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China Takes Another Great Leap Forward

12:00 AM, Jun 29, 2013 • By IRWIN M. STELZER
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Xi Jinping

Investors worry more about China’s slowdown than about Federal Reserve Board chairman Ben Bernanke’s “taper,” according to a recent informal poll. Goldman Sachs expects the Chinese economy to grow by 7.4 percent this year. That’s way down from 10.4 percent in 2010, 9.3 percent in 2011 and 7.8 percent last year. If the investment firm is right—others put this year’s figure as low as 6 percent if the regime really means to engineer a credit crunch—this will be the first time since the 1997 Asian crisis that China does not hit the target set by its central planners, a relatively modest 7.5 percent. And it might be the year in which a slowdown in China is felt in America, aborting our fragile recovery. But only “might”: The recovery here has increasingly strong support from the housing sector and from rising consumer wealth and confidence, which is what prompted the suddenly garrulous Bernanke to discuss in detail—with dates—plans to tighten monetary policy if the recovery picks up a real head of steam. That important “if” escaped the notice of most traders, who scurried to the bond and share market exits.

President Obama was the first to threaten the economic recovery: he raised taxes. Next came the Republicans in congress: they cut spending, tightening fiscal policy too much and too soon. Now it is China’s turn: President Xi Jinping ordered a credit squeeze—the People’s Bank of China is not an independent central bank—in order to stifle conspicuous consumption by his Communist Party elite and their offspring, and rein in excessive, risky lending by China’s shadow banking sector. That sector includes everything from loan sharks to pawn brokers to leasing companies to trusts (rather like our hedge funds). Even though the PBOC decided last week against visiting on China its very own Lehman moment, and relaxed the credit strangle that had dried up interbank lending, the message is clear: “end excessively rapid expansion of credit or, as we have demonstrated, we can make you wish you had.” Right now, private-sector businesses are scrambling for cash.

Pause here and read this warning label. Chinese statistics are not as informative as they might be. The cooking of books is a Chinese culinary skill that results in the feeding of flawed information to analysts, who understandably have difficulty digesting the information. China’s premier Li Keqiang has delicately described his country’s GDP figures as “man made,” and Kevin Jainjun Tu, a senior associate at the Carnegie Endowment for International Peace, refers to data on the energy sector as “increasingly questionable.” The Heritage Foundation’s Asia expert, Derek Scissors, is less delicate than premier Li. “The State Statistical Bureau … never reports a genuine unemployment number. … Housing prices, non-performing bank loans, and coal production… disappear from view when outcomes turn sour….[GDP] numbers are virtually useless.” 

Still, China-watchers are obliged to take a guess at what is going on in a country that David Shambaugh, the professor who heads George Washington University’s China Policy Program, tells us is the world’s second largest and for the past twenty years the fastest growing economy; is the world’s largest merchandise exporter and the second largest importer and recipient of foreign direct investment. These and similar statistics, more or less plausible, should give you some idea why policy makers everywhere worry that if China sneezes the rest of the world will catch a cold.

Here is what seems to be going on as the new regime gets its feet under its desks. And many desks there are in a centrally directed economy in which the government decides which state-owned enterprises get the credit needed for expansion, and provides subsidies to 90 percent of the 2,400 companies listed in mainland China, according to Highthink Flush Information Network, a provider of financial data. The powerful National Development and Reform Commission employs 30,000 bureaucrats to implement the regime’s industrial policy, Wang Kan, a professor at the Institute of Industrial Relations in Beijing told Bloomberg Businessweek. Those subsidies jumped 23 percent last year, and account for 30 percent of industrial output according to Usha and George Haley, professors at West Virginia and New Haven Universities, respectively. Don’t let the Commission’s name fool you—reforming itself out of business is not as high on its list of priorities as reforming the economy seems to be on the lists of premier Li and president Xi Jinping.

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