Alarm bells in Beijing

London: I stood alongside the chairman of the board of a state-owned enterprise in eastern China. The factory floor, partially open to the elements, stret-ched out far in front of us, littered with towers and blades designed for some of the world’s largest wind turbines. It was an impressive sight, one to which regular visitors to mainland factories are accustomed: China as the workshop of the world.

But something was missing: Workers. “It’s a local holiday,” he said. But there are no such things in the People’s Republic, and national holidays only occur in May, October and around Chinese New Year. I didn’t push it, but a later conversation with the firm’s senior engineer, a stocky chap in blue overalls clutching a pipe wrench, revealed the real problem. His cheery demeanour vanished when we started discussing the future. The factory, he admitted, hadn’t run at close to full capacity for a year. Experienced workers had been put on unpaid leave; migrant labourers from the countryside — lacking a local work permit, or hukou — had been told to hop it.

The company’s woes are a microcosm of the daunting challenges that face China’s stuttering economy, the world’s second largest after the United States. This week China devalued its currency by 3.6 per cent in a dramatic bid to encourage exports — a clear sign that Beijing is panicking. Forget Greece. This could be the biggest financial story of the year. Even the threat of a significant slowdown in China’s economy could be enough to send the rest of the world tumbling back into recession. It’s certainly a source of concern for Britain’s still-fragile recovery. When the Bank of England Monetary Policy Committee met last week, they dwelt on the subject of China far longer than usual.

Over the past year, every key indicator has begun pointing to bad times ahead. Electricity consumption, usually the most reliable single gauge of economic health in the mainland, expanded at the slowest rate in three decades in the year to June. Chinese house prices have stagnated, while the last time rail-freight volumes were higher than the year before was last September. Last week brought yet more bad news, with exports sliding 8.3 per cent in July from last year’s figures, imports falling for the ninth month in a row, and data pointing to further weakness in industrial output, capital investment and retail spending.

Predicting a serious slowdown in the mainland has long been a losing bet. Ask the Sino-American author Gordon Chang, whose book The Coming Collapse of China was released at the turn of the century, just as the mainland began its inexorable rise. Since then, China has dealt with every challenge thrown its way. Even the global financial crisis barely registered. Beijing merely flooded its domestic market with cheap money, creating an artificial infrastructure boom. While Britain’s economy shrank by 4.3 per cent in 2009, and America’s by 2.8 per cent, China grew by 9.2 per cent.

China’s National Bureau of Statistics has released data showing the economy expanding by seven per cent in both the first and second quarters of the year. But the NBS is constantly accused of cooking the books — it’s notable that their figures tally precisely with state forecasts set out late last year. During a tour of a vacant cold storage facility in rural China with a party official, Anne Stevenson-Yang, co-founder of the independent Beijing consultancy J Capital Research, was confronted by an angry mob, who forced the group  to flee. The official later explained why: “There used to be an orange grove on that site, so we chopped down the trees to build the facility to create jobs.

But no one wanted to invest in it, and now there are no jobs, and no oranges.” This gathering storm helps explain Beijing’s reaction to the bursting of the latest stock-market bubble, which had been driven by speculative retail buying. Having tacitly encouraged the boom by lifting restrictions on buying shares with borrowed money, Beijing saw little choice but to intervene, particularly when day-traders, deeply in debt to loan sharks, began flinging themselves from office windows.

Party leaders clamped down on “short selling”, forced tame banks and brokers to buy and hold shares, and blamed the whole sorry mess on meddlesome foreigners, who had played no part in it at all. In fact, the real losers in June and July were holders of securities listed in the West. A generalised anxiety provoked by tumbling Chinese shares knocked the stuffing out of the FTSE 100 index, and dragged British blue-chip stocks to their lowest levels since January.

The reason for the party leaders’ heavy-handed action, which makes a mockery of China’s much-trumpeted desire to reform the financial system and wrest market share away from inefficient state firms, is simple. “China’s leaders are panicking,” says Polk. “They don’t want any volatility in the financial sector, as they truly don’t know how shaky its foundations are.”

In recent weeks, everyone from fund managers to multinationals has begun to speak about what might happen if China’s economy falters. Audi, Jaguar Land Rover and BMW have all slashed local production forecasts or issued local profit warnings. Ford is expecting car sales in China to fall for the first time since 1990. Given how integral China is to global trade, this matters.

Last year, Beijing was the largest sovereign importer of crude oil, copper and soybeans. It is a voracious buyer of French cheese, Scottish salmon and New Zealand lamb, and the world’s biggest consumer of cars and smartphones. The last time China’s economy actually shrank was way back in 1976, a year also marked by the death of a dictator and the denouement of one of the most horrific revolutions in human memory. Back then, a recession in the People’s Republic would have been of only peripheral concern to the outside world. Now, it could drag the whole world economy down with it. Little wonder that alarm bells are ringing in Beijing and beyond.

By arrangement with the Spectator