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China, Savior of the World's Economy? Uh, Better Think Again

China has just become the world's biggest consumer of PCs, according to market research firm IDC. With an enormous population, growing wealth, and the post-PC atmosphere in the U.S., it would seem to make sense. You'd think that the high tech industry would cheer, looking forward to shipping something somewhere.

And yet, HSBC's survey of manufacturing shows continued contraction in the country. That's because China's situation is more complex, and less robust, than it seems on the surface. The country is in no position to save an industry, let alone the global economy.

Ghost cities
It always pays to be suspicious of numbers that seem to describe economic activity. And in China's case, greater prudence might be a good idea. A lot of government spending gets thrown indiscriminately into the mix, and yet that purchasing may not indicate organic purchasing. This becomes clear when you hear from people who have been to China and looked behind the façade.

For example, Kai Ryssdal of the American Public Media radio show Marketplace recently retraced his steps to a broadcast site in Chongqing, China. Entering the city's World Trade Center, here's his memory of the area from five years ago:

There's enough stuff that's new, there's a decent amount of new buildings. The question though, is anybody in those buildings? Because we would come here at 2:30 or 3 o'clock in the morning, and if you pressed the wrong button and get off at the 40th floor instead of the 45th or whatever it was that we were going up to, there was nothing. It was bare concrete flooring, it was wires dangling from the ceiling. There was nothing. This was a brand new building in 2006, and it looks like it's been here for 35 years. It's just old and covered in grime, and you have to wonder how anything survives here.
Back to the present, he went to the 44th floor and found ... nothing but dusty concrete. There weren't even elevator call buttons, just dangling wires. One empty building, even if you'd expect it to be a center of business activity, is nothing. There are the ghost cities of China -- elaborate deserted communities devoid of people:
Regional governments across China have been building massive real estate projects, including Kangbashi in Inner Mongolia and Zhengzhou New District, which have remained empty, because of the high prices and interest in investment.

Kangbashi, which was built in just five years, was meant to be the urban centre for Ordos City -- a wealthy coal-mining hub home to 1.5million people.

It was filled with office towers, administrative centres, museums, theatres and sports facilities as well as thousands of homes, but remains virtually deserted.

Such reports came to mind reading the news about PC shipments because of one little detail: a big driver of the jump in sales was public sector purchases.

China's government gooses the numbers?
The Chinese government has poured heaven knows how much into economic stimulus. How much of that has spilled out into jobs, business purchases, and what have you that are going to support things that ultimately won't be economically productive? How many of those PCs go into buildings that will never be used and, for that reason, never need replacement, software, or maintenance?

The World Bank describes a strong Chinese economy with a national government that holds several trillion in foreign exchange reserves. But that may be smaller than the spending and debt that local governments incur:

The comments have focused attention on research done by Victor Shih, a professor of Northwestern University in America, into China's local investment companies. These financing vehicles allow municipalities to circumvent central-government restrictions on direct borrowing. As many as 8,000 of these investment companies may exist, estimates Mr Shih, whose work draws on regulatory filings and various government announcements.

More alarmingly, he reckons that these entities have outstanding debt of 11.4 trillion yuan ($1.7 trillion), and commitments for a further 12.7 trillion yuan, much of it tied to infrastructure projects designed to stimulate the economy. For comparison, China's heavily publicised national stimulus plan was worth 4 trillion yuan, 1 trillion yuan of which came from the central government. If Mr Shih's estimates are even close to accurate, the scope of China's spending spree is far larger than thought.

Ultimately, all these loans are the responsibility of the central government. That's right: China may have a debt problem that rivals that of the U.S. or EU, only without the visibility.

Look away from the government, and things look less certain, as smaller manufacturing slows. In addition, small businesses are often being forced to effectively accept IOUs for goods, rather than actual payment, while workers demand higher wages and inflation is on the rise.

For all its collective finger-wagging at the U.S., China may ultimately be no different, as my BNET colleague Constantine von Hoffman has noted, it appears equally willing to borrow today for a bloom of apparent economic health. Not the picture of a country that you might be counting on to pull your business, industry, and part of the world out of economic doldrums.


Image: Flickr user The U.S. Army, CC 2.0.
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