forest-fire.gifOnce
it was just the coast that was on fire. Now, inland China also risk
overheating as banks, companies and local governments pour money into
showcase projects.

In Changsa, Hunan province, AP found plenty of evidence of boom and excess, including a new mall with sufficient floor space to cover 123 football fields.

The
picture is repeated in second-tier cities across inland China and
Bejing's economic planners are increasingly worried. So too, are China
watchers in the west. AP cites Morgan Stanley's chief economist Stephen
Roach:

Chinese authorities are now scrambling to regain control over a runaway economy. China needs a more serious policy tightening.”

The
AP story has some mouth-watering — yet worrying — statistics. For
example, the nationwide investment binge raised new spending on
construction and factory equipment to an astonishing $318bn by the end
of May, up 30% over the same period of 2005.

Changsha, a city of
6m people, spent $300m on construction in the first five months of this
year, more than double the amount spent in the year-earlier period.

To finance the nationwide boom, China's big commercial banks issued new loans worth $267.5bn in the first half of this year.

The
big worry is that too much of the money is going into redundant or
ultimately unprofitable investments, risking a rebound in bad loans and
possibly a financial crisis.

The Coming Collapse of ChinaThe boom-to-bust warning has been issued many times, of course. See, for example, Gordon Chan's 2001 book, The Coming Collapse of China, which is full of apocalypse and doom.

But so far, Cassandras like Chan have been proved wrong and the locomotive just keeps powering on.

Of course, the more speed it gathers, the more difficult it is to keep on the right track.

China
bulls put great faith in the Chinese consumer to come to the rescue.
But the jarring transition from a state-controlled to free-market
economy makes many Chinese fearful for their future, so they save too
much and spend too little — see this article by Roach in the Globalist for more on the Chinese consumer.

While
economists debate whether China is heading for a hard or soft landing,
the takeaway for western businesses is to be wary of investing in what
Italians call cattedrali nel deserto (*) or cathedrals in the desert — grandiose projects designed to soak up easy money rather than fulfil a real need.

The
government is hoping to damp out the fires raging through China's
economy, but western businesses could still get their fingers seriously
burnt.

(*)In past decades, Italy wasted billions of dollars on lavish infrastructure projects dubbed cattedrali nel deserto,
in a vain attempt to develop its poor south. All too often, the only
real beneficiaries were corrupt politicians and organised crime.

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