China’s Economic Rumbles

The People’s Congress puts on a brave face, but signs of trouble build.
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China's Premier Li Keqiang answers question during the annual news conference following the closing session of the National People's Congress at the Great Hall of the People on March 16, 2016 in Beijing, China.
China's Premier Li Keqiang answers question during the annual news conference following the closing session of the National People's Congress at the Great Hall of the People on March 16, 2016 in Beijing, China. Photo: Getty Images
 

China’s National People’s Congress wrapped up its annual two-week session on Wednesday by approving a 13th five-year plan and promising that the Communist Party will steer a steady course.

The government will restructure the economy without mass layoffs, says Premier Li Keqiang, and it is “impossible” the country will miss its latest, a lower, target of 6.5% GDP growth for next year. In the West, that’s called whistling past the graveyard.

One of the most telling events of this year’s Congress was the boast by Heilongjiang Province’s Governer Lu Hao that the state-owned Longmay Mining Co. is a model for how to restructure the coal industry, where the government says layoffs will be limited and laid-off workers will quickly find new jobs. “Not one” of the laid-off workers, the Governor declared, “has not been paid monthly wages and their income hasn’t fallen a penny.”

That provoked protests by angry miners who said Longmay owes them months of back wages. Mr. Lu quickly backed down and promised to punish the managers who concealed the truth. Mr. Lu’s ignorance suggests Beijing’s leaders are being fed a false picture of the state of the economy. Company managers routinely hide the depth of their financial problems in order to obtain bank loans and other assistance from the central government.

At the core of China’s economic troubles is a shrinking work force that has led wages to double over the past decade, outstripping productivity. Privately owned factories in the Yangtze and Pearl River Deltas are now closing as production moves to lower-cost countries.

The China Labor Bulletin, a Hong Kong group that monitors the mainland economy, reports that labor protests doubled last year, with much of the increase coming in the last quarter. The trend has continued this year.

Then there is the monetary problem. Producer prices are falling, but lending rates remain steady, meaning that real interest rates have risen. The People’s Bank of China has tried to ease credit, but banks direct new loans to zombie companies so they can keep repaying old loans. With few productive investments available, many borrowers have put funds in speculative investments such as Shenzhen real estate.

This economic storm is the result of Beijing’s response to the 2008 financial crisis. China’s leaders gambled that stimulus could keep the domestic economy growing until global trade recovered.

Governments from Beijing down to the township level spent on bridges, roads and airports.

The state-owned banks provided the loans for these projects as well as housing developments.

The plan yielded the expected results. The domestic economy continued to grow as the coal, steel, cement and glass industries boomed, adding capacity and hiring workers. But the costs have been high. Those factories are now running below capacity, China’s debt level has doubled, and many projects will not recoup their investment. After vowing it would not fall into the same trap as Japan in the 1990s, Beijing has set the scene for its own balance-sheet recession.

China optimists say that the current restructuring is less severe than under Premier Zhu Rongji in the late 1990s and early 2000s when state-owned factories laid off some 45 million workers. That may be true, but the fate of the newly unemployed is likely to be worse this time.
 
Fifteen years ago Beijing gave away state-owned housing to the occupants, creating a wealth effect that cushioned the closure of rust-belt factories. Demand for private housing took off, which led to a construction boom that absorbed many workers. Export industries continued to grow.

Today urban residents’ demand for housing is largely sated. And China’s exports fell last year as global trade declined.

This year’s NPC put on a brave face, but once the reckoning has begun it will be impossible for the authorities to retain a facade of normality. General Secretary Xi Jinping’s recent crackdowns on the media and Party dissenters look to be preparation for a difficult period ahead.

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