Why Beijing Is in a Risky Place
George Wehrfritz reports in NewsWeek:
Workers are losing factory jobs at the fastest rate in decades. Automakers—having failed to anticipate today’s sales slump—are lobbying politicians for bailouts. The stock market is a crash heap, home prices are down by 35 percent or more in many cities and toxic assets have begun to weigh heavily on banks. America in 2008? Try China, where the global economic downturn now looks certain to end the country’s 30-year growth boom, posing the greatest leadership challenge to Beijing since pro-democracy demonstrations threatened one-party communist rule back in 1989.
That’s not the conventional take on China—yet. But with most industrialized countries now in recession and countries the world over hoping against hope that the planet’s most buoyant major economy might somehow dampen the global downturn, it’s a forecast that increasingly rings true. The reasoning goes something like this: China, despite its deep pool of savings and $2 trillion in foreign reserves, is unprotected from the fall in global demand that began in earnest in mid-2008. Notwithstanding all the hoopla about the rise of China’s billion consumers, the body blow that’s now landing in the industrial heartland will debunk the notion that China has already begun transitioning toward a new growth model based less on exports and investment and more on household consumption. “We would love to believe it too, but it just ain’t so,” wrote Standard Chartered bank’s highly respected China economist, Stephen Green, last month. He says expecting Chinese spending to save the world from recession is “a pipe dream.”
With China at the vanguard, Asia as a whole stands dangerously exposed to external shock. Since the late 1990s, household consumption as a share of China’s GDP has fallen from roughly half to 35 percent. On the flip side, the share of Asia ex-Japan’s output devoted to exports is now more than 45 percent, or roughly 10 points higher than it was on the eve of the 1997–98 Asian financial crisis. When juxtaposed with America’s debt-driven gluttony, Asia’s puny appetite for the goods it produces reflects a global economy that’s staggeringly out of whack. “We are where we are because of massive imbalances that policymakers and politicians have allowed to build up over the last decade,” argues Stephen Roach, chairman of Morgan Stanley Asia. “Those imbalances were never sustainable, but the longer they went on the more they seduced people. And now we’re paying the ultimate price for that seduction.”