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From NPR News, this is ALL THINGS CONSIDERED. I'm Audie Cornish.
ROBERT SIEGEL, HOST:
And I'm Robert Siegel. This week, we're looking at the challenges facing a new generation of leaders preparing to take over China's Communist Party. Over the last decade, the country's economy has exploded, becoming the world's second largest. But growth is now slowing and problems are mounting. As NPR's Frank Langfitt reports, China's incoming leaders will have to make tough reforms to keep the economy on track and their party in power.
FRANK LANGFITT, BYLINE: If you watched American TV in recent years, you might have thought China was about to take over the planet.
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LANGFITT: But talk to Chinese economists these days. It's a different story.
XU DINGBO: I'm not as optimistic as many people in the Western world thinks about China.
WANG JIANMAO: If you want to be the world leader, you know, I think that China is far from ready.
ANDY XIE: The efficiency is going down. Corruption is widespread. So I think that this is the crossroads for China.
LANGFITT: That's Xu Dingbo and Wang Jianmao, both professors at the China Europe International Business School, and Andy Xie, a Shanghai-based economist. Why do they sound so somber? Well, the economic formula that brought China such staggering success doesn't work anymore. Nick Lardy is a senior fellow at the Peterson Institute for International Economics in Washington, D.C.
NICK LARDY: The growth model has to change. They've done very well emphasizing exports and investments, and particularly property for 10 years or so, but that string basically has run out.
LANGFITT: Rising labor costs means China isn't a cheap place to make low-end products anymore. The financial crises in the U.S. and Europe mean there are far fewer consumers to buy China's stuff anyway. And China's economic growth is out of whack. About half of it is driven by investment, often in things like real estate and government infrastructure. Again, Nick Lardy.
LARDY: The perception in the United States is based on the headlines that China has been growing at double-digit rates for 30 years. So we tend to portray China as a giant. It's very difficult to see from a distance kind of structural weaknesses that exist here.
LANGFITT: You can see those weaknesses in Tangshan. It's a city of more than 7 million in North China, and its signature steel industry is struggling. A cook named Liu is frying up pork and onion pancakes for steel workers. In August, though, steel mills on either side of his restaurant collapsed.
LIU: (Through Translator) Because steel prices have fallen, workers are working less, about 15 to 20 days a month. Compared with before, the number of customers has shrunk 50 percent.
LANGFITT: One company went bankrupt after it expanded too quickly. Workers told China's state-run press the boss owed banks more than $120 million. In fact, by the end of last year, Chinese steel firms owed some $400 billion, according to an industry association. Economists say the problem is this: companies have overinvested in steel to feed an overpriced housing market and massive construction of government infrastructure. One steel mill official named Wang said his plant closed for more than three months this summer.
WANG: (Through Translator) I was worried when we would start back up again. Due to the effects of the market, about 20 percent of small-sized mills had temporarily stopped production.
LANGFITT: Wang Jianmao of the China Europe Business School says some companies act as if the boom will never end.
JIANMAO: A huge success in the past three decades, actually, made some Chinese people actually very, I have to say, you know, arrogant. They think, you know, they take this fast growth just for granted. They don't believe, you know, China will have a crisis. But the problem - if you don't believe you have a crisis, you will have a crisis.
LANGFITT: The government poured tons of money into infrastructure, in part, to boost GDP - money not always well spent. To give you an example, right now, I'm in the southern boomtown of Shenzhen, and I'm standing on a pedestrian overpass. It's very elaborate. It actually looks like the Bird's Nest stadium in Beijing, costs more than $8 million to build last year. The problem is it wasn't very well-built, and when it rains, it floods. So right now, as you can hear in the background, people are drilling away, putting in new floor tiles. An IT worker named Wu uses the bridge every day. But he's critical of the project.
WU: (Through Translator) It feels a bit extravagant, a bit wasteful. Money should be spent on where it's needed, not just on an overpass.
LANGFITT: Given the bridge's shoddy construction and high price tag, Wu assumes money was siphoned off.
WU: (Through Translator) Inspectors probably didn't do their job and builders skimped on the job. As to $8 million, they may have spent, at most, one to $3 million here.
LANGFITT: China's state-owned banks often fund these projects. But if you're a small or a midsized private business, the kind that produce most of the jobs here, good luck getting a loan. Ask Katrina Tong. She exports electric chargers for a company in Shenzhen.
KATRINA TONG: (Through Translator) We think market demand for our products is out there and we have potential, but it's really hard to get financial support. It's so frustrating.
LANGFITT: In fact, the vast majority of small and midsized companies in Shenzhen can't get bank loans. Instead, many turn to private lenders, who charge a loan shark-like interest rates.
TONG: (Through Translator) We feel our business and ideas are very good. But in China, it is really hard to get investment. Investment all goes to big companies.
LANGFITT: China's state-owned banks prefer state-owned companies, in part, because they're less risky. But economist Xu Dingbo says many state firms are inefficient.
DINGBO: You see a lot of nice building, highway and beautiful cities like Beijing and Shanghai. But if you look at the real financial numbers of many Chinese companies, the picture is very bad. It's horrible.
LANGFITT: Xu says the largest 102 state-owned companies had an average return based on assets of about 3.5 percent.
DINGBO: For nearly half of the assets in China, the rate of return is less than depositing the money in the bank. That means we are wasting lots of resources in China now.
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LANGFITT: This is Wen Jiabao, China's outgoing premier, addressing skeptics at a forum last month. Wen insists China can rebalance its economy by unleashing consumer demand.
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LANGFITT: Fixing China's economy will require taking on powerful interests, including the state banks and state-owned companies that enjoy monopolies. It's a big challenge and a crucial test. But given the Communist Party's remarkable track record, no one is counting it out. Frank Langfitt, NPR News, Shanghai.
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