Zero Growth in China Is 2009 Black Swan Event: William Pesek

Commentary by William Pesek

Jan. 7 (Bloomberg) -- Anyone who said a year ago that China’s economy was crisis-bound was dismissed out of hand. Today, skeptics have lots of company.

“This year is going to be characterized by much, much weaker growth in China than I think people are anticipating,” says Jim Walker, chief economist at Asianomics Ltd. in Hong Kong.

That may be news to the World Bank, which forecasts China will expand 7.5 percent in 2009. The government is targeting 8 percent growth, believing the 4 trillion yuan ($586 billion) stimulus package it announced in November will boost the world’s fourth-biggest economy.

Citigroup Inc. agrees. “The most important reason supporting our confidence about 8 percent growth is the government’s will and ability,” says Huang Yiping, the bank’s chief Asia-Pacific economist in Hong Kong.

That’s the problem. Chinese officials have done a masterful job generating growth, creating jobs and reducing poverty. They have done so with impressive regularity and earned the trust of many economists and investors. It’s important to remember, though, that external trends made China’s success possible.

The global boom of the 1990s floated most boats, including China’s. Even during Asia’s crisis in the late 1990s, rapid U.S. demand supported the most populous nation. The real acceleration in growth that caught investors’ attention came after China’s accession to the World Trade Organization in 2001.

Zero Growth?

There’s no doubt that China’s leaders have the will to support growth. The question is their ability to do so while all of the world’s economic engines sputter. Yes, all.

That issue featured prominently in the annual “10 Outrageous Claims” release of Saxo Bank. Each year, analysts at the Danish Internet trading bank come up with a list of “Black Swan” events, or unexpected ones with great impact. This year’s candidates include the odds of revolution in Iran, crude oil falling to $25 a barrel, the Standard & Poor’s 500 Index sliding to 500 and Italy scrapping the euro.

A Saxo Bank team led by London-based Chief Investment Officer Steen Jakobsen also pondered this question: Will we see a China crisis with gross domestic product at 0 percent?

Their rationale is that the export-driven industries of China’s economy will be hurt by the freefall in U.S. growth. Many commodity-related investments in recent years will sour with global demand. And since China has been running an overly expansionary monetary policy for many years, the gamut of speculative bubbles will be revealed.

Tough Year

Clearly, zero growth isn’t the most likely outcome. Walker, for example, expects 0 percent to 4 percent this year, with a 30 percent probability of a contraction.

For a developing and highly populated nation like China, 5 percent growth is as good as zero. For Japan, such output would be a dream; for China it would be a nightmare.

A year ago, officials in Beijing struggled to keep their $3.3 trillion economy from overheating. That task will prove easy compared with juggling plunging exports, shuttered factories, tumbling property prices, surging unemployment, dwindling demand and growing worker unrest.

The ruling Communist Party faces its toughest challenge since 1989, the year of the Tiananmen Square protests.

Economists have long agreed that China needs growth in the vicinity of 10 percent to placate the masses. The social contract is this: We will make you richer, you won’t question the government. If growth slows to 5 percent, never mind zero, Chinese officials will be in a very bad way.

Losing End

China’s $1.9 trillion of currency reserves are a plus. So is the government’s success in letting the yuan rise a bit, but not enough to devastate exporters. And as we saw from recent stimulus efforts, China is willing to do what it takes. That may not be enough, though.

Plunging home prices around the world are just part of it. This month, Americans, Europeans and Japanese will be reviewing their 2008 investment and retirement-fund statements. When it dawns on average households in Cleveland, Manchester or Nagoya that they lost 40 percent or more of their net worth, they might put off that holiday. They might scrap plans to buy that new car, flat-screen television, stereo unit, mobile phone, iPod, business suit, sofa or toy.

China will be on the losing end of many of these decisions. The era of excess discretionary spending that served Asia so well these past 10 years is over. That leaves China with two options: boost public spending and encourage consumers to save less.

The trouble is, China must turn its economic model upside down, relying on growth from within rather than from abroad. Spooked by a 66 percent decline in China’s benchmark stock index last year and growing economic gloom, consumers are more likely to increase saving than spending.

The stability of a top-down, command economy now rests on the shoulders of the masses far below. In 2009, China may learn the limits of conjuring growth from on high.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net