[Viewpoint] Greenspan’s spirit lives on in China

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[Viewpoint] Greenspan’s spirit lives on in China

China’s 10 percent growth never quite feels right when you’re walking the streets of Shanghai.

That’s the thing about the nation’s booming coastal cities. Growth often feels like 20 percent, or higher. What tamps down official gross domestic product figures is the fact that most of China’s 1.3 billion people live nowhere near the skyscrapers, bright lights and construction cranes of Shanghai.

We are seeing cracks in this virtuous dichotomy. Growth slowed to 9.6 percent in the third quarter from 10.3 percent in the second and 11.9 percent in the first. Yet inflation, which many believe is understated, accelerated to the fastest pace in almost two years. It’s a sign that frothy China needs to get serious about risks of overheating before they spread everywhere.

Recently, something may be afoot to put China on more stable turf: the end of the “Wen put,” China’s version of America’s “Greenspan put,” which propped up asset prices in dangerous ways.

The next two years are make-orbreak ones for China. President Hu Jintao and Premier Wen Jiabao aren’t lame ducks as they reach the twilight of their periods of influence. The dynamic is the opposite of, say, the United States. As China’s leaders spend their political capital and choose successors, they have a remarkable chance to reform an economy showing signs of strain.

China’s leaders often seem more interested in censorship and blocking Google Inc.’s search engine than big changes that would make the world’s most populous nation more sustainable 10 years from now. Thankfully, the more reform-minded Wen appears to be up to the challenge.

The gloves are coming off. China’s central bank raised interest rates last week for the first time since the global crisis. It’s far more important to dispel the notion that the government will dogmatically keep GDP above 9 percent and prop up asset prices.

One of former Federal Reserve Chairman Alan Greenspan’s lasting legacies was his penchant for rescuing markets when things got dicey. A libertarian on paper, Greenspan was a monetary socialist in practice. China conjured up a version of the “Greenspan put,” something that helped send property prices into the stratosphere.

Investors always take such implicit guarantees too far. The IMF last week said Shanghai’s property market and some wealthier areas of Beijing may be starting to overheat. So, national data masks the severity of bubbles in China’s showcase cities — ones on which foreign investors focus.

There are signs that the “Wen put” is undergoing a makeover. More talk of reform has hit the airwaves and it’s about time. China needs more balanced growth, greener industries and a narrower gap between rich and poor. We could soon see less empty investments that pave the way for an explosion of bad loans. More productive use of China’s savings will leave the nation stronger in the decade ahead.

Obvious steps China could take include pushing its currency higher. It would accelerate the process of moving away from sweatshops toward services and better-paying, high value- added industries. The renminbi isn’t likely to strengthen significantly, though. China sees a weak exchange rate as a shock absorber as it tweaks its model. It’s all about balance.

It’s a point that’s missed in the furor over China’s curb on the export of rare earths. Sure, China is flexing its muscles in rationing out the raw materials vital to everything from hybrid cars to laptops, wind turbines, weapons and iPhones. It’s also about creating jobs and domestic wealth. China has failed in articulating the latter strategy to irked trading partners.

Another perception that needs addressing is the state’s readiness to make risky bets that are in the best interests of investors. When you chat with investors in Hong Kong and Shanghai and suggest bubbles are growing, you often hear some variation of, “Yes, but do you really think the government will stand by and let stocks or real estate plunge? No way.”

There’s the rub. China needs to get out of asset markets, publicly and transparently. Yes, markets will gyrate, investors will complain and politically connected executives will work the phones. Yet this is a vital step China needs to take to become a more stable economy in the long run.

Engineering a soft landing depends on it. Zero rates around the world mean that Chinese rate hikes will only attract more hot money as investors seek higher yields. The sobriety China’s economy so badly needs must come from government policies.

Hypocrisy clouds this issue. Japan and Hong Kong aren’t above pumping public money into asset markets when things get rough. The U.S., once the shining icon of free-market ideology, has lost its way. Nowadays, it’s hard to figure out where the Fed’s balance sheet ends and the credit markets begin. We’re not talking about other economies here, though. We’re talking about investors’ troubling faith in China to protect them. Wen has until 2012 to roll up his sleeves and see to it that China doesn’t just grow faster, but better. Proving that China isn’t some giant insurance company for investors is a great way to start.

*The writer is a Bloomberg News columnist.


By William Pesek
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