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Interview: Gordon G. Chang on Chongqing's 'Magic' and China's Coming 'Economic Turbulence'




Pedestrians pass a courtyard between high-rise apartments in southwest China's Chongqing municipality on January 28, 2011. (STR/AFP/Getty Images)

Pedestrians pass a courtyard between high-rise apartments in southwest China's Chongqing municipality on January 28, 2011. (STR/AFP/Getty Images)

Forbes.com columnist Gordon G. Chang, author of Nuclear Showdown: North Korea Takes On the World and The Coming Collapse of China, will moderate an April 27 discussion at Asia Society in New York entitled "Western China: China's Real Estate Frontier – The Development of Chongqing," featuring Albert Chan, Director of Development Planning and Design at Shui On Group, Qiu Shujie, Vice Chief Architect of Chongqing Urban Planning Bureau, and Mahadev Raman, Principal and Board Director at Arup. Chang spoke to us about Chongqing, urbanization and whether he believes China is still on the verge of collapse.

Approximately 46% of China's population currently lives in urban areas. By 2035, that figure is expected to be 70%. Are China's cities ready for this growth? What preparations are being made?

Few cities are ever really ready for rapid population growth, but China’s planners have been looking at urbanization as a way of speeding up the country’s modernization. There is a sense among central technocrats that the country can sustain a virtuous circle of urbanization creating economic growth and economic growth easing the pain of urbanization.

Planners can ease the pain of urbanization by eliminating the hukou restrictions so the Chinese people can live and work wherever they choose. If they had the right to move from place to place, they would make and remake urban centers. Individuals, through millions of uncoordinated decisions, generally make smart choices. Of course, they also make bad ones, yet by their nature people spark competition that is the engine of growth. And growth solves many more problems than it creates.

Before leaving this issue, we should talk about demographics. Most projections indicate China’s population will grow for another 15 to 20 years, at which time it will level off. My sense, however, is that the country will peak before then, in about 10 years. If the population peaks soon, the number of people flooding into the cities will undoubtedly be lower than planners anticipate. That will make it easier for the cities to accommodate new arrivals.

Where does the municipality of Chongqing — nearly the size of Austria, nearly the population of Canada — fit into China's urbanization? Is there anything unique about its growth?

Chongqing is history’s grandest lab experiment in urbanization.

The techniques urban planners have applied there are the same as used elsewhere in China. What makes Chongqing unique, however, is that planners have been given such a large area to work with. There are 33 million residents inside the municipal boundaries, which encompass an area almost three times the size of Belgium. Actually, we should not be speaking in terms of urban planning when we think about Chongqing — it is really an exercise in regionalization.

Chongqing planners, by concentrating on transportation infrastructure, have created the conditions for extraordinarily fast economic growth in the satellite urban areas surrounding the urban core of 10 million people. This is the source of Chongqing’s economic magic.

In your recent Forbes.com piece, you quote Chongqing vice mayor Huang Qifan as saying, "There will be no slums in Chongqing, unlike India or Brazil." Given the large number of poor migrant workers flowing into the city on a daily basis, do you think Huang's prediction is possible?

Slums will always be with us. Therefore, Vice Mayor Huang’s prediction is, of course, overly optimistic.

Yet the dynamic he foresees is, in a general sense, realistic. “Rapid economic growth means farmers can quickly find work,” he says, “so they won’t live in poor conditions.” The issue, therefore, is whether Chongqing and other cities can sustain growth over a long period so that new arrivals into urban areas can earn their way out of poverty quickly.

My concern is that Beijing’s top-down initiatives will not work for much longer. Private enterprise has been the engine of China’s miraculous growth during the last three decades, and migrants are the hope of tomorrow’s growth in Chongqing and other Chinese cities. Chongqing can avoid creating enormous slums only if it can wean itself off government money and instead look to private enterprise.

Unfortunately, Beijing is now headed in the opposite direction. Its November 2008 stimulus program has resulted in a massive increase in government involvement in the economy.

Earlier this year, in the Sydney Morning Herald, a senior manager at one of Chongqing's largest property development companies said, "I think the property market will keep booming for years." Does this ring true? What would happen to China's economy if a US-style real estate crash occurred?

China's property market is in the midst of a bubble, and all bubbles end badly, one way or another. There are many analysts who say "China is different," but words like those are always followed by horrible consequences. So, no, China's property market cannot boom for years. Nothing defies gravity forever.

The essential problem is that Beijing’s November 2008 stimulus program poured more money into the Chinese economy than it could ever absorb. One of the results of the government’s overinvestment was the property bubble, manifesting itself in historically high prices and unaffordable housing. Moreover, overinvestment has resulted in empty apartments and the now-famousghost cities.”

The bubble will burst because the government is slowing its spending. The government is slowing spending for three principal reasons. First, the state banks, the source of much of the cash that initially fueled the boom, cannot continue to lend like they have—their balance sheets are in terrible shape if prudential standards were properly applied.

Second, state investment is losing its effectiveness. It now takes seven yuan of investment to create one yuan of gross domestic product.

Third, government spending is contributing to the country’s out-of-control inflation. Beijing is now spending less as it seeks to rein in price increases.

As the central government decreases spending, the risk of a crash will be high. When the Chinese bubble ends, the central government will have to rush in to shore up the banks.  The stock markets will plunge and could take the rest of the economy with it.

Central technocrats are trying to take the air out of the property bubble slowly, but Japan offers a sobering lesson when a government tries to avoid sudden downward price movements.  In many ways, managed collapses are worse than fast ones. Who wants a decade—or two—of stagnation? 

Do you believe Chongqing has been able to boom in spite of or because of its well publicized mafia ties?

Organized crime always strangles economic growth in the long run. Why? It limits the workings of the market and forces the exit of legitimate market participants. It is as simple as that.

You wrote the 2001 book The Coming Collapse of China. With cities like Chongqing growing at their current rate, do you still feel China is primed for a collapse?

Yes, China is on the verge of severe economic turbulence. No economy have ever grown in a straight line. Do we think Beijing will be the first in history to manage this?

For one thing, there’s the bubble nature of the economy. Inflation, perhaps running at 10 percent at this time, shows that Beijing has lost control of the economy. Unfortunately, Premier Wen Jiabao is only taking half-measures that have little prospect of stemming politically sensitive price increases.

Then there are structural problems that central planners have yet to deal with. First, no one thinks that China’s growth model, which excessively relies on government spending, is sustainable. Although technocrats talk about increasing domestic consumption, consumption’s role in the economy has been sliding from its historical average of about 60 percent to around 36 percent today. And the steps the central government is taking to stimulate the economy are, by definition, anti-consumption.

The overriding reality is that consumption cannot become significant until Beijing, in fact and not just in words, abandons its investment-led strategy. The problem here is that the handoff from investment-led growth to consumption-led growth will be more difficult than it appears. Low consumption is the inevitable result of China’s growth model, not merely a remediable feature of the model.

Consumption’s role will not grow significantly until Beijing takes painful steps to change the model. Model-changing is, almost by definition, risky.

To change the model to increase consumption, Beijing will have to let the renminbi float; permit banks to compete for deposits by offering market interest rates, which means charging market rates to state enterprises; allow labor to organize and demand higher wages; and provide a better safety net, especially in the healthcare area. Beijing is reluctant to take these steps because it fears what will happen to growth before consumption patterns change.

Second, the country has already benefited from its “demographic dividend,” an extraordinary bulge in the country’s workforce. Soon there will be a heavy “demographic tax” when one worker supports two parents and four grandparents. China’s workforce will level off in about 2013, and the country will begin to shrink a few years after that. A shrinking population will, in all probability, mean shrinking GDP.

Third, the partial renationalization of the economy, one of the results of Beijing’s November 2008 stimulus program, will undermine growth. Most recent growth is attributable to investment, and almost all of that has come from the state. As they say in China, “the Communist Party is now the economy.”

Finally, the country has progressed about as far as it can within its existing political framework. Further economic reform, for instance, would threaten the power of the Communist Party, so the Party will not sponsor much more change. A true market economy, for example, requires the rule of law, which in turn requires “institutional curbs” on government. Because these two limitations on power are incompatible with the Party’s ambitions to continue to dominate society, China cannot make much progress toward them, at least as long as the Communist Party is around.

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