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Kevin Rafferty

Economists who believe that China can come to the rescue of an increasingly troubled global economy are now in a decided minority, with questions increasingly being asked about whether China can save itself. Will China's economy achieve a soft landing, a hard landing or even suffer a crash landing?
If the reported words of Larry Lang Hsien Ping,  professor of finance at the Chinese University of Hong Kong and television personality, are to be believed, China's economy has already crashed, but the damage has not yet been recognised. 
In a speech in Shenyang last month covered by Epoch Times, the Hong Kong professor reportedly claimed that China is in serious crisis, on the brink of bankruptcy, and that every province of China is Greece.
According to Epoch Times, Lang banned the media and decreed that no recording be made of his speech or 'everyone will look bad'. He made five points to support his gloomy assessment:
 China's debts have reached almost 36 trillion yuan (HK$44 trillion), adding up local government debts of 16 trillion to 19.5 trillion and those of state-owned enterprises of 16 trillion yuan, on which interest payments were 2 trillion yuan a year.
 The accurate figure for inflation is 16 per cent.
 Private consumption is only 30 per cent and there is serious excess capacity in the economy. The July purchasing managers index of 50.7 indicates recession.
 The official 9 per cent figure for GDP growth is false: according to Lang's data, China's GDP has shrunk by 10 per cent. The official figures are bloated by dramatic increases in infrastructure construction and property, accounting for 70 per cent of gross domestic product last year.
 China's taxes are too high and businesses pay 70 per cent of earnings, including direct and indirect taxes, while individuals pay 81.6 per cent, according to Lang. 
 Lang has yet to confirm that he made the speech. According to the Epoch Times account, Lang warned that once China's 'economic tsunami' starts, the regime will lose credibility and China will become the poorest country in the world.
Most economists are not so pessimistic, although argument rages between bulls, who believe that any property bubble or bad loans disruption will be merely a short-term cold that will not interrupt China's rise to become the world's mega-power, and bears, who fear that the cold will produce fever and pneumonia that could endanger the political and economic life of the Communist Party if not the country itself. On Nouriel Roubini's EconoMonitor this month, Alessandro Magnoli Bocchi admitted that powerhouse China today 'looks as invincible as Japan did in the 1980s': state intervention and long-term corporate thinking; a reliance on a 'dual economy' of export-led growth by efficient overseas oriented companies alongside highly-subsidised protected domestic companies; and high savings rates and low consumption, which provide cheap capital for investment.
But he believes that China enjoys key differences in having 'strong fundamentals, excellent demographics, a rising middle class, massive urbanisation, and high savings.'  
China is also trying to avoid export dependence and attempting to promote local demand. In addition, China's property bubbles are likely to be deflated quickly by the country's immense growth potential. On top of all this, Bocchi has confidence in the Communist Party, which he says is unlikely to repeat the mistakes of Japan's Liberal Democratic Party.  
However, the Communist Party, whatever its good intentions, is locked in a dance with vested interests, so that it is hard for the central leadership to root out corruption, which is at least as bad as Japan's was.  
 As Michael Pettis, a self-proclaimed 'China sceptic' and not a 'China Bear', pointed out recently: 'China is a version of an old development model that has been taken to an extreme that we haven't seen before.'  The model's hallmark is generating great, sometimes miraculous, investment-led growth in the early stages and then, 'growth stopped in the middle of a huge amount of debt,' Pettis says.  
In China's case, the demographics are still with the country, but will soon begin to turn as the 'one child' policy causes both a decline and an ageing of the population.
Important damaging factors in China's case are the low contribution of consumption to GDP and limited levers in government control.  The share of consumption in GDP has fallen to an unprecedented (by world standards) 35 per cent,  a drag on the economy. 
McKinsey Global Institute recently calculated that without further government action, consumption would reach only 39 per cent of GDP in 15 years' time. With policy changes, the government might push it to 45 per cent, still well below the levels of other major economies. Aggressive and comprehensive reforms are needed to bring consumption to 50 per cent, which would also put China in better economic shape. 
Sadly, however, confronted with falling economic growth, which some economists predict to drop to 5 or even 3 per cent, the government's temptation is to reach for the easiest levers, to pump-prime more loans for investment, detracting from consumption growth and adding to the bill to be paid later.
36tr yuan
China's total debts, in yuan, says Professor Larry Lang Hsien Ping of the Chinese University of Hong Kong



The 'saviour' that crashed?