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Sunday, April 25, 2004
China's economy is overheated, its banks are shaky, and hot money continues to pour in. Can the new leaders rein in a runaway financial system?Scenes of prosperity, scorching expansion, commodity shortages, and speculative froth in the Chinese economy: In Beijing, local authorities are driving an unprecedented stadium-construction boom to prepare for the 2008 Olympic Games, an historic shot for the country to strut its stuff and showcase its economic ascendancy before a global audience. The capital city is spending $30 billion-plus on new subways, road construction, and glittering stadiums.In some thriving coastal cities, 2004 is shaping up to be the year of the brownout, as construction of new factories and housing fuels ever greater demand for electricity. China's State Grid Corp. forecasts an electricity gap of some 30 million kilowatts this year. Power rationing has become a fact of life in Shanghai and in smaller towns in the provinces of Zhejiang and Anhui in the booming Yangtze River Delta. Because the yuan is fixed at a cheap rate of 8.27 to the dollar and the government so far has not let it appreciate, the Chinese are spending more and more to import increasingly dear raw materials, which mainland manufacturers turn into products to sell abroad at low prices. In other words, China is paying more and getting less in return. The result: China actually ran a first-quarter trade deficit of $8.43 billion.The system is clearly out of whack. Yes, China is regarded as a country with first-world manufacturing prowess, the planet's workshop. But that industrial might is hitched to a broken, third-world financial system. When the heat turns up, things can get ugly.The authorities are clearly getting nervous. Beijing has raised bank-reserve requirements for the second time in eight months, and a sell-off in Chinese bonds has been accelerating.For all of its glittering skylines, emerging space program, and love affair with cell phones and the Net, China is still burdened with a backward financial system that can't tell a good risk from a bad one -- and often doesn't seem to care. "There is no such thing as efficient capital allocation in China," says Carl E. Walter, chief operating officer for J.P. Morgan Chase & Co. (JPM ) in China.Very scary and looks to be precarioussly perched - but China has always managed to baffle the world in the past and this gives them enormous confidence that things can be managed. Also the stakes are high for the big economic powers and any collapse can have severe impact for them as well - the hope is that this would ensure that they rally behind china and support it when the need arises.
