News Journal: China faces political trouble as its economy slows

Just 10 months ago, all of the major financial media outlets headlined a story about a World Bank report that predicted China’s economy would surpass that of the United States in 2015.

The story spurred economists into looking at statistics from a lot of different sources, and most concluded that the World Bank analysis was flawed. The U.S. economy is still close to twice the size of China’s.

It wasn’t only individual western economists who disputed the World Bank’s findings, however. In fact, one government did. Ours? No, surprisingly, China’s.

The Washington Post reported, “China’s National Bureau of Statistics, which took part in the study, rejected its conclusion, according to the World Bank report.” The Bureau questioned the study’s methodology and said the results would not be published in China.

At first, this seemed puzzling. It certainly hasn’t been China’s style to downplay its accomplishments.

News organizations here attributed China’s reaction to everything from it not wanting to be expected to stimulate the world economy to worries that it would make it harder to resist making concessions on trade and climate change.

Probably so, in part. But I think the major reason China came down so hard against disseminating the World Bank report was that the government was afraid it would raise expectations among its people.

China maintained a historic average growth rate of over 10 percent for decades. But that slowed to 7.4 percent in 2014, the lowest rate since the economic fallout from the Tiananmen Square 25 years ago. Chinese Premier Li Keqiang in his speech last week to the Chinese congress forecast the growth at about 7 percent, and the International Monetary Fund forecasts 6.8 percent. Haibin Zhu, chief economist at JP Morgan, believes slower growth “is mainly driven by the slowdown in fixed investment, especially in real estate and manufacturing investment, which face oversupply problems.”

Twenty-three years ago, the few acres of the Imperial Palace in Tokyo were worth more than the entire country of France. Ten years ago, we were in the middle of a real estate boom that often doubled the value of a house in three or four years. Real estate bubbles always eventually burst. Japan’s did, and the country still hasn’t recovered. Ours did, and you know the havoc that inflicted on millions of people who were economically devastated.

Maybe you have seen pictures of the incredible new skyscrapers built in the past few years in Shanghai and dozens of other Chinese cities. In terms of how much was done in so few years, China’s building boom has been unprecedented. But unsold floor space in commercial buildings stood at 26.1 percent by the end of 2014. A lot of these skyscrapers are virtually empty.

That’s bad for real estate speculators. It’s also bad for the unemployed workers who aren’t sitting at desks in those empty buildings.

Given the government’s approach to employment statistics, it is hard to get a handle on just what China’s unemployment rate is. The official published rate is based on the number of people who register as unemployed, but the Chinese have no financial incentive to register. The rate is also complicated by over 250 million migrant workers who are not included in the published rate.

The best estimates of independent economists who study the Chinese system is an unemployment rate of close to 20 percent. And, noting the precarious position of migrant workers, the Financial Times estimates another 20 percent of China’s population “could be a week’s or a month’s wage away from losing their recently acquired status as aspiring middle-class citizens.”

The majority of the Chinese people have for years made a kind of silent bargain with their government. They don’t like the rampant corruption that gives government officials incredible power over their lives. They don’t like the censoring of their news or the blocking of their Internet connections. They don’t like the absence of the rule of law in their courts. But as long as their economic future continues to look brighter and they can see a productive life for their children and grandchildren, they won’t make waves. They will begrudgingly trade freedom for financial well-being.

But now, growth is slowing and unemployment is rising. No wonder government leaders want to tamp down the expectations they have encouraged for years. The bargain they made with the Chinese people may be starting to unravel. If that happens, the political fallout could be far-reaching.

Ted Kaufman is a former U.S. Senator from Delaware.