The Chinese economy is overheating. Beijing
is trying to slow growth to sustainable levels and ensure a
"soft landing" that will underpin its long-term development
plans. But the government's twin fixations on maintaining
social stability and hosting a successful Olympics delayed any
potential crackdown until after the Games end and the world's
attention is elsewhere.
Until recently, that just about summed up the
conventional wisdom about China's near-term policy path. And
while the chances of the government doing anything to
jeopardize its "harmonious society" before or during the
Olympics were about as likely as Beijing winning a gold medal
for its air quality, what happens after the closing ceremony
Aug. 24 is less of a sure thing.
In fact, it's looking increasingly likely
that the government's main concern is no longer how to slow the
economy. China's top brass instead may be focusing on ways to
avoid a shuddering halt.
This may seem hard to believe, given some of
the numbers coming out of China. Economic growth slowed in the
second quarter to 10.1 percent, but that's hardly evidence of a
slump. Iron ore demand, steel output and oil imports all
continued to increase at double-digit annual rates. And leaving
aside the mass clear-out of migrant workers from Beijing ahead
of the Olympics, the country's incredible urbanization rate
continues apace 1 million or so people are moving from the
countryside to the cities each month. In population terms,
that's a city the size of Chicago every quarter.
But underneath the headline numbers there
appears to be growing concern among China's leaders about a
slowdown. The reasons are familiar. Chinese growth has helped
underpin the global boom of the past two decades, so it
shouldn't be surprising that China is every bit as vulnerable
to the economic slings and arrows that are bombarding consumers
and business elsewhere (the theory of "decoupling," which
argues that emerging economies are immune to a slowdown in the
developed world, doesn't look so smart when oil costs more than
$100 a barrel).
There have been three major changes to
China's economic position over the past few months, as analysts
at BCA Research Inc., Montreal, pointed out in a recent
The first, and for Beijing perhaps the most
important, concerns its exports. Economists can debate until
they are blue in the face about whether China's economy is
dependent on exports or just heavily reliant on them. Either
way, stuttering demand from Western economies, the slow but
steady appreciation of the yuan and China's own efforts to
raise interest rates and stem shipments of resource-intensive
products like aluminum and steel have hit exporters.
The second is energy prices. The United
States isn't the only big oil importer to have felt the pain of
recent surging prices China's oil imports as a proportion of
its overall import bill rose to almost 12 percent in the spring
from around 8 percent at the start of the year. China's
predicament is made worse by an unholy mess of price caps and
subsidies in its domestic energy markets, which have led to
shortages of fuel and electricity.
Lastly, Chinese stock markets have crashed
over the past year. Investors smarting from the 20-percent
decline in the Dow Jones Industrial Average since October
should be thankful they're not in China the Shanghai Stock
Exchange fell 53 percent over the same period.
There are growing signs that higher costs and
the slowdown in some industries are starting to hit consumers.
The impact of the surge in food prices is well publicized; news
that unsold automobile inventories rose 50 percent to a
four-year high in June suggests that China's middle-class could
be feeling the pain as well.
China's rulers, then, are facing a similar
dilemma to Washington. Do they focus on fighting inflation,
which was running at over 7 percent in June? Or do they instead
look to stimulate a slowing economy? The latter course seems
more likely for many reasons, chief among them politics. If the
U.S. economy stumbles, administrations get voted out of office.
China's rulers know that their legitimacy is dependent on
raising the standard of living. A "hard landing" for the
economy leaves them flat on their face and out of power.
With inflation and energy costs seemingly
moderating in the early summer, Beijing may have a little more
room to act. Any new growth program is unlikely to lead to
another explosion in exports of commodities like steel, as the
need to rein in energy costs makes that unfeasible, but the
slowdown that many are expecting may be put off for a