China’s battered image – Bears in a China shop

The “peaceful rise” hits some turbulence; but China’s economy is not about to crash

Published on The Economist, January 14, 2010.

THE thunderous applause that China has become used to has suddenly been drowned by catcalls. Celebration that it had seen the light on climate change turned to condemnation of its spoiling role at Copenhagen. Foreign complaints about the jailing of a human-rights activist and the execution of a mentally disturbed British drug-smuggler recalled the bad old days of hectoring from Western governments. Barack Obama is (at last) due to meet the Dalai Lama, and his government has gone through with the sale of arms to Taiwan. And Google, an internet giant that had been notoriously willing to tailor its services in China to repressive local regulations, has said it may quit the market (see article). Even China’s strongest suit, its booming economy, has been damned. Rather than cheering China’s success in shrugging off the “Great Recession” of 2009, some analysts say China’s prosperity comes at the expense of the rest of the world and claim that, anyway, it is heading for a crash. One describes it as “Dubai times 1,000, or worse”. 

Two Chinese bubbles, in other words, seem about to pop. One is a confection of naive optimism that the rise of a continent-sized, authoritarian power could be accommodated in the global system without serious strains. The other is a “bubble economy”, characterised by excessive lending, overinvestment and overvalued share and house prices. The obvious comparison is to Japan in the 1980s. When this bubble bursts, argue pessimists, China will suffer a prolonged slump similar to Japan’s after its bust two decades ago.

It is tempting to link the two bubbles: the myth of China’s smooth ascent is exploding because its economic miracle has proved partly illusory. In fact, China’s government may be right to see the economic gloom as in part wishful thinking from outsiders repelled by its repressive political system. The truth is, the economy is not yet a Japan-style bubble … //

No three-bears economy:

That does not mean China has a Goldilocks economy. Bank lending is growing too fast, which may be fine if it is flowing into useful investments, but not if it is fuelling asset prices. The risk of bubbles and excess capacity will grow unless policy is tightened soon. The People’s Bank of China has just raised banks’ reserve requirements, but it needs to act more boldly to lift interest rates and curb bank lending. That means that the yuan must be allowed to rise. China’s main excuse for holding down the yuan—to support battered exporters—is no longer tenable in light of the rebound in exports. Recent warnings about an imminent Chinese crash are premature, but unless China acts, the bears will one day be proved right.

Before then, however, the continued rise of the Chinese economy will exacerbate the diplomatic and political trials its government has faced in recent weeks. China’s growing economic clout brings with it demands that the country should play a more responsible role in global affairs. The exchange rate and carbon emissions are only two areas in which its policies will be expected to take into account the interests of the world as a whole as well its own citizens’. And at home, the government may not be able indefinitely to rely on economic advance to buy off demands for greater political freedom.

This week the Chinese blogosphere, usually intensely nationalistic and sensitive to any pinprick from a foreign government, journal or company, rallied to Google’s defence. For China’s government, that may be more ominous than a shelf of gloomy brokers’ reports—and another reminder that politics, not the economy, remains China’s biggest problem. (full text).

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