The candles in Hunan are a sign that China’s economy may be on the verge of a meltdown. In what some economists consider a warning sign of overheating, China is running out of steam–not to mention water, coal and electricity. In heavily industrialized southern and eastern regions, shortages have forced authorities to impose rolling blackouts in residential areas, to require all but the largest factories to cut back on manufacturing and to launch media campaigns urging the masses to conserve. Nationwide, the supply of electricity last year rose 5 percent slower than demand, dipping as much as 30 percent below demand in Hunan. By now 21 of China’s 31 regions have faced shortages caused by lack of fuel or by poor government planning. And economists say the situation probably won’t improve until new power plants are built.
Two decades of economic reform in China has lifted millions of people out of poverty and created a middle and an upper class that are buying cars, homes and expensive vacations. The economy is growing fast–at a rate of 8.5 percent in 2003, according to official figures; outside estimates put the rate in double digits. Recent energy shortages are just one sign that demand is starting to outrun supply. After six years of falling prices, deflation gave way early last year to inflation, which hit 3 percent in November. That rate is well within safe limits, and far short of the runaway inflation that is the classic symptom of an overheating economy. Yet the sudden turn from deflation to inflation accompanies an almost euphoric rate of government and consumer spending, largely made possible by risky bank loans. The question of whether the world’s most populous country is growing too fast is now more than idle musing.
The Chinese government and many analysts deny the economy is in danger of crashing. Some analysts attribute recent price spikes to one-time events–natural disasters that drove crop prices up, for example. “[Food] prices are rising a little, but they’re still pretty low,” says Yang Yiyong, deputy director of the government-affiliated Institute of Economic Research. “I think that for 20 years China’s economy shouldn’t have a problem growing an average of 7.5 percent a year.”
But some economists are more worried. They think Beijing should try to slow things down–or risk entering a vicious cycle of boom and bust. Already there are signs that the real-estate industry is in danger of becoming saturated with investors, with prices similar to those of major U.S. cities and a lack of wealthy Chinese to buy all the luxury housing. Other sectors could be in trouble, too. For example, while industrial output overall rose by about 17 percent last year, the output of cars and home appliances rose by 50 percent. In all of these areas, much of the investment is from state-owned enterprises, many of which are financially shaky. Because the country’s financial system remains burdened by bad debt and corruption, a real-estate crash like one that hit China in 1993 could spark a banking crisis. “China’s economy is growing fast, but it’s very volatile… People become euphoric very fast,” says Andy Xie, an economist with Morgan Stanley. “When people are too optimistic, they take on risks. It’s a trap.”
At the same time, China is running low on the raw materials it needs to fuel the boom. Prices for oil, coal and steel are rising as fast as 10 percent per year, and could eventually spin out of control. Even water faces this upward pressure. According to the World Bank, China’s per capita water resources are about one quarter of the world average. That means there’s little H2O to run hydraulic power plants, which is partly to blame for the electricity shortage. Water is also essential for many industries that give China its global competitive edge, such as textile manufacturing (for washing and curing fabrics). Officials have already forced some companies in northern China to abandon water-intensive plants, and continuing shortages would threaten economic growth in the next decade. “Sooner or later, China will reach a stage where there won’t be enough water for everybody,” warns Li Xiaokai, a water engineer in the World Bank’s Beijing office.
While insisting the economy hasn’t begun to overheat, Chinese officials are nonetheless taking clear steps to make sure it doesn’t. The central bank plans to cut the growth rate in the money supply, which hit 20 percent last year, to less than 13 percent. That should restrain lending and price hikes. Authorities recently made it harder for real-estate companies to obtain bank loans. They also raised some energy prices to slow down fuel-intensive industries, while boosting investment in the power grid. Many measures weren’t implemented until after the outbreak of SARS, when the government realized the epidemic would not slow economic growth as much as expected. “During SARS, nobody had the guts to take cooling measures because they worried about the economy collapsing,” says Xie. Beijing knows that even pockets of economic instability could upset the country’s delicate social balance during its difficult transition from socialism to capitalism. The 1989 protests in Tiananmen Square erupted at the tail end of an economic boom amid high inflation. Already, millions of workers laid off from state-owned enterprises stage daily protests around the country. The government wants to ensure that electricity shortages don’t produce millions more angry demonstrators. In Changsha, for example, local officials have allowed many restaurants and hotels to turn their neon signs back on during the run-up to the weeklong Chinese New Year national holiday, which begins Jan. 22, to create a bright and cheerful environment for visitors. “They want to keep electricity flowing steadily during the holiday to maintain social stability,” says one local reporter. But it’s an optical illusion. Nobody knows what will happen when the vacation ends.
