolic assertion
More than seven months into the armed conflict in Gaza, the International Court of Justice ordered Israel to take “immediate and effective measures” to protect Palestinians in Gaza from the risk of genocide following a case brought by South Africa regarding Israel’s breaches of the 1948 Genocide Convention. The international community, including Amnesty International, called for an immediate ceasefire by all parties to prevent further loss of civilian lives and to ensure access to life-saving aid. Several protests have been organized around the world, including at the University of California Los Angeles (UCLA) and many other universities in the US.
Every day since Oct. 7 last year, the world has watched an unprecedented wave of violence rain down on Israel and the occupied Palestinian Territories — more than 200 days of constant suffering and death in Gaza with just a seven-day pause. Many of us in the American expatriate community in Taiwan have been watching this tragedy unfold in horror. We know we are implicated with every US-made “dumb” bomb dropped on a civilian target and by the diplomatic cover our government gives to the Israeli government, which has only gotten more extreme with such impunity. Meantime, multicultural coalitions of US