Olympics run-up stresses China's
economy By Scott B MacDonald
NEW YORK - In the short term, the Chinese
economy looks ready to run at a strong pace. Real
GDP (gross domestic product) growth in 2005 was
9.9% and is expected only to moderate to 9% this
year, hardly a slump in activity. Indeed,
first-quarter data showed the economy heating up
even further, to a 10.2% annual growth rate.
It has been estimated that Beijing will see some
US$160 billion worth of construction in the
lead-up to the 2008 Summer Olympics. That money
will go into luxury apartments, subway and rail
lines, ring roads, sports arenas, and an upgrade
of the
international airport. Some
93 million square meters of offices, shops and
apartments will be added to make Beijing the
shining beacon of the new China.
While the
Olympic boom is providing a major face-lift for
Beijing, it runs the risk of pushing up the
country's debt, increasing bad loans for the
banks, and bumping the currently red-hot economy
into a major slowdown. This scenario is hardly
unprecedented: the 2004 Athens Olympics had
precisely that legacy for Greece.
Yet for
China's leadership, the 2008 Olympic Games are
highly important as they represent a major coming
to age of the world's fourth-largest economy. In
many regards the 2008 Beijing Games have echoes of
Japan's (1964) and South Korea's (1988) hosting of
the Games. Indeed, the 1964 Tokyo Summer Olympics
were the first to be held in Asia. For China, the
2008 Olympics will showcase the advances made over
the past several decades.
The Olympics
provide a fortuitous opportunity to look at
China's strengths and weaknesses. One of China's
potential Achilles' heels is its banking system.
For much of the communist period, the country's
banks were used to prop up a wide range of
companies. Credit issues were trumped by political
considerations and the banking system reflected
this process.
However, as China shifted
gears to a more market-oriented economy, the
authorities turned their attention to cleaning up
the banking system. This issue became even more
pressing as China moved along the path to joining
the World Trade Organization in the 1990s.
According to Moody's, the government has spent
$432 billion since 1998 to clean up the banking
sector.
However, although considerable
progress has been made in strengthening China's
banking system, the banks are not yet out of
trouble. In the first quarter of 2005, China's
four largest state banks - the Industrial and
Commercial Bank of China, the Bank of China, China
Construction Bank, and the Agricultural Bank of
China - reported a rise in problematic real-estate
loans of $8.7 billion (10% of their property
loans). These Big Four are the most exposed to
real-estate development, and they account for 76%
of all lending. We can expect that those numbers
are only going to increase because of the ongoing
construction boom.
But any crisis in the
Chinese banking system will have ripples far
beyond Chinese shores. Beyond the general effects
that will be seen in numerous sectors and markets
that have become dependent on ever-increasing
growth from a rapidly developing China, a number
of Chinese banks have sold equity shares on
foreign stock exchanges.
As well, a number
of international banks have bought about $19
billion in strategic stakes in the Bank of China,
China Construction Bank, Industrial and Commercial
Bank, and the country's fifth-largest commercial
bank - the Bank of Communications - in addition to
a variety of smaller commercial banks around
China. Among the foreign lenders most exposed are
Allianz, American Express, Bank of America,
Goldman Sachs, HSBC Holdings, Merrill Lynch and
the Royal Bank of Scotland. A bank meltdown in
China would certainly catch foreign institutional
players and small investors in the aftershocks.
China has faced tough economic challenges
in the past. Indeed, the past 20 years have
witnessed many proclamations of the coming demise
of China's economic miracle. Thus far, China's
policymakers have managed to steer the country
through several global shocks as well as the
potential political disruption related to
Tiananmen Square in 1989. For this, they deserve
praise.
However, times have changed. The
economic policymaking environment is very
different than it was in the last century. China
is now the world's fourth-largest economy, it has
a much more globalized economy than before, and
its population is more likely to hold the
government accountable. A major dip in the economy
post-2008 could have rapid sociopolitical
consequences.
In all fairness, the
government of President Hu Jintao is keenly aware
of the stakes, but is caught between the desires
to maintain strong economic growth and to keep the
population happy, balanced with avoiding any
shocks.
China since 1978 has been the
scene of one of the world's most amazing growth
stories. Yet with dynamic growth has come tough
challenges: severe environmental pollution, rapid
urbanization, and transportation bottlenecks.
Economic problems have challenged more than once,
but thus far, the government has been able to
manage the process and steer the country to calmer
waters. The coming economic crisis - if it indeed
happens - is likely to be the toughest test faced
by the new China.
Scott B
MacDonald is senior managing director at
Aladdin Capital and a senior consultant at KWR
International.
(Posted with permission
from KWR International, Inc
(KWR), a consulting firm specializing in the
delivery of research, communications and
advisory services.)
