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Global Viewpoint

China: the world’s next great economic crash

Like Dubai at the beginning of last year, China is now reaching the peak of a bubble.

By Gordon G. Chang / January 21, 2010



New York

Has the global economy recovered? Forecasters say there will be an uptick this year of 2.4 percent, but they’re forgetting something. China could fail soon, and, if it does, the world’s most populous state will drag the rest of us down.

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At this moment, a Chinese crisis seems like the last thing we should be worried about. After all, last year China overtook America as the planet’s largest car market and passed Germany as the biggest exporter.

On Thursday, Beijing announced that growth for the fourth quarter of 2009 was 10.7 percent and 8.7 percent for the entire year. Some analysts said the numbers were so strong that the country zoomed past Japan to become the world’s second-largest economy. Stock markets, property prices, you name it: Everything Chinese is soaring.

Dubai was once soaring, too. Global markets therefore, shuddered in November at the news that Dubai World, Dubai’s state investment firm and biggest corporate debtor, had asked for an extension on its $59 billion of obligations. Troubles in the booming emirate had been evident for some time, but stock investors were nonetheless caught unawares, apparently thinking a default would not occur.

They were obviously wrong. Global markets, for the time being, got past the shock, in part because the emirate is small. China, on the other hand, is not. Legendary short-seller James Chanos, who predicted the failures of Enron and Tyco, calls the country “Dubai times 1,000 – or worse.”

Like Dubai at the beginning of last year, China is now reaching the peak of a bubble. At first glance, there is not much that connects the tiny city-state with the continent-sized nation. Yet both of them suffer from overexpansion.

China’s export-led economic model delivered spectacular growth in the post-cold-war period of seemingly never ending globalization and economic development. Yet global trade is now stagnant after dropping significantly last year. As a result of troubles abroad, Chinese exports declined 16.0 percent in 2009. There is little prospect for a sustained recovery this year.

Beijing, ignoring advice from Washington and other capitals, did not in the boom times try to restructure its economy to favor consumption. Instead, the Chinese government sought to take maximum advantage of then-surging foreign demand. The role of consumption, therefore declined – falling from a historical average of 60 percent of the economy to about 30 percent last year. No country has a lower rate.

To make up for slumping demand abroad and sluggish consumer spending at home, the State Council, the central government’s cabinet, announced a stimulus plan in November 2008. Beijing originally said it would spend $586 billion through 2010. In the first full year of the program however, it has directly and through state banks disbursed about $1.1 trillion in stimulus funds.

The plan, not surprisingly, is creating gross domestic product, but growth is an artificial “sugar high.” For one thing, Beijing’s stimulus spending last year was around a quarter of the total economy. Now, perhaps as much as 95 percent of China’s growth is attributable to state investment, as a Chinese analyst noted recently.

Despite the massive state spending, the country’s economy is not particularly robust. Power consumption statistics, a crucial indicator of economic activity, show the economy expanding at only two-thirds the announced rate.

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