China’s “Ghost Economy”: Will It Last, Despite Good Signs?

Ghost-EconomyChina’s economy is doing well, although there are fears this will not last long. Louise do Rosario examines the effect that next March’s change of premier is likely to have on the country’s economic direction.

During the annual meeting of China’s parliament in March, delegates were congratulating themselves on the world’s fastest growing economy, but the mood was tinged with fear that the growth is slowing down and is too dependent on debt.

Last year, China’s GOP grew by an official 7.3%, the best figure of any major economy in the world. The country also attracted $46.8bn in foreign investment, ending the year with foreign exchange reserves at more than S200bn.

Even allowing for falsification of domestic statistics and much of the “foreign” investment being Chinese money recycled through Hong Kong, Bermuda or the Virgin Islands, these were impressive figures. They were enough to persuade presidents, prime ministers and chief executives the world over to beat down the door to Beijing.

Economic worries

The self-congratulation was mixed with apprehension, though, about whether this remarkable growth has strong foundations and whether the government is taking the right measures to sustain growth. One anxiety was that GDP growth slowed in each quarter of last year, from 8.1% in the first quarter to 7.7%, 7.0% and then 6.7% in the last quarter. That was due to the global recession, the impact of the September 11 attacks on the US, the slowdown in the US market and, most importantly, weak demand at home.

“China is facing the pressure of deflation and its macro-economy is running the risk of recession,” said Xu Hongyuan, deputy head of the economic forecasting division at China’s State Information Centre. “After the start of the Asian financial crisis, from October 1997 to April 2000, China used an active fiscal policy to stop deflation and in May 2000 the consumer price index moved into the positive column. But, in 2001, deflation emerged again,” he said.

The second anxiety was about how China achieved the figures of the past four years. In part, it was through strong export growth and inward investment. But it was also through heavy government spending, which will continue this year with a bond issue of Rmb150bn–the same as in 2001, which resulted in a record budget deficit of Rmb309.8bn this year.

This was one of the few issues during the meeting that provoked public criticism of the government. Yu Zuyao, a delegate from Beijing, said if the government continued to run high budget deficits to stimulate the economy, it would lead to a financial and currency crisis like that in Russia in the late 1990s.

Quick fix policies

“We have had four years of expansionary financial and currency policies,” he said. “This loose monetary policy only treats the symptoms but not the disease, like keeping a dying patient alive. It cannot bring about fast and steady growth of the economy; it can only lead to hidden dangers.

“An enormous budget deficit and large debt burden will finally cause a financial crisis, in the form of runaway inflation like that in Russia in the 1990s, or stagflation, as in the western countries in the 1970s. Any wise policy maker knows you cannot have such an expansionary policy over the long term,” he said.

A substantial number of delegates share Mr Yu’s views. One Chinese economist said: “When Zhu Rongji took over as premier from Li Peng in March 1998, the government’s accumulated debt was Rmb46bn. Now it has mushroomed to Rmb500bn.”

In a stimulative measure, the central bank recently cut interest rates for the eighth time since May 1996, reducing the rate on a one-year fixed deposit from 2.25% to 1.98%. It has little room left to make further cuts and sees the worst-case scenario in neighbouring Japan, where the central bank has reduced rates to zero but cannot persuade consumers to spend.

Millions of the urban Chinese population are in the same mind-set as the thrifty Japanese. Individual bank deposits in China at the end of 2001 totalled Rm7380bn, an increase of 14.7% on a year earlier, even with the low interest rates. The reasons behind this figure are that people are saving for medical care, old age, unemployment and education for their children. These services were free or cheap in the Maoist era but are growing increasingly expensive.

The other main issue at the annual parliamentary meeting, discussed in private but not in public, was the name of the person who will succeed Mr Zhu as premier at the annual meeting next March and what kind of policies they will follow.

Mr Zhu, 73, said he would retire next year. People who have met him say he is tired and ready to step down.

Premiership front runners

The three front runners to replace him are vice-premiers Wen Jiabao and Wu Bangguo, and the Communist Party chief in Guangdong province, Li Changchun. Mr Wen, 59, is the favourite and is believed to be Mr Zhu’s choice of successor. A graduate of geology and mining, Mr Wen rose through the ranks of the ministry of geology.

The image many Chinese have of Mr Wen is of him standing behind then party chief Zhao Ziyang, to whom he was a close aide, when he visited protesting students in Tiananmen Square on May 19, 1989. That was two weeks before the People’s Liberation Army took over the city, killing hundreds, perhaps thousands, of people.

The two men knew a tragedy was about to happen and their faces were sad and gaunt. Mr Zhao has been under house arrest since then but, remarkably, Mr Wen has remained in senior government posts.

“Wen is a softer personality than Zhu and not an economic specialist,” says a Chinese journalist. “The best we can hope from him is that he will surround himself with good people and take their advice. We will look back on the Zhu era as a mixed performance.

“Nineteen ninety-seven was the best year — high growth, low inflation and the return of Hong Kong. Since then, the economy has not performed well. Zhu was in too much of a hurry and instituted too many reforms, some of which contradicted one another. He is an honest man and his family is not corrupt — but has not succeeded as people had hoped when he took office,” he says.

Li Changchun, 58, is said to be president Jiang Zemin’s choice for the next premier. His strength is that he is the only contender to have run three large and diverse provinces: industrial Liaoning in the northeast, agricultural Henan in the centre and Guangdong in the south, China’s richest province and the one with the most foreign investment. This has given him first-hand experience of industry, especially state industry which dominates Liaoning, agriculture and foreign investment, and trade, three vital components of the Chinese polity.

Hong Kong press reports describe Mr Li as capable, intelligent, cunning, authoritarian, proud and slightly arrogant; an operator not a visionary; a man who attracts respect but is not charismatic. He has not studied or lived overseas for an extended period.

Wu Bangguo, 61, has been vicepremier in charge of reforming China’s state sedor. A graduate of wireless technology from Qinghua University — the alma mater of Zhu Rongji — Mr Wu spent most of his professional life in Shanghai, working in industry and rising to the post of Communist Party secretary of the city in April 1991.

Direction unknown

In the secretive world of Chinese politics, where officials repeat the words of their superiors and conformity is the rule, it is impossible to know if any of these candidates would lead the country in a direction different to that of Mr Zhu.

Most observers expect the premier to keep one of his three posts after March next year, probably that of chairman of the party’s military commission, to enable him to retain a strong influence over policy-making. With this continuity of leadership, dramatic changes in policy are unlikely, especially since none of the front runners for the premiership have the incumbent’s strength of personality or expertise in finance and economy. They are more likely to act like a chairman of the board than a powerful chief executive.