Our man in Davos sends word t0day of a CCTV debate on the global dimensions of China’s growth. Moderator Rui Chenggang likened China to a 16 year old Yao Ming, the basketball player, already 2 meters tall, but still lacking the muscle, skills and game experience that he would subsequently acquire and make him a basketball star.
It is an interesting metaphor by which to think of China which is now seen by the outside world, and particularly the U.S. and Europe, as a global power that China doesn’t yet see itself to be. It also helps explain the different expectations that the two sides have of what should be China’s appropriate global role and responsibilities.
Our man at the World Economic Forum’s annual meeting in the Swiss ski resort of Davos (this Bystander rarely moves in such rarified circles) sends word of a seminar there on U.S.-China relations. The point that caught our man’s ear was an unconsidered consequence of China’s urbanization. An estimated 60% of the population will live in cities by 2020. Urban lifestyle diseases such as strokes and heart diseases along with the aging of the population could help double the country’s health care spending to 8% of GDP within 15 years.
Bank of China’s announcement that it is to raise 40 billion yuan ($5.8 billion) of new capital through a convertible bond issue is the latest example of the authorities moving to sop up the stimulus-feed liquidity slopping around the economy. The big state-owned banks have to told to get back in line with their minimum capital requirements after last year’s 9.5 trillion yuan lending spree (with Bank of China at the forefront). They have also been told to rein in new lending, a message repeated again last week after previous strictures apparently fell on deaf ears and an estimated 1 trillion yuan was lent out in the first two weeks of this month. Regulators are worried by the risk of lending fueled property and stock bubbles going pop, nascent signs of inflation and the possibility of banks being left with bad loans on their books (and they have seen in America what happens when that occurs).
At the end of September, Bank of China says, its capital adequacy ratio was 11.63%. As it needs an estimated 140 billion yuan over the next two years to maintain the required 12% ratio, this may not be its last capital raising exercise. And expect the other big state-owned banks to follow suit.
The 2009 GDP figures are a triumph for central planning, or at least central spending. At the start of the year, Beijing adjudged 8% growth for the year as necessary for social stability. It delivered 8.7% thanks to the massive stimulus program that flooded into jobs-creating infrastructure investment via state bank lending. Fourth quarter growth was 10.7% — double digit growth like we were back to before the global financial crisis hit.
Now has to come the hard work of mopping up the excess liquidity to prevent inflation taking hold and the swelling bubbles in the property and stock markets from going pop. Consumer prices rose 1.9% in December over a year earlier after falling for much of the year, which will have rung some political as well as economic alarm bells. State-owned banks have been told to rein in new lending, their reserve requirements have been raised and an interest rate rise seems a sure bet. And as we have noted before, there is still the need to turn stimulated demand into the self-sustaining variety.
As for which is the world’s second largest economy after the U.S., this Bystander thinks it is still too close to call between China and Japan. Even stripping out the exchange rate factors, the margin of error, to put it politely, in the calculation of China’s GDP is too broad to provide a definitive answer while the headline numbers (and Japan’s is still an estimate) are still this close. No doubting that it is also a question of when not if, though.
Google’s search engine. James Cameron’s Avatar. Both much the same in China; cleared out to make room for local product.
The controversial $8.6 billion rail link from Hong Kong to Guangzhou where it will join China’s high-speed rail network has had its funding approved by Hong Kong’s legislature, though the protests against it continue. Objectors say it will displace many residents in the New Territories and cause environmental problems for unproven economic benefits. The link is due to be completed by 2015. Once it is built, Shanghai will be an eight-hour journey from Hong Kong and Beijing 10 hours. The railway is one of 10 mega-infrastructure stimulus projects that Hong Kong’s government is planning, including a bridge to Macau.
The yearly Global Risk Report issued by the World Economic Forum ahead of its annual meeting in Davos (again) lists “China’s growth falling to less than 6%” as one of the key risks facing the world economy. The report doesn’t give a probability of that happening, beyond indicating it is unchanged from a year earlier, though it does lay out how it could occur:
[China's growth] derives from high credit growth, which entails an increased risk of misallocation of capital and renewed bubbles in financial asset prices and real estate. These can always carry the risk of a sharp and potentially recessionary correction.
Not an unconventional concern.
The report lists the drivers and developments to watch as follows, with a plus sign denoting drivers of increasing risk; minus signs drivers that reduce risk:
+ Excess ex-ante savings over-investments in China
+/- Chinese government’s ability to stabilize domestic demand in the wake of loss in export momentum
+/- Ability of Chinese government to maintain stable renminbi in the wake of high foreign reserve accumulation
+/- Ability of Chinese government to maintain political stability in the wake of sizable loss in growth momentum.
China’s growth falling to less than 6% has turned up in each of the five past Global Risk reports, a fact that the WEF acknowledges in its latest one:
The implication of a decline in China’s growth has been a constant since the first edition of the report. Thus far, this risk has not materialized but it is clearly one that would have considerable implications for China and also for the global economy.
Nor an unconventional analysis.
One other table that caught our eye in the report was a listing of stimulus packages for the energy sector. China has committed $46.8 billion for 2009-11, second only to the U.S.’s $66 billion, but way more than third placed Japan’s $8 billion. America’s money is going to clean energy generation; China’s to energy efficiency.