Full steam ahead for China - but a battle to keep the rollicking growth train on the rails

BY TIM HUNTER

IN A scruffy shopping mall outside Hong Kong's showcase conference centre on the Wan Chai waterfront, locals on their lunch break hurry past the ultimate sign of globalisation – a Peruvian busker playing the panpipes.

Like any smart street performer, he's following the money.

As he puffs his way through another version of "La Bamba", 100m away inside the huge convention centre, the people who control that money are talking about a new economic order.

Their story is this. In a post-crisis world, the old powers of America and Europe are weak. Asia in general, and China in particular, have shown more resilience through the storm and emerged as economic powers to rival the old world.

Economic output in Asia, excluding Japan, is expected to grow by more than 7% this year. China itself has had six straight years of GDP growth of more than 6%.

Sleek ANZ Bank CEO Mike Smith put it in a nutshell. "The importance of Asia to the world economy is now completely obvious," he told the throng.

But as the financial centre of gravity shifts east, there is worry about how to keep the rollicking growth train on the rails.

On Wednesday morning, the first day of the Asian Financial Forum in Hong Kong, a headline in the South China Morning Post issued a warning: "Property sales up 75% fuelling bubble fears".

Prices were soaring, it said, with average home prices in Shanghai's urban areas, for example, up more than 60%. The following day it reported investors were so worried about a bubble, they demanded China's biggest property developer Evergrande offer a huge 13% interest rate on a new $US500 million bond issue to finance development.

The fear extends beyond property developers – as the financial crisis showed, the implications for banks who lend money on property are potentially catastrophic. And few places have ever seen as much credit growth as China – in 2009, banks lent 31% more money than the year before as credit supply hit 9.5 trillion yuan.

It didn't take long for such concerns to be addressed in conference hall 5F-G. Dominique Strauss-Kahn, managing director of the International Monetary Fund, was first up to address the rows of dark-suited delegates.

He saw no asset bubble – and although growth had returned, it was fragile.

"We shouldn't focus only on growth figures – most of the growth comes from public support and private demand is still very weak."

He also had doubts about the idea that Asian consumers would take over from Americans as the world's growth driver.

"That's fine when you say it in a sentence that short, but when you do the math it's a much more difficult thing."

Later in the day, Stephen Roach, chairman of Morgan Stanley Asia, hammered the point home. Accusing Asian cheerleaders of "a worrisome sense of complacency", he noted that China's growth was funded by a record surge of bank lending and the rest of the economy was weak.

"This is an artificial stimulus as opposed to the organic resilience of the economy," he said.

"Private consumption in China is 35% of GDP – no country in the world has so small a proportion of output going to domestic consumption."

The solution was for China to fund a social safety net, he said. "Only then will Chinese families reduce the excess of fear-driven saving [and start spending]."

Chinese have good reason to hoard their cash. In just one case to hit the headlines that day, the parents of three-year-old boy Zhou Hongdu found themselves paying 19,000 yuan for his treatment after he was diagnosed with swine flu in Guangzhou last month. It appears they could not afford further treatment and the hospital discharged him. He was found dead on a roadside three days later.

Such tragedies are a daily occurrence in China, where millions live in poverty. For them, economic growth can't come fast enough.

The trick, then, is to keep the growth engine running hot without overheating.

Chinese central banker Liu Mingkan, chairman of the China Banking Regulatory Commission, was on message. Credit growth was huge last year because it was necessary, he said. "This year we will control the pace and amount of credit supply growth to 16-18% on a year-on-year basis."

Unlike our own central bank, China can order its commercial banks to open the credit floodgates or close them as it sees fit. This year, Liu told the forum, new lending would not exceed 7.5 trillion yuan. Such control may be the stuff of dreams for New Zealand Reserve Bank governor Alan Bollard, but it's clear that China has only recently emerged from a banking nightmare. In 2003, Chinese banks' non-performing loans totalled 17.9% of assets, and most banks were in breach of capital adequacy ratios.

By last year those scary figures were under control – a product of back to basics banking, said Liu.

"We've been sticking to simple ratios, rules and targets."

Housing investors, for example, were required to have a 40% deposit, which was "effective in curbing excessive speculation".

Like most of the speakers from Asia, Liu addressed the conference in excellent English, his dry and detailed academic style a familiar one for most listeners.

Detail, however, did not appear in the delivery of other speakers from the People's Republic. Lou Jiwei, head of giant sovereign wealth fund China Investment Corporation, took 15 minutes to say nothing, while Shanghai vice-mayor Tu Guangshao's strident yet vague harangue had droves of delegates seeking escape in their BlackBerries.

Still, there was no mistaking the determination of Asia's new order to seize the initiative from America, Europe and Japan too.

On the day Japan Airlines filed for bankruptcy, only one speaker from Japan addressed the conference. Rintaro Tamaki, vice-minister of finance, revealed Japan was now struggling with tax revenue back at levels not seen since 1985 and deflation was a serious risk.

Rubbing salt in the wound, Lou told delegates: "China is now ranking number two in the world, surpassing Japan."

Despite the caution of Americans like Roach, the conference got the message loud and clear.

Tim Hunter travelled courtesy of the Hong Kong Trade Development Council.

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