So, apparently China’s expressway system has more than doubled in length in the past decade. It’s so long, in fact, that it should soon overtake the interstate highway system of the United States as the world’s longest. What’s the impetus for such rapid lengthening?
No doubt the recent spike in Chinese car sales, which grew 46% year-over-year from 2008 to 2009, rising to 13.6 million, significantly higher than the next largest auto market, the United States. With nearly 120 automakers currently registered, the world’s most populous country, whose roads served less than one million privately owned cars just three decades ago, is on track to overtake the US in overall car ownership by 2017. This statistic may come as little surprise, given China’s recently-announced 8.7% GDP growth in 2009, which has it poised to surpass the purchasing power of silver medal winner Japan sometime this year.
So what’s that gurgling noise we hear? An engine being revved perhaps?
Oh no, that’s not it – It’s more like the air that’s been pumped into the Chinese economy, skyrocketing toward the heavens and making us wonder when all the pressure will cause it to explode.
As we reported last week, fear is building over the stability of China’s current housing bubble. But many people outside of China have been speculating since the U.S.’s own bubbles burst in harmonic sequence that a much larger snap, crackle and – finally – pop may be in for China, starting a domino effect whose destructive end we are unable to fathom. Say critics, the mechanism of this disaster to be lies in the very blueprint of China’s economy itself. As Foreign Policy’s Vitality Kastenelson explains:
China can force government-owned corporate entities to borrow and spend, and spend quickly itself. This isn’t some slow-moving, touchy-feely democracy. If the Chinese government decides to build a highway, it simply draws a straight line on the map. Any obstacle — like a hospital, a school, or a Politburo member’s house — can become a casualty of the greater good.
The collapse which occurred in the United States, whose most measurable casualty has been its real estate market, can largely be attributed to a simultaneous free fall in consumer confidence and spending power, an economic deathbed that even the riskiest of Wall Street gambles cannot reverse on its own.
While China’s middle class numbers are growing—and growing fast—its economy functions in a much less consumer driven way—and consumers here spend less. Kastenelson continues:
Although China can’t control consumer spending, the consumer is a comparatively small part of its economy. Plus, currency control diminishes the consumer’s buying power. All of this makes the United States’ TARP plans look like child’s play. If China wants to stimulate the economy, it does so — and fast. That’s why the country is producing such robust economic numbers.
But whether we’re talking bubbles or tarps or the prices of stock, what goes up must, without exception, come down and the popping of China’s numerous bubbles may echo loudly enough to be heard by the whole world, especially the United States. The unconditional confidence China displayed in the US dollar—buying Treasury Bonds instead of exchanging its dollar reserves back into its own currency—led to a bubble in the dollar itself, weaker than should-have-been-expected growth in its Renminbi and China left with $2.2 trillion and nothing to do with it but sell, sell, sell. Right?
Not so much:
Now, China needs to stimulate its economy. It’s facing a very delicate situation indeed: It needs the money internally to finance its continued growth. However, if it were to sell dollar-denominated treasuries, several bad things would happen. Its currency would skyrocket — meaning the loss of its competitive low-cost-producer edge. Or, U.S. interest rates would go up dramatically — not good for its biggest customer, and therefore not good for China.
In layman’s terms, China’s dilemma can be explained as follows: its explosive growth in cars, GDP and just about every other measure is buoyed by its investment in the United States, specifically the United States as it existed before its own meltdown. The shock wave from that particular fallout will soon reverberated back across the Pacific, popping every bubble in sight.
Thankfully, China will still be ahead in length of paved road by kilometers. So what if none of the cars produced can run on hot air?
Image from blog.redfin.com