China's Economy: Seizure or Cancer?
Image Credit: Robert S. Donovan

China's Economy: Seizure or Cancer?


The unexpectedly sharp slowdown of the Chinese economy has fanned anxieties around the world. Based on the latest figures released by the Chinese government, the economy slowed more than expected in the first quarter of this year compared with the fourth quarter of last year. Is the once unstoppable Chinese economic growth engine grinding to a halt?

For the West, deteriorating growth in China is obviously bad news. With Europe sinking into recession and the United States mired in an anemic recovery, growth in emerging markets, China in particular, has been a bright spot in an otherwise bleak economic landscape. As the world’s second-largest economy, annual growth at high single digit (8 percent to 9 percent) makes China the largest contributor to global GDP growth. Now that China is faltering, many worry not only about the effects of China’s stagnant growth on the rest of the world, but also about its impact on China itself.

On the surface, the recent precipitous drop in growth in China is the result of two factors. The first is the tightening of monetary policy adopted last year to cool the real estate market and fight inflation. The second is the rapid decline of export orders for Chinese goods, a development closely associated with the escalating debt crisis in Europe.

Had the Chinese economy been more balanced between domestic demand and exports and between household consumption and investment, monetary tightening and falling exports would not have had such dampening effects on growth. But the Chinese economy is highly unbalanced (although compared with a few years ago, China’s internal-external imbalances have moderated significantly), thus making the country less able to cope with the knock-on effects of credit-tightening and disappearing external demands.

In the short-term, most analysts are worried about a possible “heart attack” for the Chinese economy. Under this nightmarish scenario, plunging growth will expose China’s highly leveraged local governments, real estate developers and state-owned enterprises to the risks of insolvency and default while China’s export sector, dominated by foreign companies and domestic small and medium-sized private firms, contracts and lays off workers. The nasty feed-back loop looks like this: falling growth will greatly reduce the financial viability of the projects in which China has overinvested in the last three years. Such projects include real estate developments, heavy industries, and infrastructure (the most infamous example being the scandal-ridden high-speed rail system). Falling growth means lower demand. These projects won’t be able to charge higher enough prices to make a profit. Because they were financed with bank debt, it’s almost certain many of these projects will default.

In most other countries, such a crash would lead to a banking crisis, hence the “heart attack” scenario.

But China is different. Because the banking system is effectively owned and controlled by the state, a banking crisis won’t materialize unless the state itself is insolvent and Chinese depositors have completely lost confidence in the state’s sovereign guarantee of its banks. This unique character of the China’s state-owned financial system is the cause of the country’s inability to allocate capital efficiently. However, in the short term, this structural flaw may turn out to be an asset in averting a seizure of the financial system.

The Chinese government has already taken measures to prevent such a seizure. Last year, Beijing ordered a one-year moratorium on repayment of loans made to local governments and their highly leveraged financing platforms, thus delaying the day of reckoning. As the economy continues to struggle, one should expect the Chinese government to extend this moratorium to give local governments more time.

September 7, 2012 at 18:12

"The other option – repeating the folly of stimulating the economy through state-led investment – would make China’s economic cancer all but incurable."
With hundreds of billions now going into inefficient railway and subway projects, and probably more to come, it looks like Chinese officials have chosen that other option.

August 6, 2012 at 03:39

I sugguest people around the world stop purchase Made in China's food, household and construction product. Plus, travel to China is also unsafe for the foreigner.  China Petrochemical product may cause cancer or  environmental pollution. 

July 24, 2012 at 12:04

JOhn Chan. Are late term abortions performed forcibly on women 8 months into pregnancy simply western imperial sensationalism? Your complete denial of any corruption or wrong doing by the CCP is what hampers open debate. Also the US doesnt have lackeys it has allies. Something only china wish it had, a friend to depend on. lol.

June 9, 2012 at 04:52

Oh, it must be a cancer. I don’t have to read the article to reach the conclusion.

The only problem I have is how can they pull themselves out from the financial trunami so fast and how can they still keep moving ahead, while we are still stuck in the mud?

In the end, I really don’t care if China’s economy has a cancer or a seizure any more. I care about if ours is dying.

June 5, 2012 at 13:30

Less government (more on border) and less spending (except defense) – It has been the joke around the world.

June 4, 2012 at 19:22

@John Chan,
Our ability to discern is what makes us “home-sapiens”. We don’t obey rigid rules, we don’t act by instinct.

June 4, 2012 at 00:00

ABC News Australia reported that China refused to accept contracted shipments of coal on the 2nd of May. Intelligence reports caused various governments around the world to issue a warning to their business people that Chinese manufacturers who have not been paid (in particular for substandard products provided) have resorted to locking up foreign business people on return until payment is negotiated. Skyrocketing company closures. This list goes on and on.

China is in unthinkable trouble at the moment and no amount of propeganda can convince us any differently. The opacity of their financial reports lets the imagination run wild as to the macro economic policy they implemented over the last decade or so. Just look at the fiscal sterilisation and its effects on their headline inflation rate and the effects on US bonds and European Bonds etc. Saving face is one thing, but deviating from sound economic policy to keep up appearances is quite another. I dare say, there is a growing tide of very disgruntled Governments and major multinationals that are more than a little upset at the moment.

Keep an eye on all the bankers leaving China and all the companies moving to Indonesia and Eastern Europe to manufacture. We’ve know for sometime what was happening. China feels as though its been hard done by over the last century by Britain, Japan Etc. this time its their own making. This is not a heart attack waiting to happen, it’s too shocking to mention.

June 3, 2012 at 11:00

I think that this slowdown is due to the fact of combination several factors:
1) Real Estate Bubble in China bursted.
2) High Inflation in China – recently I went to a store to look for some sofa. My surprise was that the relatively chinese products rose aprox. between 25-40% in the last 3 years. That makes our national (Mexican) products or american ones more competitive. People are shifting from low cost focus into quality environment friendly products. The same thing happens with accesories and clothes. Since 2010 after years of decreasing value of clothes, the fabrics and all the clothes started to increase. That makes things more expensive and people are willing to pay more up to the certain point.
3) Macro-economic manipulation of economy by Chinese government is not always the best remedy.
4) The continuous push to revaluate the Chinese currency. Chinese currency together with euro should be devaluated but they cannot be because of the international pressure. It should be 10 yuans per dollar and 1 dollar per euro, but no one dares.
5) The total cost of supply chain for some products start to be lower in other countries such as Brazil or Mexico, due to the high oil prices and the ability of these countries to adjust their currency to more competitive exchange rates.
6) Global Depression that is manifesting in different ways around the world. It hurts not only Greece or Spain, but its effects are felt in all the countries.
7) and other factors.

John Chan
June 2, 2012 at 00:06

@Kangmin Zheng,
On this site, you are spreading toxic unfound allegations from foreign countries to poison the environment of exchange ideas and conduct meaningful debate on difficulty issues facing the world.

Human capsules is an unfound allegation from South Korea, an American lackey, to smear China’s increasing competitive export into Korean market.

Organ donation is a noble behaviour regardless the identity of the donor. Due to shortage of organ donation the West has been trying very hard to institute compulsory organ donation, and a lot of people in the developed world go to buy organs in India and Africa the go to hospitals back home to clean up. Yet you only smear China’s organ donation program as human organ harvesting relentlessly, but utter no word against the hypocrisy of the West, your mind is indeed sick and ugly comparing to those prisoners.

“Man eat man” happens in the USA if you watch news in TV at all, after taking the new synthetic drug “Bath Salts” those addicts start to act weirdly and violently; half face of an dead addict was found eaten by his companion.

China’s crime rate is way below most of the nations in the world, you use individual cases to demonizing China using a Chinese screen name, your intention couldn’t be more insidious than evil, comparing with your kind of character CCP is an angle.

John Chan
June 1, 2012 at 23:21

@Matt Dowd,
It is the 1% controls the congress, thru tens of thousands of lobbyists funded by the Wall St. big corporations, and others in that 1%.

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