Applying brakes to China's red-hot
economy By Li YongYan
BEIJING
- Rampant, unfettered and unplanned economic growth,
complete with dazzling, sizzling statistics, is not a
good thing. Take China.
Two months ago, the
sizzling growth in China's economy - a 9.1 percent
increase in gross domestic product (GDP) over the
previous year - had Beijing worried, rightly, rather
than jubilant, about the feverish temperature and
underlying health of a questionably sustainable and
balanced economy. What the central government did at the
time was order a halt in fresh investments in such key
industries as cement, steel and aluminum.
Two
months have passed since then. Is the country responsive
to Beijing's imperial decree? Of course not. The
opposite is happening, in a big way. Instead of cooling
down in an orderly fashion, China's GDP grew 9.7 percent
in the first quarter of 2004, and it shows no sign of
leveling off and subsiding any time soon. It is driven
again by continued investment in the very industries
that China wants to cool. Worry is turning into anger
and the central government can take this flagrant
defiance no longer.
Last week, the State Council
forcibly shut down a giant steel project in the coast
province of Jiangsu and disciplined a dozen obdurate
local administrative and banking officials in the
process.
The steel plant offender, a private
entrepreneur who is already under arrest for alleged
bribery, had allegedly persuaded local governments and
banks to provide the necessary assistance - land
allocation, forced eviction of the inhabitants and
billions of yuan in loans. He wanted and got virtually
everything needed to begin construction on a monumental
scale, despite a warning in February from the central
government against precisely this type of investment. As
the saying goes, kill a chicken to frighten a monkey.
The offender happened to walk into the coop when the
government, furious over its inability to command
anyone's attention, found it convenient to kill a
chicken in order to scare the misbehaving monkeys.
Intuitively, a hot economy that keeps rolling is
a good thing. It generates wealth, increases tax
revenues and creates jobs. But all that glitters is not
gold. There is a cost to everything. And cost can and
often does exceed benefits. When that happens, a good
thing starts to turn bad. China's booming economy is
structurally flawed in that it is heavily dependent on
natural resources. While a software programmer can sit
down at a personal computer and churn out codes that
sell for a small fortune - all at the cost of his brain
cells, a few kilowatts of electricity and several java
lattes - a steel plant consumes mountains of iron ore,
coal, coke and vast joules of electricity. The plant
also eliminates arable and farming land and pollutes
land and waters. A full one-third of the world’s total
steel output is now consumed in China, where demand
reached 260 million tons last year, 2.5 times more than
the entire steel production in the United States.
That, and a host of other resource-guzzlers and
heavy polluters, are stretching and undermining China's
fragile infrastructure in ways that are disquieting, to
say the least. Power consumption grew 16.4 percent in
the first quarter of this year, causing country-wide
shortages that resulted in both industrial and
residential blackouts. Demand for rail cars, the
backbone of transport in a highway-challenged China,
exploded 75 percent to 280,000 cars per day, far
outstripping the supply of 100,000 presently available.
Millions of migrant workers who flock to cities in
search of jobs, literally must squeeze into packed
passenger cars that don't even have standing room.
During the peak travel season, like the Spring Festival,
many travelers must be on their feet, if not their toes,
for hours on end, and many trips are 10 hours or longer.
Economic growing pains mean real suffering,
death If living in darkness or traveling in
no-style amounts to growing pains, then the suffering
will probably become unbearable. China's
labor-intensive, manufacturing-centric development is
fraught with the accompanying industrial hazards that
kill, literally. And this refers not only to the coal
mine explosions and accidents that one hears of
frequently. Toxic chemical leaks and fires are far more
lethal, and very frequent, as evidenced by recent deaths
in Sichuan Province and elsewhere.
Economically,
the frothy building up of China's infrastructure and the
expansion of its manufacturing capacity will eventually
hurt the economy without clearheaded checks and
balances. For one thing, bad debts will accrue,
undermining the government's master plan to overhaul its
seriously ill banking system, laden with bad debts from
inefficient state-owned enterprises. Because all banks
are state-owned, the government has an obligation to
oversee a gradual reduction of dead assets on banks'
balance sheets that are the result of previous great
leaps forward.
Environmental concerns must also
be addressed sooner rather later as more and more rivers
have either dried up or turned black because of
uncontrolled waste discharge. An increasing number of
cities already face acute shortages of water, safe or
otherwise. Inflation is also a monster that has to be
watched closely - the rising consumer price index is
sending the current interest rates, under 2 percent per
annum, into negative territory, further fueling the
borrowing spree by the industrial sector.
In
addition, Beijing is also fighting on the political
front, too. Outlying provinces are growing increasingly
centrifugal - choosing to carry out only those central
directives that they consider beneficial but to ignore
those that are harmful to their own local interests. Of
course, nobody will stand out and openly defy the
central authority, but over the years local officials
have perfected this game to an art that they call
"skirting the edge" - doing things that are borderline
legitimate, or illegal, depending on the perspective.
For example, the officials in the above ill-considered
steel case approved the project, with its land grab,
loans and all, in incremental allotments, each
installment being exactly under the Beijing-set limits
on the size of the loans and land conversion. When this
shenanigan was completed, the scheming officials and the
entrepreneur patched up all the allotments and had
themselves a nice piece of land totaling 400 hectares,
far exceeding the size approved by the provincial
government authority.
This central vs local war
of smarts has been going on for the past two thousand
years and will continue to unfold. Beijing should be
able to enforce its policies through both administrative
power and economic tools. For now, besides having a few
heads on a platter, one thing Beijing's economists can
do is jack up the interest rates, making the cost of
money more expensive and thus giving eager
industrialists a pause in their calculation of their
next great leap.
Li YongYan is a
Beijing-based analyst of Chinese business.
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