Unsustainable – facing up to the pressures of growth

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Remember the heady days of Japan Inc in the late 1980s, when land in Tokyo alone was deemed to be worth more than the whole of the United States? Well, based on the average price of Beijing properties in 2010, the total land value in Beijing is estimated at $19.85 trillion, way above the US GDP of $14.5 trillion. Even more absurdly, including Shanghai, the aggregate land worth of China’s two leading cities is calculated to exceed the combined 2009 GDP of the world’s five largest advanced countries - US, Japan, Germany, France and Britain, according to an article in the China Economic Weekly, a magazine sponsored by the People’s Daily. 

China’s bank lending in 2010 was $1.2 trillion, slightly lower than the all-time record of $1.4 trillion in 2009. More than a quarter of bank loans poured into real estate, in search of short-term gains as the profit-margins in manufacturing, mostly resource-intensive, have been reduced to 5% or less by the global demand of the ‘China Price’. According to China’s National Bureau of Statistics, Chinese bank loans totaled 7.95 trillion yuan ($1.212 trillion) in 2010. The credit ratings agency Fitch reckons that another 3trillion yuan ($457.3 billion) worth of loans were created off balance sheet. Much of this has gone into property speculation.

Negative deposit interest rates also spur savers to look for better short-term gains. Moderate administrative tightening measures include higher down-payment for second homes, a ban on purchase of third apartments, and a feather-light first-ever property tax in just two cities - Chongqing and Shanghai.  These soft touches, wary of hurting China’s rising, home -owning middle class, fail to curb a tide of pent-up demand. The property fever is further heated by a tsunami of ‘quantitative easing’ liquidity finding its way from the West into emerging markets. This is driving up commodity and asset prices, adding to the inflation spiral and the desire to hold properties as a safer storage of value.

The Chinese Academy of Social Sciences estimates that, despite rising income levels, 85% of households cannot afford to buy a home, while based on electricity meter readings, it is estimated that there are enough empty flats for 200 million people.

Handy tools

The one-year deposit rate has just been raised again by 25 basis points to 3%, the third rise since the beginning of 2010. It is still way below the spiraling inflation rate.

To control the flood of liquidity, China raised bank reserve requirements by 50 basis points to a record high of 19.5% on 20 January 2011, the seventh time since the beginning of last year. During 2011,further rate hikes and increases in bank reserve requirements remain on the cards, in addition to extra administrative measures to curb property speculation.

To address inflationary pressures and asset bubbles without rocking the economic boat too much, China has tightened her monetary policy stance from ‘moderately loose’ to ‘prudent’. Bearing in mind the need to finance on-going infrastructural developments for China’s massive urbanization drive, the annual new lending target is likely to be set at 7 trillion yuan, compared with 7.5 trillion yuan in 2010, 9.6 trillion yuan in 2009 and 4.9 trillion yuan in 2008. 

Inflation and Overheating

With rising food prices, fighting inflation is right at the top of national priorities. Food price increases, however, slowed to 9.6% in December 2010, from 11.7%, suggesting that the supply crunch in fruits, vegetables and seafood products may be moderating after the Chinese New Year.

The economy expanded by 10.3 per cent in 2010, fully leaving behind the impact of the global financial crisis. Nevertheless, in January 2011, China’s manufacturing sector purchasing managers index (PMI) fell to a five-month low of 52.9 percent, compared with 53.9 percent in December. This seems to suggest continuing over-capacity, full inventory or the start of a slower growth trend.

According to Carl Weinberg, chief economist with High Frequency Economics, this resumed growth rate closely follows China’s historical average over the last three decades, while the eased inflation rate exactly matches China’s average over the past two decades. However, in the coming years, while China’s urbanization drive continues to steam ahead in a rising tide of global liquidity, curbing inflation and asset bubbles is likely to remain China’s main headaches.


Increasing the value of the RMB, as U.S. Treasury Secretary Timothy Geithner has suggested, would help ease China’s cost inflationary pressures. A higher RMB will also reduce the cost of materials and components making up a large quantity of China’s exports. However, China’s current wafer-thin manufacturing profit margins mean that any drastic appreciation of the RMB would lead to many factory closures and job losses, fanning social unrest amidst a festering sense of inequality.

Nevertheless, Geithner has recently conceded that taking account of inflation, the RMB has already been effectively appreciating by about 10% a year. In the final analysis, both to respond to international pressure and to promote domestic consumption, the RMB is likely to continue appreciating gradually over time, say by 3 - 5% a year. But the real ailment of asset bubbles, overheating, and currency friction lies elsewhere, in the very heart of China’s economy.

Economic re-balancing and re-structuring

Premier Wen Jiabao has famously enunciated that China’s economy is ‘Unstable, Unbalanced, Uncoordinated, and Unsustainable’. Too much reliance on low-profit-margin exports is reaching its limit of raising Chinese people’s income without improving the trade deficits of major importing countries. Lack of higher value-added returns continues to channel liquidity into asset inflation.  Low proportion of domestic consumption prolongs the global economic imbalance where excessive Chinese saving finances excessive American consumption. It also exposes China to external turbulence as in the case of the global financial crisis. Last but not least, a resource-intensive economy pitches China against her ecological limits and creates global energy security concerns and rivalry.

There is already a clear top-down strategy on promoting domestic consumption to redress China’s export-dependent economy. However, consumption accounts for only 36% of China’s GDP. Assuming a realistic annual re-balancing rate of 1%, it will take some 14 years before consumption reaches 50% of the GDP, let alone the level of 70% prevailing in advanced economies.

In the not too distant future, a more robust consumer-oriented economy would come about when China’s urban population expands by 350 million over the next two decades. As mentioned earlier, this huge urbanization drive is happening right now. Emerging from the countryside, new urbanites will eventually fill up many of the empty buildings in the current asset bubble. Let’s not forget that the Shenzhen-and-Pudong urbanisation miracle started with a lot of empty buildings. This time around, the miracle is being rolled out nationwide, many times over, to China’s inner provinces. In the years to come, this space is likely to remain a rich source for speculative alarm and excitement.

The next Five Year Plan (2011-15)

Beneath the veneer of impressive economic growth, brewing discontent has been sounding a clarion call for a more balanced and sustainable society with greater economic equality, social justice, technological upgrading, innovation, ecological conservation, agricultural productivity, regional balance, and domestic consumption.

The 12th Five Year Plan unveiled in March emphasised a strengthening of the social infrastructure such as education, healthcare and welfare, supported by re-distributive policies including wage increases and hardship subsidies. More impetus will be given to promoting energy-saving and environmental protection, new-generation informatics, bio-technologies, and high-end manufacturing.

With more environmental awareness and the creation of more green cities, China is redoubling her efforts to turn Green. She is well on track to meeting or even exceeding her target of using renewable energies for 15% of total primary energy needs by 2020. All these should augur well for a model of less heated and more balanced and sustainable development, at a less heady rate of economic growth.

An Achilles’ Heel

This next Five Year Plan promises to be a watershed response to China’s pressing challenges of imbalance, inequality, injustice, and instability, changing tack from sheer economic to a more people-based development.

According to PEW, an independent public attitudes research centre based in Washington D.C.,the level of the Chinese people’s satisfaction with the country’s direction and economy has been going up steadily over the past few decades, attaining World No.1 ranking on the eve of the Beijing Olympics. For now, the overall level of satisfaction is still relatively high by international comparison, but rising discontent has become more evident with galloping prices, irregular land grabs, labour disputes, growing inequality, rampant pollution and corruption.

Although there is no organized political opposition, as China’s more educated and more affluent middle class grows to over half of the population by the latter part of the next decade, the demand for more representation, more political accountability and more civil liberties is likely to become more strident.

Enabled by New Age social networking technology, the Jasmine fever sweeping across the Arab world is a timely reminder that an economy, however sustainable, needs ultimately to be supported by a political system that is able to evolve effectively to respond to the changing demands of the times. It remains to be seen how, rather than forever relying on the famous Great Firewall, China can in due course harness this new connectivity of a rising and more educated middle class for the best interests of the nation.

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