POSITION & HOLD

China's economic growth opens skies for bizjets

Prosperity promotes increased air traffic and permits Chinese execs to purchase private aircraft.


Fiber optics testing exemplifies the growth of high-tech industry in China, a major driver of business aviation in the region.

At the end of 2010, happy days were there again. The official unemployment rate had slipped to 4.1%—down from 4.3% a year earlier.

The Ministry of Human Resources & Social Security announced that the country had created 11.68 million jobs in the year, with 5.47 million laid-off workers re-employed.

Home prices, car sales, and retail sales in general all were soaring again. GDP growth shot back up to 10.3% for the year.

Beijing kept pushing. In 2010 and 2011, it poured money into the marketplace to keep the yuan artificially low and exports cheap. In 2 years, the money supply, broadly measured, grew by 54%.

At the same time, massive lending by state-owned banks has sent money sloshing around the national economy. This policy has helped to keep growth strong, but it has its risks.

Present status

Many of the problems that China seemed to escape before 2007 have begun to cause trouble, and economists are starting to worry. Could Asia's great miracle finally be nearing its end? And what will that mean for aviation? Unfortunately, to figure that out we have to spend some time on the kind of economic data that puts most of us to sleep.

Inflation has been climbing steadily for most of 2 years. In August, it was running at 6.2%, thanks to high food, energy and real estate prices.

China has been taking the usual measures to fight inflation, raising interest rates and adding less money to the economy. It has also begun to stabilize prices for key commodities such as grain, oil, sugar and cotton and to ship more diesel to market.

Inflation is still climbing.

Chinese construction has been responsible for much of the country's economic growth. Shifting to a consumer-driven economy is a difficult challenge for the coming decade.

The problem is that tightening too much could throttle growth, and then Beijing would have real problems. It takes around 5% GDP expansion just to absorb the new workers who enter the market each year.

Exports may face trouble as well. Between Jun 2010 and Sep 2011, the yuan had risen by 6.8% on foreign exchange markets. To foreign consumers, this meant that Chinese imports were nearly 7% more expensive this September than they had been 15 months earlier. If that cuts export sales, China may not be able to rely on them to prop up its economy as it has done for the past 20 years.

Home prices are troubling as well. In Beijing, they rose by a record 20% in the 12 months ending this March. They are still climbing. More disturbingly, in August, for the first time ever, new home prices were up in all 70 cities China monitors—this despite government attempts to slow the growth of housing prices.

Is this another real estate bubble of the kind we have seen in the US, Australia, Spain and many other countries? It could be.

All this has led pessimists to start speculating: If banks tighten lending in an effort to control inflation, it could burst the real estate bubble they see forming in China. That could be as hard on the country's economy as the collapse of American home prices has been on the US.

But even that may not be the worst threat to Chinese prosperity. Economists are beginning to worry about the lending that has helped to keep the country growing. According to Credit Suisse, there was a lot more of it than the official data claim. Much of it was off the books, and much of it went to borrowers who did not deserve it.

A Gulfstream IVSP taxis out at PEK (Beijing, China). Flight slots are so crowded at PEK that bizjets arriving and leaving in one day cannot return until they have spent the night at another airport.

At USB China, Chief Economist Wang Tao estimates that some $460 billion in loans to local government investment companies may never be paid back. Others put the figure as high as $1.3 trillion.

Private lenders are even further extended. Unlike developed nations, China has a host of so-called underground banks in addition to its official institutions. And where the state-owned banks have offered 3.25% interest for 1-year deposits of late, the underground banks have been giving 25–30%.

To earn it back, they poured many billions of yuan—at least—into cash-starved companies that may never repay what they borrowed.

In late Apr 2011, the billionaire Jin Libin took a quick but unpleasant route out of debt—he set himself on fire. When investigators looked into his finances, they discovered that he owed "only" 150 million yuan to the official banks. However, he owed another 1.23 billion yuan to underground banks and individual creditors. This has them wondering about other debtors.

The Basel Committee on Banking Supervision is the international arbiter for this sort of thing. It says a country is in trouble when its level of debt grows beyond 110% of its GDP. Government debt added up to about 105% of GDP as of Mar 2011.

Hidden lending by under­ground banks could easily put the total debt at nearly 120%—well into the danger zone. When those debts are written off, a lot of the money that might otherwise be invested in future growth will simply disappear.

Business environment

Chinese textile workers and peers in other low-tech industries are drawing aviation from coastal provinces deeper into China.That's enough of hard economic data, at least for the moment. Let's look at some other unpleasant portents.

Strikes, while not technically illegal, are effectively forbidden. Nonetheless, there have been at least 130 strikes, walkouts and similar actions in China since 2008.

They have hit industries from hotels to steel mills and mining to toy factories. Two years ago, in Laiyang City, Hunan, even police officers went on strike.

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