China's 'unsustainable'' economy weighed down by debt

Hopes that the continuation of China’s long boom will drag the rest of the developed capitalist world – the so-called advanced economies – back from contraction have been further dashed

The country’s part in the global economic spiralling slowdown was underlined yesterday when rating agency Moody’s joined Fitch in downgrading the country’s credit outlook. The downgrade from positive to stable was the agency’s response to the news that China’s growth rate has slowed to 7.7%, continuing the downward trend of the last two years.

News of the slowdown - greater than expected by market speculators who were banking on 8% or higher – reverberated around the world. Prices on the commodity and stock exchanges dropped sharply as demand for key inputs, including copper and oil, will fall.

Fitch downgraded its China rating last week. The agency sees warning signs in the massive expansion of credit from 130% of gross domestic product in 2008 to 200% in 2012. This is partly the result of the state’s huge investment in new cities and transport infrastructure, which was the response to the 2007-8 financial crash.

But the growth in credit is also the product of a hardly-regulated shadow banking industry offering “wealth-management” products to the minority of new rich who’ve benefited from China’s emergence as the world’s second largest economy.

The investment from abroad in search of cheap labour, which drew millions of Chinese into the workforce serving the profits of global corporations is now in decline as companies like Foxconn, which runs Apple’s assembly plants is looking elsewhere  in the world. Some corporations are even returning to the United States where real incomes have been driven down.

China’s state infrastructure programme, heavily promoted by former premier Wen Jia Bao, encouraged local administrations into spending way beyond their means in order to stave off the worst effects of the global crash, but he saw its limits.

"Another year of propped-up growth via state spending and a credit deluge would, we fear, push China dangerously close to proving Wen Jiabao correct - that the current economic model is 'unsustainable'," said Alistair Thornton, senior China economist at IHS Global Insight. "If something is unsustainable, at some point, it won't be sustained."

Despite the warning signs, China’s central bank has cut interest rates twice since June to reduce borrowing costs for businesses and consumers and increase lending.

And China is far from exempt from the continuing global slowdown. Yesterday the International Monetary Fund once again cut its forecast for world growth to 3.3% for 2013, from its January prediction of 3.5% whilst trying but failing to convince the markets that it remains upbeat about the future.

The IMF’s latest World Economic Outlook sees the eurozone as a whole contracting by 0.3%, the US slowing to 1.9% growth as the government slashes spending, but it also saw growth slowing in large emerging economies like Russia, China, Brazil and India.  

Summarising the latest set of global data, leading economics professor Eswar Prasad says: “The global economic recovery remains stuck below takeoff speed, unable to achieve liftoff and facing the risk of stalling.”          

Prasad’s warning that “politicians around the world continue to avoid tough structural reforms, instead relying on central banks to continue propping up growth”, implies a redoubling of the assault on living standards that has produced 60% unemployment among young people in Greece and Spain. 

Without these more vicious “reforms”, says Prasad, “policy and political uncertainty remain sources of drag that could prevent the world economy from attaining liftoff, raising the risk of a crash”.

On the day that UK unemployment rose by 70,000, you have to say that the “crash” Prasad warns about is a more likely outcome than “liftoff”.

Gerry Gold

Economics editor

Historic showdown builds in Europe

Two of surely the most delusional people on the planet strolled down the red carpet in Berlin last night, talking about growth and keeping Greece among the eurozone countries. No chance on the first, and close to zero on the second.

Francois Hollande, the newly-elected French president, took more notice of the lightning strike on his plane from Paris to meet Germany’s chancellor Merkel than the real state of the economy.

Greece is close to financial collapse, with people taking their euros out of the country, leading to fears of a run on the country’s banks. With fresh elections due in June, the country is without a government after electoral deadlock.

Even if Greece had a government, there is no way the European Union/International Monetary Fund would meet demands, expressed by voters, for a renegotiation of the draconian bail-out terms. So much for “democracy”.

Europe is in trouble – serious trouble, with the debt contagion claiming Greece, Spain, Italy and Portugal to name just some of the victims in recession. There are serious doubts whether the euro could survive a Greek exit from the single currency, as seems likely now.

But what about the so-called emerging countries? In China, looked to by many as the saviour of the capitalist economy,  a measure of money supply and a leading indicator of economic growth six months ahead has  contracted since November. They are shrinking faster that at any time during the 2008-2009 global meltdown, and faster than in Spain right now

State investment in railways has fallen 44%, with an accelerating decline over recent months. Highway construction has dropped 2.7%. "The data shows extreme weakness in the Chinese economy," said Alistair Thornton from IHS Global Insight in Beijing. Yes indeed it does: eight of the ten largest shipbuilders in the country have not received a single new order this year. "A wave of closures in the shipbuilding industry has yet to begin. A hurricane is approaching," said one official. 

Housing sales slumped 25% in the first quarter, and this has fed into a drastic fall in new building, which employs 10% of the Chinese work-force directly, and a further 20% indirectly. Land sales provide 70% of tax revenue to local authorities and 30% to the central government. Or at least they did.

Ambrose Evans-Pritchard, international business editor of the Telegraph, isn’t known for understatement, but his stark collection of data should make everybody’s eyes widen in alarm. “Something odd is now happening,” he says. “The People's Bank said new loans fell from $160bn (£99.5bn) in March to $108bn in April. Non-conventional lending seized up altogether. Types of credit including ‘trust lending’ fell by 96pc, and ‘bankers' acceptance bills’ by 90pc. This is astonishing data,” says Ambrose, and you have to agree.

India? Its industrial output fell 3.5% in March. Brazil’s growth has slowed too, with car sales down 15%  and industrial production contracting in March. The bad loans of its banks have reached 10.3%, higher than after Lehman crashed, taking the global financial system down with it.

Evans-Pritchard and his co-thinkers including Willem Buiter, and Ebrahim Rahbari of Citigroup, still call for miracles in the shape of a new globally co-ordinated collective effort by central banks to pump more fountains of cash into the financial system in the faint hope of staving off a world slump. 

Merkel holds the ring in Europe right now, and she’s got no intention of returning to Weimar-style inflation. So it’s austerity and “restructuring” all round, whatever Hollande may have promised the French people who elected him.

The Communist Manifesto was published in 1848, the last time there was a Europe-wide revolt against the old order. With Merkel’s party losing heavily in weekend elections, a new showdown is building between the working people of Europe and a political class that is helpless, hopeless and committed to a capitalist economy and financial system beyond repair. In their manifesto, Marx and Engels wrote, the “proletarians have nothing to lose but their chains. They have a world to win”. That remains the case today.

Gerry Gold

Economics editor