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Is China’s Fast-Growing Economy Headed for a Crash?

January 24, 2013 at 12:00 AM EDT
Will the Chinese economy continue its torrid pace of growth and overtake the U.S.'s top status? Or is it a bubble destined to burst, taking the world economy down with it? Paul Solman interviews a highly-respected China "bull" and a prominent China "bear" as part of his ongoing Making Sen$e project.
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JEFFREY BROWN:  Next: trying to make sense of China’s economy.

A top Chinese official told leaders at the Davos World Economic Forum in Switzerland this week the country is expecting faster growth this year. If anything, he said, China’s trying to stop the economy from overheating too quickly. But some are asking whether China’s high-flying growth may be built on questionable assumptions.

NewsHour economics correspondent Paul Solman has our look as, yes, part of his ongoing reporting Making Sense of financial news.

PAUL SOLMAN: China, the juggernaut that’s driving a world economic recovery, or a classic bubble about to burst, taking us all down with it?

The evidence is dramatic, on both sides. On the one hand, breakneck central government-planned and -financed urbanization. If current trends continue, a decade from now, China will have some 200 cities with populations over one million and eight mega-cities with more than 10 million, on the other hand, newly built ghost towns and empty housing developments throughout the country.

Recent headlines report that Chinese exports are back on track. But they also feature corruption, the riches of the politically plugged-in, stunning inequality. Yes, wages are rising for the burgeoning middle class, but for hardscrabble factory workers, mounting protests against unlivable wages and working conditions.

So, race to the bottom or race to the top? When we visited China in 2005 for the NewsHour, we already saw a hotel tower in Shanghai taller than the 102-story Empire State Building. And then, last year, China’s Broad Group, which had recently erected a 30-story energy-efficient hotel in 15 days, announcing plans to put up J220, a 220-story tower more than half-a-mile high, 10 feet taller than Dubai’s Burj Khalifa, the building featured in “Mission: Impossible” four.

While the Burj took Tom Cruise just moments to repel, reportedly without the use of a stunt double, it took five years to build. J220 is slated to rise, toe to tip, in 90 days.

VIKRAM MANSHARAMANI, “Boombustology”: The world’s tallest tower status at this point is a sign of hubris, and overconfidence, of chest-thumping.

PAUL SOLMAN: The former investment banker and hedge fund operative Vikram Mansharamani, author of a book on financial bubbles called “Boombustology,” the edifice complex is a sign of a market top from which the only direction is down.

VIKRAM MANSHARAMANI: In 1997, the world’s tallest tower was in Kuala Lumpur, not far from the base of the Asian financial crisis. In 1999, the worlds tallest tower status moved to Taipei, the home of the tech boom, at least in a hardware sense. And, finally, by 2007 the world’s tallest tower status moved from Asia to the Middle East, within weeks of global equity markets peaking.

PAUL SOLMAN: And just down the block from where we stood, 40 Wall Street, which briefly held the title world’s tallest building. It was topping off in 1929, just as the New York Stock Exchange crashed.

Mansharamani took us to the exchange floor for another sign of a China bubble, the stock price of art auctioneer Sotheby’s, which, he has found, also tends to peak just before a bubble pops.

VIKRAM MANSHARAMANI: In 1989, when Sotheby’s stock price hit a new high, it was world record art prices paid by Japanese buyers that set that stock on fire.

PAUL SOLMAN: Two months later, Japan’s Nikkei index hit its peak, nearly 40000. Today, it slouches at around 10000.

As for Sotheby’s:

VIKRAM MANSHARAMANI: In 1999, the stock again hit a new high. This time, the buying pressure was coming from those who had generated wealth through the technology, media and telecom sector.

PAUL SOLMAN: Wealth that most vanished when the tech bubble burst in 2000.

VIKRAM MANSHARAMANI: Stock hit a new high in May of 2007, this time, world record art prices being set by buyers from emerging markets, hedge fund billionaires, the private equity billionaires, beneficiaries of easy money.

PAUL SOLMAN: The great recession hit six months later. Sotheby’s sank, but it’s up again, thanks to a new group of buyers.

MAN: In Hong Kong, a Ming vase broke records on Wednesday. The cobalt blue artifact sold for $21.6 million.

JEFFREY BROWN:  The Chinese are now driving the art market. And yet:

VIKRAM MANSHARAMANI: We see empty malls, empty ghost cities, excess real estate, millions and millions of units empty.

PAUL SOLMAN: Well, yes. But what about the explosion in GDP?

VIKRAM MANSHARAMANI: So, in China, we have examples of GDP creation that doesn’t generate economic activity or value.

PAUL SOLMAN: Like what?

VIKRAM MANSHARAMANI: So we have got an example of a seven-year-old bridge with a 40-year use for life blown up and rebuilt. Why? Because you generate GDP credit for the explosives that you purchased, the construction crew that comes in to clean up and the construction crew that builds the new bridge, the new steel, the new cement.

PAUL SOLMAN: Mansharamani now teaches his brand of bubble-ology at Yale. Do his students buy his China story?

MAN: There is a bubble.

PAUL SOLMAN: Consider the coming catastrophe of the one-child policy.

MAN: They start to have an aging population, so that brings a lot of questions on the future of the Social Security programs and how the government is sort of going to fund this aging population going into the future.

PAUL SOLMAN: Now, of course, not everyone at Yale believes that China’s headed for a fall.

STEPHEN ROACH, Yale University: If you’re looking for a crash landing in China, a slowdown that really puts the economy and its supply chain through the windshield, it’s not going to happen.

PAUL SOLMAN: Stephen Roach, longtime economist for the Morgan Stanley investment bank, spent 10 years in China. He teaches several courses on the Chinese economy at Yale.

STEPHEN ROACH: China is a high-growth economy. The fast pace focused on exports and investment delivered beyond anyone’s wildest expectations, including the Chinese.

PAUL SOLMAN: But a slowdown doesn’t sound the death knell for growth, says Roach, just a very deliberate shifting of the gears. Look at the latest five-year plan, he says, enacted in 2011.

 

STEPHEN ROACH: It’s redirecting the mix of economic growth away from investment and exports towards more of a consumer-led model. And that’s a source, a powerful source of future employment in China.

Industries such as wholesale trade, retail trade, domestic transportation, supply chain logistics, even leisure and hospitality are tiny compared to what the footprint should be in an economy the size and scale of China.

PAUL SOLMAN: What about the ghost towns that you see in China now?

STEPHEN ROACH: It’s basically a myth. When you have rural-urban migration averaging 15 to 20 million people a year since 1990, you have to build in anticipation of the influx. It’s the “Field of Dreams” approach. And if you just wait until the workers move there, you will have an urban underclass teeming with social unrest.

PAUL SOLMAN: Because they will have no place to live?

STEPHEN ROACH: Exactly.

PAUL SOLMAN: But what if you build it, the workers come, but consumer-led growth doesn’t materialize quickly enough?

VIKRAM MANSHARAMANI: Have we built an extra three years of demand for properties in Shanghai such that for the following three years we won’t have any needed new construction? If the economy doesn’t continue to grow and you need to continue to build excess capacity to keep the economy growing, and you need to take it to 10 to 15 to 20 years of excess capacity, well, now we have got a bigger problem on our hands.

PAUL SOLMAN: In fact, it all reminds Mansharamani of the last great Asian bubble: Japan. That’s our stretch of a segue to the tables down at Mory’s and a whiff of the Whiffenpoofs, Yale’s famed a cappella singing group.

The professor had invited three of his former students to join us for dinner. Both Jared Middleman and Zachary Graham buy into the China bubble hypothesis.

MAN: It’s not looking good.

PAUL SOLMAN: Rhodes Scholar-designate Cate Laporte-Oshiro doesn’t.

CATE LAPORTE-OSHIRO, Former Student of Vikram Mansharamani: I think that while they have a lot of pressure stacked against them, declining labor force, overinvestment, corruption, scandals, at the same time, they have done fairly well dealing with a lot of different problems at one time.

VIKRAM MANSHARAMANI: The one point I wanted to make, Cate, is that I thought we learned through the example of the Soviet Union that central planning is good at mobilizing resources, but is not good at sustaining innovation, not good at sustaining incentives for real long-term growth.

PAUL SOLMAN: And, yet, given all the trillions the country has amassed over the past few decades, it may have a soft landing, while it’s the rest of the world that will suffer.

VIKRAM MANSHARAMANI: Suppliers to the things that are going into the building of stuff, whether it’s coming from Australia, South Africa, or Brazil, that whole system that has been feeding this investment beast will be found to have massive overcapacity.

MAN: So if they succeed and avoid a bubble bursting and reorient their economy, then they can be totally fine and the rest of the world can still suffer?

VIKRAM MANSHARAMANI: As weird as that sounds, I actually think the pain will be felt outside.

PAUL SOLMAN: And so, in the end, it could be that China sneezes and the rest of the world catches a cold, not a pleasant prospect, especially this flu-ridden winter.