12     China Bubble — Next Bust?


Double, double, toil and trouble;
Fire burn, and cauldron bubble.

– Shakespeare, Macbeth

Never, ever has there been an economic cauldron of quite the size of the new Capitalistico-Communist China, in which all manner of fantasy and make-believe are crumbled into the pot. The resulting broth can easily run up an unprecedented productivity in nightmares.

Let’s listen to The New York Times (18/01, “Is China the Next Bubble? “by Keith Bradsher): “Dongguan, China – The prospectus for China Green Holdings Ltd. looks like a seed catalogue. Color photographs show the corn, cabbage, pickled plums and other vegetables that the company exports, mostly to Japan. There is even a helpful list of the growing times for broccoli, cauliflower and sweet peas tucked in between tables showing that the company earned $14.1 million on sales of $31.2 million in its last fiscal year. Though China Green’s business literally involves small potatoes – cubed and shipped in plastic bags – its initial public offering in Hong Kong was anything but. Retail investors put in bids to buy more than 1,600 times as many shares as were available, making it the most oversubscribed IPO ever in Hong Kong. The stock jumped 58% last Tuesday, its first trading day.

“Japan had its bubble in the late 1980s, when the Imperial Palace grounds in Tokyo became worth more than all the land in California. Thailand and Indonesia had their bubbles in the mid-1980s, when speculators and multinationals poured money into what seemed a Southeast Asian miracle. The US had its Internet and telecom bubble in the late 1990s, when stock prices looked as if they could rise indefi-nitely and unemployment kept hitting new lows.

“Each of these bubbles ended badly, with millions of families losing their savings and many losing their jobs.

“Recent excesses – from a frenzy of factory construction to speculative inflows of cash to soaring growth in bank loans – suggest China may be in a bubble now. Bubbles can last years, but they seldom deflate painlessly when they do pop. No-body knows how harmful a sharp economic slowdown would be in China, a country undergoing huge social changes like the migration of peasants to the cities. The Communist Party rests its legitimacy on delivering consistent annual increases in prosperity.

“The Chinese government is showing concern. In the last few weeks, the central bank has tried to dissuade banks from reckless lending while the government has bailed out two of the largest ones, to prepare them for possible hard times as well as planned stock sales. The State Council, China’s cabinet, has warned that it will discourage construction of new factories in industries like aluminum and steel, whose capacity has grown swiftly in the last three years.

“Huge billboards in Guandong Province commemorate Deng Xiao-Ping’s decision, a quarter-century ago to allow capitalism to gain a foothold in a few cities in southeastern China. Practically ever since, China’s astounding economic growth has provoked warnings that the boom may not be sustainable. Year after year, China has proved the worriers wrong, although there have been missteps notably when inflation surged and foreign exchange reserves withered in the early 1990s.

“But even by Chinese standards, things have been moving at a blistering pace of late. Official statistics, which the government tends to smooth so as not to indicate big booms or busts, show that the economy expanded 8.5 percent last year, despite the fact that growth came to a virtual halt during the second quarter because of an outbreak of SARS. According to independent economists, however, the Chinese economy actually expanded at an annual pace of 11 to 13% through the second half of last year.

“Strains are already showing. Black-outs have become a problem in a majority of China’s provinces, as families with new air-conditioners and refrigerators compete with new factories for electricity. Auto sales soared 75% last year, as prices in a market protected from imports until 2001 drifted down toward global levels. Still, automakers are planning huge factory expansions in the hope that such growth will continue.

“Most economists specializing in China now predict that sometime this year growth will have to slow, at least for the investment side of the economy – the building of new factories, for example. That could prove painful. The US economy suffered severe weakness on the investment side in 2001 and 2002, when the market for telecommunications equipment became glutted. Tens of thousands of lost jobs in that industry resulted, not to men-tion steep drops in the stock portfolios of millions of Americans.

“If there were a prospectus for the Chinese economy, it would need to warn of a high dependence on sales to America. China exported $125 billion worth of goods to the US in the first 10 months of last year and imported just $22 billion. The resulting trade surplus equalled an extraordinary 9% of China’s entire economic output during this period. That has turned Chinese exports into obvious targets during an American election year.

“American trade officials have begun to take the legal steps needed to impose steep tariffs on Chinese products as varied as color televisions, furniture and bras. To avoid a trade war, China has followed Japan’s example in sending official buying missions to the US. Shopping for everything from soybeans to communications equipment, they have agreed in the last two months to buy $11 billion worth of goods, by Beijing’s calculations. Some of these deals might have happened anyway like the one to import General Motors auto parts for assembly into finished cars here.”


— from Economic Reform, April 2004