China's economy has been growing at a phenomenal pace in recent decades. Beneath the continued robust appearance, however, there are signs that the world's No. 2 economy may be tumbling into recession or even heading toward a hard landing.
China's economic performance has been astonishing. "Since 1978 China has maintained rapid economic growth for 33 consecutive years," says Justin Yifu Lin, chief economist of the World Bank, "its average annual growth is 9.9 percent and the average annual growth of foreign trade is 16.3 percent." According to Dr. Lin, China's economic growth has also benefited the world. "China's strong growth during the crisis was the most important driving force for the global economy," writes Lin, "over 2000-07 two-thirds of the economies in Africa grew at more than 5.5 percent a year, and nearly one-third reached 7 percent. Such unprecedented growth in Africa was in large part thanks to China."
"China has the potential to achieve another 20 years of 8 percent growth," Lin told an audience at the U.S. Federal Reserve Bank in December 2011, "in two decades the Chinese economy could, in purchasing power parity terms, end up twice the size of America's."
But negative perceptions and skepticism are mounting and economists and policy makers around the world see that China's boom may breed bust.
Nicholas Lardy of Peterson Institute sees at least three warning signs looming on the Chinese horizon. First, the European Union and the United States together absorb about half of China's exports. Europe's slump has significantly weakened China's trade-Europe buys more than a fifth of China's exports, while the U.S. purchases from China have declined to its lowest level since March 2005. Second, the Chinese housing market is showing signs of a bubble and is deflating. Finally, the Chinese government will have a much harder time deploying a new stimulus than during the 2008-09 financial crisis-Chinese government debt rose from 26 percent of GDP in 2007 to 43 percent of GDP in 2010.
Patrick Chovanec at China's Tsinghua University thinks that China's real estate bubble may have already popped. "For years," writes Chovanec, "analysts have warned of a looming real estate bubble in China, but the predicted downturn never occurred-that is, until now. Shanghai property developers have started slashing prices by up to one-third. Shanghai homeowners are hardly the only ones getting nervous. Sudden, steep price reductions are upending real estate markets across China. New home prices in Beijing dropped 35 percent in November 2011 alone. Everyone from local landowners to Chinese speculators and international investors are now worrying that these discounts indicate that 'the biggest bubble of the century' has just popped, with serious consequences not only for one of the world's most promising economies-but internationally as well."
The fear of bursting the real estate bubble is sending shockwaves through the Chinese economy. China's steel production, reported Chovanec, was down 15 percent in the second half of 2011, and approximately one-third of Chinese steelmakers are now losing money. In many Chinese cities, the collapse in property prices has produced a credit crisis, with reports of ruined businessmen leaping off building rooftops or fleeing the country.
China's real estate bubble, government debt and a declining export industry are just the tip of the iceberg. There are still far more problems to come in the Chinese economy. Even the self-confident Chinese economist Justin Lin recognizes that Beijing must unravel what he calls the "triple imbalances"-a lagging domestic consumption, a widening income gap, and a rapidly degraded environment.
The last time I was in Beijing in early December, the entire city choked on an unprecedented level of pollution and a thick grey cloud covered Beijing for days and thus forced the authorities to close down almost all highways across the North China Plain and caused hundreds of flights into Beijing to be delayed or canceled.
The U.S. Embassy in Beijing, which monitors the air quality index (AUI) from its own pollution monitoring equipment on the embassy compound, reported a PM2.5 AQI reading above 500-an AUI greater than 300 is considered as "hazardous" and a "health warning of emergency conditions for the entire population," by U.S. Environmental Protection Agency standards.
If a hard landing of Chinese economy materializes, the consequences will be catastrophic and spread significant damage to Asia and beyond. It is time for Beijing to start some real structural changes before it is too late and lay the foundation for China's next round of multi-decade economic growth.
Xiaoxiong Yi is the director of Marietta College's China Program.