China and Corruption

THURSDAY, MARCH 22, 2012

Corruption threatens China’s future – By Edward Chancellor

Widespread corruption at the local government level remains a threat to China’s economic development. If stories are to be believed, Chongqing’s disgraced party boss Bo Xilai even used an anti-corruption drive to put the squeeze on local business people. Beijing faces more immediate problems, however. Recent policies have pushed the country’s well-known macroeconomic imbalances to extreme levels, its real estate market is glutted and its credit system appears increasingly vulnerable.

Premier Wen Jiabao has talked repeatedly of the need to address China’s “imbalanced, uncoordinated, and unsustainable development”. Yet its growth continues to depend on increasing amounts of investment. Last year fixed-asset investment accounted for 90 per cent of economic growth. The trouble is that much of the money has been frittered away on trophy infrastructure projects, such as the country’s expensive high-speed rail network, with low prospective returns. Mr Wen may fret but if investment were to stop expanding, China’s growth rate would slow dramatically. Beijing is holding a tiger by the tail and doesn’t dare let go.

One area of particular concern is the residential real-estate market. After years of overbuilding, tens of millions of apartments sit empty. In 2011 housing supply exceeded demand by about 50 per cent, according to UBS. For two years, Beijing has acted to damp speculation in the housing market. In January home prices fell in the majority of the 70 mainland cities surveyed by the National Bureau of Statistics. Most people believe that real estate will rebound as soon as policy is loosened, but recent experience from the US, Spain and Ireland suggests that overbuilt housing markets take years to correct. This could spell bad news for China, where residential construction accounts for about 13 per cent of gross domestic product.

Source

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