With the renminbi in the ascendancy, China lecturing the United States on good economic housekeeping and Chinese Minister of Commerce Chen Deming transparently stating that his country is in the market for the juiciest assets that largely insolvent Europe has to proffer, now seems to be an unusual juncture at which to question the economic credentials of the PRC. Yet that is exactly what one increasingly prominent economist is doing. Larry Lang, a charismatic Professor of Finance at the Chinese University of Hong Kong who received his PhD from the University of Pennsylvania, recently made headlines for a 22nd October 2011 speech that he gave in Shenyang – yet another Chinese city of close to ten million people that few people in the West are even aware exists.
Lang – whose lecture, The Epoch Times reported, was ordered to take place behind closed doors and with no recording equipment present – pulled no punches in hammering home the message that China’s economy is heading for an ‘economic tsunami’. Lang posited that the following combination of factors will prove problematic in China’s future: (i) massively indebted local governments and state-owned corporations; (ii) inflation that is much higher than the government figures would suggest; (iii) ‘serious excess capacity’ in the economy; (iv) fake GDP data that are disguising a severe economic contraction; and (v) exorbitant taxes.
But is Lang correct? While we at Mediolana are not fully convinced of his thesis, we would readily concur that many of the individual issues he raises have a certain validity to them; in particular, his point about debt is a sobering one given that Lang states the magnitude of the outstanding obligations as being as high as US$5.68trn. Even for an ascendant, cash-rich PRC, this is hardly pocket change: China’s total GDP in 2011 is estimated at US$11,316.224trn by the International Monetary Fund.
However, when contemplating the bespectacled professor’s analysis, a related thought struck us: given that the PRC is a one-party state, the authorities would be well-advised to seriously consider how to insulate the country’s financial and political institutions against corruption for the simple reason that the tendencies towards obfuscation and market manipulation will almost certainly be stronger than in a more ‘naturally’ transparent configuration of governance. Examples of extreme resource misallocation – such as China’s ‘ghost’ shopping malls, not least the New South China Mall at Dongguan – point to this phenomenon in the Chinese property sector; a systemic problem of this nature throughout the economy, as Professor Lang seems to be alluding to, is not something to be taken lightly.