Is China An Economic Miracle, Or A Bubble Waiting To Pop?

Feb 16, 2012
Originally published on February 17, 2012 11:18 am

China's economy sailed through the financial crisis unscathed — at least in the short run.

When the global crisis hit, the country's government-owned banks started lending out lots more money. The money came largely from the savings accounts of ordinary Chinese people. It went largely to finance big construction projects, which helped keep China's economy growing.

"It sort of explains why China recovered so quickly," Hu Angang, an economist at Tsinghua University, told us. Indeed, China's strong showing through the crisis was seen by some as a vindication of the large role Chinese government plays in steering the country's economy.

But if it turns out China doesn't need all that new stuff it's building, the country will face an economic reckoning, says Michael Pettis, who teaches finance at Peking University in Beijing.

For Pettis, China's economic miracle is just the latest, largest version of a familiar story. A government in a developing country funnels tons of money into construction. This increases economic activity for a while, but the country ultimately overbuilds — and the loans start going bad.

"In every single case it ended up with excessive debt," Pettis says. "In some cases a debt crisis, in other cases a lost decade of very, very slow growth and rapidly rising debt. And no one has taken it to the extremes China has."

The counterpoint to Pettis's argument: China is extreme. It's a country of a billion people, growing at an incredible rate. The country needs to build lots of new stuff — new roads, new power plants, new buildings.

It's been this way for decades, says Arthur Kroeber, who runs the Chinese research firm Dragonomics. When he first arrived in Beijing in 1985, the city had just finished building a new ring road — a highway that runs in a loop circle around the city center. It was so empty that he and his wife rode their bikes down the middle of the highway.

"At that time I thought, 'This is crazy,'" he says. "Why enormous roads with nothing on it?"

Since then, Beijing has built three more ring roads, each one farther out than the last. Today, the ring roads are all jammed with traffic.

"It's kind of an emblem of the way things get done here," Kroeber says. "At any point in the last 25 years you could walk around and say, 'They're building all this stuff, and who will ever possible use it?' You come back five years later and its not nearly enough. That logic will, I think, eventually come to an end. But it has worked for them pretty well up to now."

Kroeber and Michael Pettis — and even the Chinese government itself, to judge from its latest five-year plan — agree that the Chinese economy needs to change. The government needs to spend less money building stuff, and ordinary people need to spend more money buying stuff.

What they disagree on is how much time China has to make this change. Kroeber figures China's got another 10 or 15 years before it has to make the shift. Pettis, thinks it may already be too late.

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Transcript

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The fates of the U.S. and Chinese economies are increasingly intertwined. They are, after all, the number one and number two economies in the world. China has been booming for 30 years. But there's a big debate now about whether it can keep growing at its current pace or if its economy is headed for trouble.

David Kestenbaum and Jacob Goldstein from our Planet Money team recently visited China. They brought back this report.

DAVID KESTENBAUM, BYLINE: The debate centers on something you see everywhere in China: construction, new fancy bullet trains, new airports, new roads...

JACOB GOLDSTEIN, BYLINE: ...and new apartment complexes like this one that we just happened to drive by.

KESTENBAUM: Can we try and count up how many apartments are here?

GOLDSTEIN: Yeah, let's just count.

KESTENBAUM: It's, like, infinite in every direction, so it's hard.

GOLDSTEIN: It's six stories, right? One, two, three, four...

Like lots of big developments you see in China, these apartment towers are in the middle of nowhere, empty farmland with nothing around, a few hundred miles from Shanghai.

KESTENBAUM: This is a huge part of China's economic growth: building new stuff. Michael Pettis teaches finance in Beijing and writes a well-regarded blog and newsletter about the Chinese economy. He says there's one big problem: China doesn't need all this new stuff.

MICHAEL PETTIS: China is chockablock full with brand-new airports, most of which have very few flights every day. And we're building more, 45 more airports.

GOLDSTEIN: Airports, desalinization plants, power plants, local governments are building lots of stuff. And most of it is built with borrowed money. If those airports, for example, stay empty, that is a real problem.

PETTIS: They borrowed money, and how do they pay it back? They can't pay it back.

KESTENBAUM: In the U.S., we hear a lot about China's trade surplus. But the money for all this development comes largely from China's biggest banks, which are controlled by the government. Ordinary Chinese people put their money in savings accounts, and the banks lend it out, often to companies that are also owned by the government.

GOLDSTEIN: Zhang Weiying, an economist here, thinks it's a bad idea for the government to control the flow of all this money. He told us that last fall, he was participating in a panel discussion sitting right next to a very high-ranking government official. And Zhang Weiying, he just came right out and said it.

ZHANG WEIYING: I said it's a bunch of smart people, really smart people doing something really stupid.

(SOUNDBITE OF LAUGHTER)

KESTENBAUM: A bunch of smart people doing something really stupid.

WEIYING: Yes, I said that.

KESTENBAUM: Michael Pettis says this sort of thing has happened before in other countries. The government takes money from the people and builds things with it. That means hiring people to build roads, factories, trains, airports. For a while, it feels great, it looks great. Your economy is growing at an incredible pace.

PETTIS: But in every single case, it ended up with excess of debt. In some cases, a debt crisis. In other cases, a lost decade of very, very slow growth and rapidly rising debt. And no one has taken it to the extremes that China has.

GOLDSTEIN: China's building boom is definitely extreme. But Arthur Kroeber, who runs a Beijing research firm called Dragonomics, says everything about China is extreme.

ARTHUR KROEBER: It always looks strange. It seems like things should not work. It should just be a total chaotic mess. But in fact, you know, the track record is pretty excellent.

KESTENBAUM: Kroeber points out this is a country of over a billion people growing at an incredible rate. China needs to build lots of new stuff: new roads, new power plants, new cities.

GOLDSTEIN: He tells this story about Beijing's ring roads. A ring road is what we'd call a beltway in the U.S. It's a freeway that runs in kind of a circle around the city center. When Kroeber got here in 1985, Beijing had just finished building a new one. It was empty. He and his wife rode their bikes on it, in the middle of the highway.

KROEBER: Not in the bicycle lane but in the main part because there were no cars. I remember thinking that time this is kind of crazy, why they had this enormous road. There's with nothing on it.

KESTENBAUM: Since then, the government has completed three more ring roads, each further and further out. Today, they are not empty. Today, they are filled with cars.

KROEBER: Full of traffic all day long, which - it's kind of an emblem of the way things get done here. At any point in the last 25 years, you could walk around and say they're building all this stuff and who will ever possibly use it, and come back five years later and it's not nearly enough. That logic, I think, will eventually come to an end, but it has worked pretty well for them up to now.

GOLDSTEIN: Arthur Kroeber and Michael Pettis and even the Chinese government itself, they actually agree. The Chinese economy does needs to change. The government needs to spend less money building stuff, and ordinary people need to spend more money buying stuff. What they disagree on is how much time China has to make this change.

KESTENBAUM: Arthur Kroeber figures China has got another 10 or 15 years before it has to make the shift. Michael Pettis thinks it may already be too late.

I'm David Kestenbaum.

GOLDSTEIN: And I'm Jacob Goldstein, NPR News. Transcript provided by NPR, Copyright NPR.