Bubble trouble
The notion of 10-year cycles is popular in China. For instance, 1978-79 was the major turning point of paramount leader Deng Xiaoping's ascendancy and the decision to reform and open up China. Ten years later, 1989 witnessed political turbulence - a student and blue-collar uprising against nepotism and corruption, amid hyperinflation. Another 10 years on, Zhu Rongji was premier and the once unimaginable happened: the process began to convert state-owned enterprises into corporations, and to dismantle the state planning bureaucracy, thus eliminating dozens of ministries on the way to introducing a fully fledged capitalist economy.
Now that we are at another 10-year mark, what should we expect? Of course, 2008 will be the year China hosts the Olympics and, for most of the leadership, that is all they expect; a grand curtain-raising of an economically reformed, prosperous - even rich - new China. It could also be a year of great turbulence, with the government tested by a host of issues, the main one being inflation. That may bring back bad memories from 1989.
China's current inflation is more complicated than in 1989 (which was not controlled, leading to runs on markets and stores, fomenting social unrest), and in 1994 (which was successfully controlled through a combination of monetary policy and state planning measures using an administrative apparatus that now only partially exists). China's current inflation problem is multifaceted, effectively an economic bubble in great part due to hyperinvestments and spending fuelled by Olympic expectations, and the rising costs of property, skilled labour and energy.
Premier Wen Jiabao wants to maintain Mr Zhu's economic formula of 10 per cent growth with 3 per cent inflation. But circumstances have changed. While growth has risen past 11 per cent, inflation has gone to 6 per cent. The soaring prices of goods have only been exceeded by those of assets. Combined money and credit growth have created a cyclical economic bubble. The underlying cause is surplus liquidity and negative interest rates. Urban residents have shifted their money from banks to speculate either in property or the stock market.
Mr Wen has turned to monetary policy as the main tool to rein in the economy, but so far with limited results. Surplus liquidity continues against a backdrop of dizzying monetary control measures: last year, the central bank raised deposit reserve rates eight times, and deposit/loan interest rates five times - policies that are seldom resorted to. So, what next?
Expect a host of hard macromanagement remedies in the first quarter of 2008, from raising down-payments for property purchases to simply ordering banks not to lend. Such measures could have the desired effect by the third or fourth quarter but, in the meantime, a lot might happen. Certainly, we may not be talking about the 'soft landing' that Mr Zhu took credit for engineering on his watch. So, what happens in a hard landing?
The leadership, for all its Olympics hullabaloo, has deep concerns for the year ahead. An economic bubble is no joy to sit on, especially in an Olympic year when the world's press are likely to focus as much, if not more, on China's social transformation as athletics. China's securities markets have peaked and are ready for turbulence.
With oil testing US$100 per barrel, rising energy costs will be an inflationary impediment for investment and exports. Beijing will come under increasing international political pressure for a further appreciation of the yuan while it is effectively pegged to the declining US dollar. China's high-expectation, white-collar elite have never experienced an energy crisis. What will happen when they have to line up in their Mercedes for rationed petrol?
Official slogans about a 'harmonious society' might pale this year. There are many potential flashpoints, and a major shift in international trade, energy prices, stock markets and domestic inflation could provide the spark to ignite them.
Laurence Brahm is a political economist, author, filmmaker and founder of Shambhala Foundation
