China Growth: Can the Chinese Keep Upturn Going ???

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22 September 2009. By David Caploe PhD, Chief Political Economist. By now, everyone knows how deeply inter-connected the US and Chinese economies are. Indeed, some have even called the two countries Chimerica because of their interdependence:

22 September 2009. By David Caploe PhD, Chief Political Economist. By now, everyone knows how deeply inter-connected the US and Chinese economies are. Indeed, some have even called the two countries Chimerica because of their interdependence:

the US is China’s main market for its exports, and, with the dollars it gets as a result, China buys whatever “real property” it can get its hands on, in the US or elsewhere, e.g. stock in oil and other mineral extraction companies to insure supplies, as well as a massive amount of US government securities. As many have noted, this means whatever potential Chinese unhappiness with the weakness of the dollar – and, hence, the relative devaluation of their Treasury note holdings – they can’t really “dump” those securities, because that would only drive down further the value of their remaining, large, position in official US paper. At the same time, the economic fate of the two countries is not identical, as


this excellent article from the New York Times

makes clear, and the shrewd Chinese leadership is taking advantage of this fact to promote a notable up-turn, even as the US remains mired in recession, the wishful comments of Fed chief Ben Bernanke aside. [br] The Chinese central bank said the country’s economy surged at an annualized rate of 14.9 percent in the second quarter. The United States economy shrank at an annual rate of 1 percent in that period.
Now, a bit of skepticism is always advisable these days when it comes to any pronouncement from any banking official in any country about projections of current economic growth, but whatever the specifics, the general trend line is clear – China is in much better shape than its most important trading partner, the US.

The key to this stronger Chinese profile is its much more regulated banking system, which was able to escape almost completely the disaster that hit the US financial sector – as well as those equally unregulated systems in Iceland / the UK / Spain / and much of Eastern Europe – which, in turn, created the credit crunch that has now manifested itself in a serious crisis in the American “real economy”.

This whole dynamic was avoided in China, which has helped in two different ways.


Chinese banks came into the crisis with enormous excess reserves, the result of three years of tight regulatory limits on lending to prevent the economy from overheating.

This, of course, is the exact opposite of what happened in the US, where the banks ran wild under the not-so-watchful eyes of both the Clinton administration – which, we should never forget, snuck in de-regulation of derivatives in its waning days of constant “triangulation” – and the Cheney / Bush regime, which never saw a give-away to the rich and powerful it didn’t wholeheartedly embrace.

At the same time, once the banks flipped out after the Black September weekend of Lehman / AIG / Merrill Lynch, and instituted an immediate and traumatic credit freeze, they basically shut off the stream of liquidity on which all modern commerce depends.


China’s well-capitalized banking system [however] allowed for rapid investment.

When limits were removed, and authorities urged bank executives to lend, the total value of loans outstanding shot up more in the first seven months of this year than in the previous 24 months.

By contrast, total loans and leases outstanding at financial institutions insured by the Federal Deposit Insurance Corporation actually fell $249 billion, or 3.2 percent, in the first half of this year.

No less importantly, the Paulson “Plan” and its series of equally tepid successors under Obama have basically involved the government throwing billions at the banks, and, literally, begging them to lend – which, of course, they have generally deigned not to do, whatever hard times such decisions may bring to their fellow Americans.


Though Washington has used taxpayer money to bail out American banks, it does not have Beijing’s power to force banks to lend that money to businesses and consumers.

And lend they have:


The state-controlled banking system here … unleashed $1.2 trillion in extra lending to Chinese consumers and businesses in the first seven months of this year. That money is financing everything from a boom in car sales, up 82 percent in August from a year earlier, to frenzied factory construction.

And this is hardly the only form of support the Chinese government has given various strategic sectors of the economy:


Beijing also has given huge tax breaks and other assistance to exporters. They include placing broad restrictions on imports and intervening heavily in currency markets to hold down the value of the renminbi, to keep Chinese exports competitive even in a weakened global economy.

Indeed, subsidies abound at all levels of government: the Wuxi municipal government just offered up to $146,000 to each local business that increases exports in the last three months of this year.

And in good Keynesian fashion, the result of this intelligently-planned and strategically-focused tidal wave of cash has had predictably positive effects:


In China, even the hardest-hit factories – those depending on exports to the United States and Europe – are starting to rehire workers. No one here is talking about a jobless recovery

To be sure, not all the laid off workers throughout China have been hired back.

“Some plants reduced worker numbers by 20 to 30 percent, now they hire back 10 percent,” said Stanley Lau, deputy chairman of the Federation of Hong Kong Industries, which represents export-oriented factories employing 10 million Chinese workers …

“We definitely see an upswing in sales orders in the second half of this year when compared to the first half,” said Gu Fung, the sales manager at the Wuxi Baolai Batteries Company …

[Indeed] American trade data shows that imports from China only eroded 14.2 percent in the first seven months of this year while imports from the rest of the world plunged 32.6 percent. China’s trade surplus, already the world’s largest, was $108 billion for the seven-month period.

Now, part of this from the US side is that a significant part of China’s exports there are concentrated on the low-margin / downscale / Wal-Mart end of the spectrum.

But dominating that sector of the American export market – combined with the well-conceived and -executed “pump priming” and other government-led efforts – means that China is doing about as well as can be expected, given the global slump that began, fundamentally, with the collapse of Wall Street derivatives.

That said, there are definite issues about which both China and the rest of the world needs to be concerned:

First and foremost, China does need the US and the rest of its export markets, especially in the more up-market spectrum, to recover eventually. If they don’t, even the current good news is unlikely to be sustained.

Second, “as much as a third of the extra bank lending in China appears to have gone into real estate and stock market speculation.”


[Indeed,] the real estate market is picking up. In [an] industrial town 90 miles northwest of Shanghai, prospective investors lined up one recent Saturday to buy apartments in the still-unfinished Rose Avenue complex. Many of them slept outside the sales office all night.

And while this may seem like a good sign, those of us a little closer to China knows this kind of frenzy is not the kind of stable growth that inspires long-range confidence.

In fact,


China’s stimulus efforts could be sowing the seeds of future distress. With so much money washing into the system so fast, regulators have voiced concerns about corruption in government investment projects.

Cheap cash has a way of inflating bubbles – just ask Wall Street – that could damage China’s economy and its banks when they pop.

“You have to imagine the rigor and due diligence” that mainland banks have been showing in rushing out so many loans, said Benjamin Hung, the chief executive of the Hong Kong unit of Standard Chartered Bank.

And you can also imagine the dripping sarcasm in which that quote was encased.

Regardless, in a world economy where, stock market “rallies” aside, unemployment is rising almost everywhere, China’s nascent recovery says something worth pondering about the advantages of a political economic scene where – at least in moments of, now sustained, crisis – political leaders tell the banks what to do – instead of, as in the US, where the political “leadership” seems to be taking its most important marching orders from the banks.

David Caploe PhD
Chief Political Economist,
President, Minerva School / ACALAHA

About David Caploe PRO INVESTOR

Honors AB in Social Theory from Harvard and a PhD in International Political Economy from Princeton.