What's Next? China's Fast-Growing Economy Slows

China's economic boom has altered the global economy but its growth is slowing down. Steve Inskeep talks to Beijing-based economist Patrick Chovanec about China's economic troubles, and how that affects the U.S. economy.

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STEVE INSKEEP, HOST:

Not so long ago, the journalist James Fallows made a prediction about China. Many Americans worry about the power of a rising China, but Fallows argued that in the next few years Americans may have more to worry about from China's weakness.

China's economic boom has altered the world economy, but its growth is slowing down. And we're going to talk about that with Beijing-based economist Patrick Chovanec. He's on the line from Beijing.

Welcome to the program.

PATRICK CHOVANEC: Good to be here.

INSKEEP: And let's first talk about what we mean by a slowdown, because China's economy is still growing. But are there signs of trouble here?

CHOVANEC: Well, China's economy has officially slowed down, from around nine to 10 percent to more seven to eight percent territory. I think that that understates the degree of the slowdown. I think that, you know, you have key sectors of the economy that - like property, like heavy equipment, that were driving growth in China and are now clearly in contraction.

INSKEEP: You said property. You mean real estate values?

CHOVANEC: That's right. Real estate has been a big driver of growth in China over the past several years. And, in fact, real estate is a relatively young industry in China. China only converted to private homeownership in the late 1990s. And over the past year, we've seen for the first time the property market really falter.

INSKEEP: Now you also mentioned heavy equipment, which when you say that phrase what I think of is construction equipment, industrial equipment, the kind of stuff that leads to later economic growth. The market in that is going down as well?

CHOVANEC: Yes. In fact, Caterpillar just reported that, essentially, its sales in China, for the first time, fell pretty significantly in the first half. So it's bulldozers, it's excavators, these are things which China couldn't get enough of until recently. And it's not just real estate. It's also infrastructure. If China built all the roads, bridges, highways, condos, villas that it did last year, but no more, then that would knock five percentage points off of China's GDP right there.

INSKEEP: Hmm.

CHOVANEC: And that's the runaway train that China is on - that it has to boost investment, higher and higher, or else growth slows significantly.

INSKEEP: And that is investment driven primarily by the government. Is the government running out of money?

CHOVANEC: The government isn't running out of money, in a sense the government can always print more money. But the government is quite concerned about inflation. In fact, because of the drought that's taking place in the U.S., there are renewed concerns about inflation in China, because China imports a lot of soy and a lot of corn to feed 400 million pigs in China, and the pork price here is a very, very sensitive price when it comes to people's quality of life. So the government can print money, but it's weary - and I think, rightfully wary - of doing so.

INSKEEP: Now when you mention the fact that the United States is selling crops to China, you remind us how closely intertwined the U.S. and Chinese economies have become. What are some of the effects that you would face, on the United States, if the Chinese economy were to seriously go south?

CHOVANEC: Well, ironically, the United States is probably in a pretty good position if there's a slowdown. And in fact, part of the slowdown that's taking place is really that the Chinese economy needs to shift from a dependence on exports and investment to drive growth, to domestic consumption to drive growth. And unfortunately, that's not - it's not a smooth shift, it's a very bumpy economic adjustment. But ultimately, if the slowdown is part of that kind of economic rebalancing, it will be good for the American economy because the United States would like to see China import more food from American farmers. They would like the markets to be open to services that American companies can provide. So that's part of, it's one piece of the rebalancing that really, in some ways, would benefit the Chinese economy as much as it would benefit the American economy.

INSKEEP: It's a truism almost - at least on this side of the ocean - for analysts to say something like well, if China's economic growth ever falls off it's going to lead to political instability. There could be uprisings. Is the situation fundamentally stable?

CHOVANEC: I don't get a feeling like people are going to take to the streets tomorrow. Although, I would say that the cynicism and the frustration that you encounter in talking to, not just people who you would expect to be frustrated - people who might be left out of the kind of boom that's taken place - but surprisingly, many of the beneficiaries, I mean people who work for state-owned companies, people who are party members. And the kind of cynicism and the frustration that they express, about the way the system works - the corruption, the feeling that false prosperity is being created and not real prosperity - it's greater than I have experienced in 25 years of traveling through China.

INSKEEP: Patrick Chovane is a professor at Tsinghua University's School of Economics and Management in Beijing.

Thanks very much.

CHOVANEC: Thank you.

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