Paradise comes at a price

ONE of the reasons the banking crisis of 2008/09 did not end in a complete global economic catastrophe was the buoyancy of the Chinese economy. China was hardly affected by the severe global downturn, and this helped the rest of the world to hobble along until the present precarious rally.

Now fast-forward to the present. Economists are speculating that the Chinese government will have to announce a package of measures to stimulate the country’s economy.

Excuse me? China, the country which, only a few years back, registered a blistering economic growth of around 14% a year and which helped to keep the world economy afloat when Europe and the USA were desperately wallowing about in quicksand?

Indeed. And what is more, the present Chinese downturn shows that they apparently didn’t learn from the crisis of 2008/09.

The August figures for the Chinese economy gave little reason for optimism in the short term. Factory output growth was the lowest in six years.

In reaction, economists reduced their growth forecasts for 2014. And it appears that September’s figures will not provide relief.

The immediate problem – or perhaps it is rather a symptom – is difficulties in the property sector, which provides about 15% of the Chinese gross domestic product. And this is where things are getting somewhat dangerous.

Fact is that the stupendous Chinese growth has fuelled a furious building boom. Huge apartment buildings and office complexes have sprung up, often taking the place of picturesque traditional Chinese housing in cities like Beijing, Shanghai and Guangzhou. Prices rose fast, and the builders and property owners rubbed their hands in glee. Banks kept on providing easy credit, making the inflation in prices possible.

But paradise always comes at a price. By and by, the new apartments and offices became too expensive. Some people could not pay their bonds any more, and other buildings became empty white elephants. According to The Economist, debt is now 200% of the country’s economy, which is not healthy at all.

You can guess where this is leading. Did not the Western crisis start in much the same way in 2008? Bankers wanting to look good on paper, dishing out loans left, right and centre to fulfil their quotas and get their large bonuses?

China is not yet there. But unless things stabilise, it is moving in the general direction of the same economic precipice where the West teetered for months, even years.

Things do not end there. At least the West had several sound foundations which also helped it from falling into the abyss.

Corruption, communism

This included a good legal system to regulate trade, investment and building, an open society where – for instance – news media are quick to expose wrongdoings like corruption, nepotism, and the like.

In China, these foundations are decidedly shaky. The country has the reputation of being riddled with corruption, while exposing official maladministration is at best frowned upon or at worst prevented. Freedom of the press and speech is allowed only insofar as the dictatorship in Beijing will allow it.

Being a democracy, of course, does not make a society immune to corruption and misuse of power. But it makes it easier to fight these things, and these methods are often bad for your health in dictatorships like China.

This country also has a second structural problem. That is the remnants of the communist system.

In communist times, as behoved a good Marxist-Leninist state, the means of production belonged to the state. This made for an extremely inefficient public economic sector.

It is one of the idiosyncracies of modern China that large parts of this system survived alongside a vigorous capitalist private sector. Which means that the state has to pour huge sums of money into a bottomless pit in order to keep the socialist sector afloat.

This acts like an albatross around the Chinese economy’s neck. And when the seas grow choppy, as is happening now, it makes it more difficult to keep the ship going.

Bad news for rest of world

China’s problems are bad news for the rest of the world, including South Africa. As stated above, the buoyancy of the Chinese economy helped the rest of the world to keep going in 2008/09.

The worst of the crisis may be behind us, but the recovery is so precarious that an imploding Chinese economy may plunge us all back into a deep recession.

This also applies to South Africa. We have developed healthy trading ties to the Middle Kingdom. And when the Chinese demand slows down, as is happening, South African importers and exporters will feel the pain as well.

In the 19th century, there was a saying: “When Paris sneezes, Europe catches a cold.” This may have to be amended: “When Beijing sneezes, the world catches a cold.”

Hopefully it will not result in the flu or pneumonia.

 - Fin24

* Leopold Scholtz is an independent political analyst who lives in Europe. Views expressed are his own.