As inflation rises and the shares of China’s big banks lose value, Moody’s issues a warning against “bad debt”. The crisis of China’s economic boom appears irreversible. Experts believe that the country’s model of development must change to empower ordinary Chinese vis-à-vis the state.
Beijing (AsiaNews/Agencies) – With inflation running at 6 per cent and bank shares dropping in value following Moody’s decision on Tuesday to issue a warning about bad debts, China’s model of development, based on endless growth and a leading state, is coming to an end. Experts warn that if China wants to avoid hyperinflation, it must reduce the role of governments and state-owned companies in the economy, whilst granting economic rights to ordinary people.
A consensus is emerging among analysts that China’s economy has now entered and irreversible phase of crisis. Although it has built up industries and infrastructures, it has failed to provide 1.3 billion people adequate health care, social security and pensions.
Beijing based everything on the myth of endless growth, driven by exports and cheap labour. When exports slowed down during the world’s financial crisis in 2009, the government implemented a US$ 586 billion stimulus programme. With most of the money channelled through banks, lending increased by US$ 1.4 trillion, and money supply rose by 29 per cent.
However, this mountain of money (which inevitably fuelled inflation) was only partly used in productive investments. Many financial institutions used it in speculative ventures (buying stocks or real estate).
By and large, China’s development was achieved on the backs of ordinary people, to the benefit of local political élites.
According to a study by Gary Shilling, an economic expert and chairman of A. Gary Shilling & Co, an economic consultancy firm, about 110 million Chinese or 8 per cent of the population accounted for 35 per cent of GDP in 2009.
For most of the rest, free medical care or retirement pensions are beyond their reach. In fact, Chinese households save close to 30 per cent of income on average, in large part to cover old age and medical costs, Shilling wrote in Bloomberg. Overall, the labour income of 1.3 billion people represents 40 per cent of the GDP, economist Andy Xie noted.
At present, exports are declining because of the crisis in the United States and Europe, and foreign investors are moving to countries like Vietnam and Pakistan where labour is cheaper.
Even though Chinese export growth averaged 21 per cent per year in the last decade, the decline will affect overall growth, expected to be around 9.5 per cent this year.
As things stand, Beijing cannot just print money to fuel growth if it does not want hyperinflation. Inflation in June should hit + 6.2 per cent (double in the case of food prices, which reached 11.7 per cent in May)
Local governments have made matters worse by using public funds for speculative purposes, especially in real estate, thus fuelling the property bubble, which could blow away private savings and public budgets.
According to government estimates, China’s municipal and provincial governments owe some 10.7 trillion yuan to banks, but on Tuesday, Moody’s raised that estimate to 12 trillion (US$ 1.8 trillion), warning that that bad debt could reach between 8 per cent and 10 per cent of the total loans because of risky investments and property speculation. For the rating agency, it is unclear how Chinese banks and authorities will deal with the problem. What is clear though is that China’s big banks saw their shares drop considerably following Moody’s warning.
“The slowdown in China's growth is a good thing,” Andy Xie wrote in the South China Morning Post. “It has become too dependent on local governments spending borrowed money and the property bubble. In this model, more growth leads to bigger problems down the road. Slowing growth at least means the economy isn't getting into a deeper hole.
“China should try to change its model to benefit more people, use fewer resources and pollute the environment less. The current growth model benefits disproportionately the few who control government-owned assets and spending programmes.”
In other words, “people need greater social security at a time when they see pork prices increase every day and see their purchasing power decline.”