0:00:09 > 0:00:12China has been booming for more than 30 years,
0:00:12 > 0:00:16consistently the world's fastest-growing major economy.
0:00:16 > 0:00:19This is urban renewal Chinese-style.
0:00:19 > 0:00:26The sheer scale of what they're attempting here is unbelievable.
0:00:26 > 0:00:29While we've been trapped in a global recession,
0:00:29 > 0:00:32China has been expanding massively.
0:00:32 > 0:00:35While the Western world was going to go through economic purgatory,
0:00:35 > 0:00:38at least China could continue growing
0:00:38 > 0:00:41at 10% per annum, which it did.
0:00:41 > 0:00:45But the Chinese were pursuing a risky strategy
0:00:45 > 0:00:47to achieve such impressive growth.
0:00:47 > 0:00:51I had no doubt what their strategy would be.
0:00:51 > 0:00:58I did not imagine one on the scale and scope that they pursued.
0:00:58 > 0:01:01They essentially gave instructions to their banks to...
0:01:01 > 0:01:05The phrase was, "Open your wallets wide and get lending."
0:01:05 > 0:01:09Now China's economy has become dangerously hooked
0:01:09 > 0:01:11on debt-fuelled growth.
0:01:11 > 0:01:15China will have replicated the entire US commercial banking sector
0:01:15 > 0:01:17within the span of half a decade.
0:01:17 > 0:01:22And suddenly, China doesn't look quite so economically invincible.
0:01:22 > 0:01:26Nothing can surely stop China becoming evermore powerful,
0:01:26 > 0:01:28ever richer...or can it?
0:01:30 > 0:01:33Weighed down by its vast debts,
0:01:33 > 0:01:36China's economical miracle may be ending.
0:01:36 > 0:01:40Its boom shaped the world and so, too, would a crash.
0:01:40 > 0:01:43There's no example in history
0:01:43 > 0:01:48of that kind of debt explosion not leading to tears before bedtime.
0:02:02 > 0:02:05Hubei Province, in the heart of China.
0:02:10 > 0:02:14TRANSLATED TANNOY ANNOUNCEMENT:
0:02:22 > 0:02:26You've probably never heard of Hubei's capital city, Wuhan,
0:02:26 > 0:02:30but it's one of hundreds of giant cities across China undergoing
0:02:30 > 0:02:33an almost unbelievable transformation.
0:02:46 > 0:02:48While we've been forced to tighten our belts,
0:02:48 > 0:02:51cities like Wuhan have been building and expanding
0:02:51 > 0:02:53as if there's no tomorrow.
0:02:55 > 0:02:58Blooming heck! This is amazing!
0:03:01 > 0:03:05Since 1980, China has grown faster and more consistently
0:03:05 > 0:03:08than any big economy the world has seen.
0:03:08 > 0:03:12It became an exporting powerhouse, feeding our shopping addiction
0:03:12 > 0:03:15by making all that lovely cheap stuff we crave,
0:03:15 > 0:03:19to become the second-largest economy in the world.
0:03:33 > 0:03:38Today, Wuhan is a city turbocharged for urban renewal.
0:03:38 > 0:03:42A city being remade before our eyes.
0:03:50 > 0:03:55Flattening, excavating, pile-driving, hoisting, building.
0:03:55 > 0:03:58Wuhan's ten million citizens want it all -
0:03:58 > 0:04:00new homes, skyscrapers,
0:04:00 > 0:04:03a gleaming new transport system, the good life -
0:04:03 > 0:04:06and there's one man promising to deliver it.
0:04:11 > 0:04:15So I've come to the Wuhan Citizens' Home,
0:04:15 > 0:04:19a vast palace whose aim primarily is to show off
0:04:19 > 0:04:22the ambitions of this giant city.
0:04:22 > 0:04:26And I've come to meet the man who's spending ?60 billion a year
0:04:26 > 0:04:29modernising Wuhan, Mayor Tang.
0:04:30 > 0:04:33Mayor Tang has power and financial muscle
0:04:33 > 0:04:36that London's Mayor, Boris Johnson, cannot even dream of.
0:04:39 > 0:04:41In Wuhan's enormous town hall,
0:04:41 > 0:04:46there's a big hello from Mayor Tang's army of an entourage.
0:04:46 > 0:04:51Well, hello, Mayor Tang. Thank you so much for welcoming us here today.
0:04:51 > 0:04:55'Tang has the grandest of all grand designs -
0:04:55 > 0:05:00'to transform Wuhan into an ultramodern mega-city,
0:05:00 > 0:05:04'challenging mighty Shanghai as China's second city.'
0:05:04 > 0:05:07So, what do we have here? Oh, my goodness!
0:05:07 > 0:05:10I'm not sure I've ever seen a model
0:05:10 > 0:05:14quite as extraordinarily detailed as this one.
0:05:16 > 0:05:19TRANSLATION: It's the plan approved by the State Council.
0:05:19 > 0:05:23It shows the comprehensive layout of the city in 2020.
0:05:25 > 0:05:29Hundreds of apartment blocks, industrial zones, ring roads,
0:05:29 > 0:05:35bridges, railways and a second international airport, all new.
0:05:35 > 0:05:39TRANSLATION: This 1,200 square metre model shows an actual area
0:05:39 > 0:05:42of more than 200 square kilometres.
0:05:42 > 0:05:44We'll build all this by 2020.
0:05:49 > 0:05:54'The rate of development spending here, ?200 billion over five years,
0:05:54 > 0:05:58'is more than double what we'll spend for the entire UK.'
0:06:02 > 0:06:05TRANSLATION: We believe that within the next 10 to 20 years,
0:06:05 > 0:06:07Wuhan will become a very important city
0:06:07 > 0:06:09for China's economic development.
0:06:09 > 0:06:11A very significant landmark city.
0:06:16 > 0:06:18So we should seize the chance to prepare ourselves
0:06:18 > 0:06:20for the opportunities ahead.
0:06:20 > 0:06:22If we miss this historic chance,
0:06:22 > 0:06:25we won't have another opportunity to do it.
0:06:28 > 0:06:32Mayor Tang believes the day will come when Wuhan is as familiar
0:06:32 > 0:06:36to the world as Paris, Tokyo or London.
0:06:43 > 0:06:47I've been to China many times and witnessed its explosive growth,
0:06:47 > 0:06:51but what's going on here in Wuhan is beyond anything I've ever seen.
0:06:51 > 0:06:54Great blocks being erected, roads being dug up,
0:06:54 > 0:06:57cranes literally everywhere you look.
0:06:57 > 0:07:03The kind of radical surgery that's being undertaken on this vast city
0:07:03 > 0:07:05is beyond anything I've ever experienced.
0:07:07 > 0:07:10But can such spending and building be sustained?
0:07:12 > 0:07:16Are the foundations of Wuhan's and China's economic transformation
0:07:16 > 0:07:18as robust as they seem?
0:07:18 > 0:07:21To understand what's really going on here,
0:07:21 > 0:07:24we need to revisit the devastation in our own backyard
0:07:24 > 0:07:26just over five years ago.
0:07:30 > 0:07:32Is your money safe?
0:07:32 > 0:07:34Something of a financial hurricane.
0:07:34 > 0:07:37One of the ugliest days I have ever seen.
0:07:37 > 0:07:39September 2008.
0:07:39 > 0:07:40A shattering financial crisis
0:07:40 > 0:07:43triggered by the demise of Lehman Brothers
0:07:43 > 0:07:47led to the worst slump in the West for more than 70 years.
0:07:47 > 0:07:51Those with their hands on the levers feared the worst.
0:07:51 > 0:07:54In the US, we really were on the brink.
0:07:54 > 0:08:00We were, I think, quite close to having a...
0:08:00 > 0:08:03a collapse of the financial system that was catastrophic
0:08:03 > 0:08:07and the economic consequences could have been very comparable
0:08:07 > 0:08:10to that of the Great Depression.
0:08:10 > 0:08:14It's been another tumultuous morning on the markets.
0:08:14 > 0:08:17Nightmare on Wall Street. Very, very bad.
0:08:17 > 0:08:20SHOUTING
0:08:20 > 0:08:23The tsunami may have started in America and Britain,
0:08:23 > 0:08:27but it was felt thousands of miles away on the shores of China.
0:08:27 > 0:08:32This was a time of great uncertainty for people in China
0:08:32 > 0:08:35because they were very dependent on exports.
0:08:35 > 0:08:37And as our economies turned down,
0:08:37 > 0:08:41it really exposed this weakness to them.
0:08:45 > 0:08:47When we went broke in the West,
0:08:47 > 0:08:51we stopped buying all those wonderfully cheap goods from China.
0:08:51 > 0:08:56They were confronted with this massive global crisis
0:08:56 > 0:08:58that resulted in a collapse in demand
0:08:58 > 0:09:00for all the stuff they were making.
0:09:00 > 0:09:03So you had massive stockpiles of goods building up,
0:09:03 > 0:09:07you had companies closing down, you had people getting laid off.
0:09:08 > 0:09:11Chinese factories hit the off switch.
0:09:11 > 0:09:14Millions of Chinese workers were put onto the streets,
0:09:14 > 0:09:17wondering if they would ever work again.
0:09:17 > 0:09:20I was in China at the time
0:09:20 > 0:09:24and witnessed the extraordinary spectacle of laid-off workers
0:09:24 > 0:09:27trooping back to their dirt-poor farms in the country.
0:09:30 > 0:09:33Mass unemployment sparked protests.
0:09:33 > 0:09:36China's unelected Communist Party began to fear
0:09:36 > 0:09:40that they might escalate and shake its undemocratic grip on power.
0:09:42 > 0:09:45They were very worried that what had gone wrong
0:09:45 > 0:09:48within the advanced economies' financial systems
0:09:48 > 0:09:51was going to have a big knock-on effect to China
0:09:51 > 0:09:53and therefore to Chinese employment
0:09:53 > 0:09:56and therefore to the whole sustainability
0:09:56 > 0:09:58of the social peace and the political system.
0:09:58 > 0:10:01The Chinese are extremely sensitive
0:10:01 > 0:10:04to the social implications of weakening growth
0:10:04 > 0:10:07because, obviously, high growth is really what gives
0:10:07 > 0:10:11the Communist Party its legitimacy in the eyes of its citizens.
0:10:12 > 0:10:15The world's two economic superpowers,
0:10:15 > 0:10:19the US and China, were in deep trouble.
0:10:22 > 0:10:25America's Treasury Secretary, Hank Paulson, was desperate
0:10:25 > 0:10:28to persuade his Chinese government counterparts
0:10:28 > 0:10:30that they were in it together.
0:10:31 > 0:10:35My counterpart at the time, a very senior Chinese minister,
0:10:35 > 0:10:37Wang Qishan, said to me,
0:10:37 > 0:10:41"You know, you used to be my teacher when it came to financial markets.
0:10:41 > 0:10:44"Now my teacher doesn't seem to be so smart."
0:10:44 > 0:10:47The hotline between Beijing and Washington,
0:10:47 > 0:10:50between Hank Paulson and senior Chinese,
0:10:50 > 0:10:52very senior Chinese government officials,
0:10:52 > 0:10:54were running on a daily basis.
0:10:54 > 0:10:58The Chinese were very concerned about the health of the US economy,
0:10:58 > 0:11:04and Hank Paulson painted a picture of truly dire consequences
0:11:04 > 0:11:08to flow from the collapse of the system.
0:11:08 > 0:11:10There was just a kind of an automatic reaction,
0:11:10 > 0:11:14which is that we cannot afford to allow growth
0:11:14 > 0:11:16to drop from what had been double-digit rates,
0:11:16 > 0:11:189 or 10% per annum,
0:11:18 > 0:11:20to the kind of maybe 4 or 5%
0:11:20 > 0:11:23that was then on the radar screen at that time.
0:11:25 > 0:11:28So, under pressure from America
0:11:28 > 0:11:31for China to save not only itself, but the world,
0:11:31 > 0:11:35the Chinese government took emergency measures
0:11:35 > 0:11:39to stimulate the economy to get growth going again.
0:11:44 > 0:11:46Less than two months after Lehman's collapse,
0:11:46 > 0:11:52China unveiled its rescue plan, vowing to be fast and forceful.
0:11:52 > 0:11:56They just hit the accelerator on investment.
0:11:56 > 0:11:58Investment is one of those things
0:11:58 > 0:12:03which at least in a state-dominated economy you can just switch on.
0:12:03 > 0:12:09I had no doubt what their strategy would be,
0:12:09 > 0:12:12the kind of stimulus programme they did.
0:12:12 > 0:12:15I did not imagine one on the scale
0:12:15 > 0:12:19and scope that they pursued.
0:12:28 > 0:12:32Even before the crash, China was investing and building
0:12:32 > 0:12:36at a rate that was off the scale in terms of magnitude.
0:12:36 > 0:12:39But rather than cut back, as many had expected,
0:12:39 > 0:12:41China now went on the kind of construction binge
0:12:41 > 0:12:45that would have daunted even Egypt's pharaohs.
0:12:45 > 0:12:49If you cast your mind back to 2007/2008,
0:12:49 > 0:12:52pretty much economists all over the world were saying
0:12:52 > 0:12:56Chinese investment was unsustainably large.
0:12:56 > 0:12:59The investment rate, far from falling
0:12:59 > 0:13:03in the way that people had suggested was necessary,
0:13:03 > 0:13:08went up from about the low 40% of GDP to 50%.
0:13:10 > 0:13:13A ?400 billion stimulus
0:13:13 > 0:13:16drove the biggest building programme in history.
0:13:18 > 0:13:21A new skyscraper every five days.
0:13:22 > 0:13:25More than 30 new airports.
0:13:28 > 0:13:31Metro systems underway in 25 cities.
0:13:34 > 0:13:39Over 6,000 miles of high-speed railway track AND all the stations.
0:13:42 > 0:13:44The three longest bridges in the world.
0:13:47 > 0:13:5026,000 miles of motorways.
0:13:50 > 0:13:53All in five years.
0:14:00 > 0:14:04This is urban renewal Chinese-style.
0:14:04 > 0:14:07A bit more ambitious than what we typically get up to in the West.
0:14:08 > 0:14:14The sheer scale of what they're attempting here is unbelievable!
0:14:17 > 0:14:19An ambitious city like Wuhan
0:14:19 > 0:14:22needs a modern, comprehensive transport system.
0:14:22 > 0:14:24These are the foundations of its new metro.
0:14:29 > 0:14:33TRANSLATION: There are 500 workers here, if you include the managers.
0:14:34 > 0:14:37We work day and night in four teams over three shifts.
0:14:39 > 0:14:40When did you start building here
0:14:40 > 0:14:43and when will the station be finished?
0:14:43 > 0:14:46Our project started on July 13th 2011.
0:14:46 > 0:14:50The completion date will be September 2014.
0:14:52 > 0:14:54This huge station, if completed on time,
0:14:54 > 0:14:57will have taken three years to build -
0:14:57 > 0:14:59half the time it's taking to finish
0:14:59 > 0:15:01one of London's new Crossrail stations -
0:15:01 > 0:15:05and by 2017, Wuhan will have five new subway lines
0:15:05 > 0:15:08and 133 miles of new track.
0:15:10 > 0:15:14It's just one of 10,000 construction sites here.
0:15:14 > 0:15:18But how can so much spending and building happen so fast?
0:15:20 > 0:15:22Well, one reason is because the Chinese government
0:15:22 > 0:15:25still owns so much of the economy.
0:15:25 > 0:15:29Despite our image of a new China driven by raw capitalism,
0:15:29 > 0:15:32some of the old communist ways live on.
0:15:32 > 0:15:33Giant state-owned companies
0:15:33 > 0:15:36bossed by the super-powerful Communist Party
0:15:36 > 0:15:39are still at the heart of China's economy.
0:15:39 > 0:15:41After the great crash of 2008
0:15:41 > 0:15:44is a time to put on the hard hats.
0:15:44 > 0:15:48The global economy, the Chinese economy were melting down,
0:15:48 > 0:15:51and the Chinese government took evasive action.
0:15:51 > 0:15:54It pulled the levers at its disposal.
0:16:02 > 0:16:04This is Wuhan Iron Steel,
0:16:04 > 0:16:07one of the world's biggest steel companies.
0:16:09 > 0:16:12Sprawling mill shops more than half a mile long.
0:16:17 > 0:16:2136 million tonnes of iron and steel spewed out every year,
0:16:21 > 0:16:25equivalent to an Eiffel Tower every two hours.
0:16:26 > 0:16:30Nationalised by Chairman Mao, it's a paternalistic throwback
0:16:30 > 0:16:33in today's China that Mao himself might find familiar.
0:16:35 > 0:16:39Over 100,000 workers on its books who can't be sacked.
0:16:46 > 0:16:48TRANSLATION: My parents and grandparents
0:16:48 > 0:16:50all worked at Wuhan Iron Steel.
0:16:50 > 0:16:53I'm a genuine third-generation employee.
0:16:53 > 0:16:57I know the company well and feel very attached to it.
0:16:58 > 0:17:01They're looked after from cradle to grave.
0:17:01 > 0:17:03Everything is provided for them.
0:17:03 > 0:17:05And their loyalty? Well, it's total.
0:17:06 > 0:17:10TRANSLATION: A state-owned enterprise is like the head of a family.
0:17:10 > 0:17:12They care about their employees in every way.
0:17:12 > 0:17:16Food, clothes, accommodation, transport,
0:17:16 > 0:17:18marriage, children, everything.
0:17:18 > 0:17:21You don't get that in a private company.
0:17:24 > 0:17:27For all the growth in China's private sector,
0:17:27 > 0:17:30state-owned enterprises are still the major players
0:17:30 > 0:17:33in everything from steel to oil,
0:17:33 > 0:17:35shipping, electricity and banking.
0:17:35 > 0:17:38When the government unleashed all that spending after the crash,
0:17:38 > 0:17:40it instructed those state-owned companies
0:17:40 > 0:17:44to rapidly expand and build new factories.
0:17:46 > 0:17:49This created employment and it also meant that the building boom
0:17:49 > 0:17:52would be fuelled by a glut of cheap materials.
0:17:59 > 0:18:02State-owned companies like Wuhan Iron Steel
0:18:02 > 0:18:06re-energised China's flagging economy.
0:18:06 > 0:18:09The economic slow-down in China was rapidly forgotten.
0:18:09 > 0:18:15The boom times returned faster than seemed humanly possible.
0:18:15 > 0:18:18The reaction to China's stimulus programme
0:18:18 > 0:18:22was one of widespread relief,
0:18:22 > 0:18:26and that China would be the world's salvation.
0:18:26 > 0:18:29That while the Western world was going to go through
0:18:29 > 0:18:32a kind of a form of economic purgatory,
0:18:32 > 0:18:34that, at least, you know, China could continue
0:18:34 > 0:18:37growing at 10% per annum,
0:18:37 > 0:18:40which it did in the rebound in 2010.
0:18:43 > 0:18:47All we could do was watch and marvel.
0:18:47 > 0:18:49Without Chinese expansion,
0:18:49 > 0:18:54the entire world economy would have been flat as a pancake.
0:18:54 > 0:18:59Now, we may think it's been tough for us over the past few years,
0:18:59 > 0:19:03but if the Chinese economy had been in recession as well,
0:19:03 > 0:19:05well, life for us in Britain
0:19:05 > 0:19:09and in much of the West would have been even tougher.
0:19:15 > 0:19:18But the revival wasn't all that it seemed,
0:19:18 > 0:19:20because only a fraction of the money
0:19:20 > 0:19:22needed for the investment splurge
0:19:22 > 0:19:24came from taxpayers and state funds.
0:19:27 > 0:19:31Most of it was borrowed from banks.
0:19:31 > 0:19:35The only lever they had which could make a difference
0:19:35 > 0:19:37within months rather than years
0:19:37 > 0:19:40is to hit the investment and hit the credit button,
0:19:40 > 0:19:44and they essentially gave instructions to their banks to...
0:19:44 > 0:19:48The phrase was, "Open your wallets wide and get lending."
0:19:48 > 0:19:50It was really just pushing on an open door.
0:19:50 > 0:19:52They just said, "We want you to lend a lot of money."
0:19:52 > 0:19:54And the banks were very obliging.
0:19:54 > 0:19:56But that was really the beginning
0:19:56 > 0:19:59of what subsequently became a credit orgy, really.
0:20:04 > 0:20:07A gushing torrent of money flowed from banks to developers
0:20:07 > 0:20:09and state-owned companies.
0:20:09 > 0:20:12In just the first year of the stimulus programme,
0:20:12 > 0:20:16Chinese banks lent almost ?1 trillion,
0:20:16 > 0:20:19double the target they'd been set by the government.
0:20:19 > 0:20:22And that's equivalent to all the debt on the books
0:20:22 > 0:20:24of Britain's biggest retail bank, Lloyds.
0:20:24 > 0:20:28And that was just what the unreliable official figures
0:20:28 > 0:20:29were saying.
0:20:33 > 0:20:35Now, by 2010, Beijing did begin to worry
0:20:35 > 0:20:38that the lending binge was getting out of hand
0:20:38 > 0:20:41and the government ordered banks to slow down,
0:20:41 > 0:20:45but it turned out that the Communist Party's top officials
0:20:45 > 0:20:48weren't quite as powerful as they thought.
0:20:48 > 0:20:51There's an old dictum from Chinese history
0:20:51 > 0:20:54about the emperor is far away and the mountains are high,
0:20:54 > 0:20:59which kind of speaks to the topic of the central government in Beijing
0:20:59 > 0:21:04having difficulty getting its ideas and its views implemented
0:21:04 > 0:21:07by local and provincial governments,
0:21:07 > 0:21:11and that's certainly proven to be the case into modern times.
0:21:15 > 0:21:19When investment can no longer be financed directly by the banks,
0:21:19 > 0:21:22local governments and developers found other sources of money.
0:21:22 > 0:21:25New lending institutions called shadow banks
0:21:25 > 0:21:28were created and enlarged.
0:21:28 > 0:21:31Lending by the formal banking system
0:21:31 > 0:21:35and, in particular, the state-owned banks which dominate the system,
0:21:35 > 0:21:39whereas that began to slow down at least somewhat,
0:21:39 > 0:21:43what is called a shadow banking system
0:21:43 > 0:21:46emerged to, as it were, supplement it.
0:21:46 > 0:21:48So these off-balance-sheet entities
0:21:48 > 0:21:53were able to go to the banks, borrow copious amounts of money
0:21:53 > 0:21:58so that they built themselves up into enormous borrowing entities.
0:21:58 > 0:22:00There were a whole series of developments
0:22:00 > 0:22:04which, for people who have gone through the financial crisis,
0:22:04 > 0:22:09are eerily reminiscent of some of the off-balance-sheet vehicles,
0:22:09 > 0:22:12the SIVs and the conduits, as we used to call them,
0:22:12 > 0:22:16which proliferated in the pre-crisis shadow banking system.
0:22:16 > 0:22:20So that raging torrent of credit wasn't stemmed,
0:22:20 > 0:22:23but because it was now growing outside of the official banks,
0:22:23 > 0:22:28it was even harder for Beijing to see and control.
0:22:28 > 0:22:31The point is that hundreds of billions of pounds of lending
0:22:31 > 0:22:33is not going through the big banks.
0:22:33 > 0:22:37It's being provided by other institutions, known as shadow banks,
0:22:37 > 0:22:40some of them set up by local authorities
0:22:40 > 0:22:42to finance huge developments.
0:22:42 > 0:22:46And the point about that lending via the shadow banks is,
0:22:46 > 0:22:49it's very hard to see. So, to that extent,
0:22:49 > 0:22:54a huge proportion of China's big debts are hidden.
0:22:58 > 0:23:01That picture was quite disturbing to us
0:23:01 > 0:23:03because it means that more and more of this credit
0:23:03 > 0:23:06is shifting into these hidden channels
0:23:06 > 0:23:09in essentially a shadow financial system.
0:23:09 > 0:23:10And we don't have data on that,
0:23:10 > 0:23:13we don't really know who's doing the lending,
0:23:13 > 0:23:15who the borrowers are, what the quality of assets is,
0:23:15 > 0:23:18what sectors of the economy the money is going to.
0:23:19 > 0:23:23China had become dangerously addicted to debt.
0:23:31 > 0:23:34A lot of that lending was for modernising China.
0:23:36 > 0:23:38And let's be in no doubt,
0:23:38 > 0:23:41much of the development is badly needed.
0:23:42 > 0:23:44In transport, for example.
0:23:44 > 0:23:47OK. So I think I want Line 1...
0:23:47 > 0:23:50'A decent metro isn't a luxury
0:23:50 > 0:23:53'in a city of more than 10 million people like Wuhan,
0:23:53 > 0:23:56'but it's not cheap, at more than ?30 billion.'
0:23:56 > 0:24:00Why is nothing coming out? This doesn't make any sense to me.
0:24:00 > 0:24:03'There'll be another two million people here in Wuhan
0:24:03 > 0:24:05'within ten years, maybe more.'
0:24:05 > 0:24:07I've got it. OK.
0:24:07 > 0:24:09HE LAUGHS
0:24:09 > 0:24:12It's the great demographic story of our time.
0:24:12 > 0:24:16400 million people relocating from Chinese farms to cities
0:24:16 > 0:24:19over the last 30 years, and they need to get around.
0:24:26 > 0:24:30I can watch the football on a screen in the metro.
0:24:30 > 0:24:32Not bad, is it?
0:24:34 > 0:24:36And they need somewhere to live.
0:24:45 > 0:24:49Nearly ten million homes each year are being built in China,
0:24:49 > 0:24:53often huge apartment blocks in the suburbs, like this one.
0:24:57 > 0:25:00Cheap credit, a rapidly expanding urban population
0:25:00 > 0:25:03and a growing middle class have created a potent mix,
0:25:03 > 0:25:06which has led to soaring property prices.
0:25:06 > 0:25:09It's reminiscent of the housing market booms
0:25:09 > 0:25:12that preceded the busts we've seen recently
0:25:12 > 0:25:14in Ireland, Spain and America.
0:25:14 > 0:25:16In some Chinese cities,
0:25:16 > 0:25:20house prices are still rising by up to 20% a year.
0:25:22 > 0:25:26This is what China is all about.
0:25:26 > 0:25:29Remaking the landscape, modernising the country,
0:25:29 > 0:25:33generating wealth at breakneck speed.
0:25:33 > 0:25:35Just here will rise
0:25:35 > 0:25:38the third or second-tallest building in the world -
0:25:38 > 0:25:42the developers are being a bit coy about quite how high it'll climb -
0:25:42 > 0:25:46surrounded by almost a million square metres of
0:25:46 > 0:25:49new offices and new homes.
0:25:51 > 0:25:54It'll be a ?3 billion urban status symbol,
0:25:54 > 0:25:59whose point is to shout Wuhan's importance to the rest of the world.
0:25:59 > 0:26:01Extremely kind of you.
0:26:03 > 0:26:06TRANSLATION:
0:26:06 > 0:26:07It's quite phenomenal.
0:26:10 > 0:26:12Lovely. Thank you.
0:26:13 > 0:26:17This development is directed at the top of the market.
0:26:21 > 0:26:24TRANSLATION: This is the show home living room.
0:26:24 > 0:26:27It has a balcony. The view is lovely.
0:26:27 > 0:26:30You can see the Yangtze and Hankou district on the other side.
0:26:31 > 0:26:33It's a very good view.
0:26:37 > 0:26:39This room is the master bedroom.
0:26:39 > 0:26:43Behind you is the bathroom and next to that is a wardrobe.
0:26:43 > 0:26:45It's a very comfortable room.
0:26:47 > 0:26:50It's good to have the wine glasses on the bed all ready.
0:26:50 > 0:26:52Fantastic.
0:26:53 > 0:26:56So is this a typical apartment for the buildings
0:26:56 > 0:27:00or is this one of the more luxurious, top-of-the-range ones?
0:27:05 > 0:27:08Normally, our show homes are pretty typical.
0:27:08 > 0:27:12At 188 square metres, this is a typical apartment -
0:27:12 > 0:27:14three bedrooms and two living rooms.
0:27:17 > 0:27:19Its best feature is the lovely view.
0:27:19 > 0:27:21You can see directly to the Yangtze.
0:27:24 > 0:27:26So, what would be the price of this apartment?
0:27:26 > 0:27:30The total price for this flat is three million RMB.
0:27:30 > 0:27:36So three million RMB is approximately ?300,000.
0:27:36 > 0:27:40What sort of person, what sort of people would buy this flat?
0:27:40 > 0:27:43Our customers have one thing in common
0:27:43 > 0:27:46and that is they are looking for a better life.
0:27:46 > 0:27:49How are you doing with selling these properties?
0:27:49 > 0:27:50Is there much demand?
0:27:50 > 0:27:53Yes, I should say.
0:27:53 > 0:27:56There is quite a big demand and sales are very good.
0:27:58 > 0:28:02In a city where the average wage is not much more than ?4,000 a year,
0:28:02 > 0:28:06there aren't many who can raise 70 times that salary
0:28:06 > 0:28:08to buy an apartment like this one.
0:28:08 > 0:28:12Here's the shocking paradox of China's house-building frenzy -
0:28:12 > 0:28:16it's the rich minority who are buying most of the new properties
0:28:16 > 0:28:19and often keeping those homes empty,
0:28:19 > 0:28:23treating them as investments, rather than living in them.
0:28:23 > 0:28:25Wuhan is the norm, it's not the exception,
0:28:25 > 0:28:28because if you go to other cities, many of those cities
0:28:28 > 0:28:31are doing exactly the same thing as Wuhan is doing.
0:28:31 > 0:28:35So, in my view, the over-supply situation
0:28:35 > 0:28:40is quite widespread in China in the housing market.
0:28:40 > 0:28:44So our estimate, which obviously may not be 100% accurate,
0:28:44 > 0:28:49but our best estimate is around 15%.
0:28:49 > 0:28:53So, 15% of properties in a country as enormous as China
0:28:53 > 0:28:56you think are empty?
0:28:56 > 0:29:00Yes. Grand houses have a higher vacancy rate.
0:29:00 > 0:29:04So the more expensive the property, the bigger the vacancy rate?
0:29:04 > 0:29:08Yes. They're owned, but people don't live in them. Yes.
0:29:08 > 0:29:12One of the things that's been feeding into this problem is
0:29:12 > 0:29:17the political structure here that encourage local governments
0:29:17 > 0:29:22to just undertake project after project after project
0:29:22 > 0:29:27to show something, even though the economic returns on that
0:29:27 > 0:29:30may not justify the credit to begin with.
0:29:30 > 0:29:33The problem isn't just homes and apartments
0:29:33 > 0:29:35too expensive for people to live in.
0:29:35 > 0:29:39The white elephants from a boom that's gone too far
0:29:39 > 0:29:42are everywhere to be seen.
0:29:42 > 0:29:46In Huainan, where average annual income is ?1,800 a year,
0:29:46 > 0:29:50they're spending ?180 million on a new Olympic-themed sports complex...
0:29:52 > 0:29:55..a fitting sister for an exhibition hall
0:29:55 > 0:29:57built with a bold musical flourish.
0:29:57 > 0:30:01In the largely rural district of Mentougou,
0:30:01 > 0:30:05they've splashed out on government offices modelled on the Kremlin.
0:30:06 > 0:30:10In Ganzhou, there's no danger of not knowing what time it is.
0:30:10 > 0:30:16But the prize for ambition probably goes to Kangbashi in Inner Mongolia.
0:30:16 > 0:30:18It's home to just 100,000 people
0:30:18 > 0:30:21but it's built the kind of municipal palaces, a sports centre,
0:30:21 > 0:30:25museum, a concert hall that would make London or New York proud.
0:30:25 > 0:30:27And the bill?
0:30:27 > 0:30:31Just ?24 billion in debts to repay.
0:30:36 > 0:30:41So, why can't Beijing just force the provinces to stop the excesses?
0:30:43 > 0:30:45Well, the building boom has made
0:30:45 > 0:30:48thousands and thousands of local party officials very rich.
0:30:50 > 0:30:53There used to be a little village here.
0:30:53 > 0:30:57Now it's a playground for China's new rich, who live in the swanky
0:30:57 > 0:31:00mansions and new apartments that have recently been built.
0:31:00 > 0:31:02Now, when these sorts of developments take place,
0:31:02 > 0:31:06there are big profits for the local authorities,
0:31:06 > 0:31:10who expropriate the land and then sell it on to the developers and,
0:31:10 > 0:31:14allegedly, there are big backhanders for well-placed officials.
0:31:14 > 0:31:17We don't know if that's what happened in this case
0:31:17 > 0:31:19but it is what local people believe.
0:31:28 > 0:31:31Fan Yang is an environmentalist and local campaigner
0:31:31 > 0:31:33who grew up near here.
0:31:33 > 0:31:38When the development was happening, what did people feel about it?
0:31:38 > 0:31:41Were there protests or did it go through smoothly?
0:31:41 > 0:31:46As I know, there are many people not really happy about it.
0:31:46 > 0:31:50Even till now, there are still people trying to do something
0:31:50 > 0:31:54to stop this kind of thing to happen again.
0:31:54 > 0:31:56If you look around East Lake,
0:31:56 > 0:31:59are there other developments like this one going on now?
0:31:59 > 0:32:03Yeah, actually all around East Lake
0:32:03 > 0:32:07there are many similar construction sites happening.
0:32:07 > 0:32:08As somebody who grew up here,
0:32:08 > 0:32:12do you like what's happened to your back yard?
0:32:12 > 0:32:19Not really, because I still prefer the more natural part of East Lake.
0:32:19 > 0:32:22This is becoming the rich man's paradise,
0:32:22 > 0:32:26so it's really kind of exclusive now.
0:32:29 > 0:32:34The whole system of development by local authorities
0:32:34 > 0:32:38has enriched the people who run those local authorities,
0:32:38 > 0:32:40not in a way that's easy to see
0:32:40 > 0:32:43but, nonetheless, everybody knows it happens.
0:32:43 > 0:32:47Can the central government really reform a system
0:32:47 > 0:32:51that is enriching so many local party members?
0:32:51 > 0:32:53They're already beginning to do this.
0:32:53 > 0:32:57How many local officials have gone to jail
0:32:57 > 0:33:02or have been given sentences by the courts in the last six months?
0:33:02 > 0:33:03It's been incredible.
0:33:03 > 0:33:06And the process has actually just begun and
0:33:06 > 0:33:09the Chinese expression is...
0:33:09 > 0:33:13"To kill the chicken to scare the monkey," in other words.
0:33:14 > 0:33:20So that is, in fact, what is happening on the disciplinary side.
0:33:20 > 0:33:26On the other side, in terms of enrichment or local officials,
0:33:26 > 0:33:28I think it's a generational issue
0:33:28 > 0:33:32because China has been poor for a long, long time
0:33:32 > 0:33:35and when people have opportunities to make some money,
0:33:35 > 0:33:37they go out and make money.
0:33:37 > 0:33:40And this is where also the entrepreneurial spirit comes in.
0:33:40 > 0:33:45I think what is really important in this particular context
0:33:45 > 0:33:48is the educational, cultural,
0:33:48 > 0:33:53social and moral standards of local officials.
0:33:53 > 0:33:57The senior level are very sophisticated
0:33:57 > 0:34:01but not necessarily will their policies be implemented
0:34:01 > 0:34:05properly at the local levels because you simply don't have,
0:34:05 > 0:34:10out of the 1.3 billion, enough people who are sophisticated
0:34:10 > 0:34:16and educated and moral enough to cover all the county level.
0:34:16 > 0:34:20But that's not something that can be addressed very quickly.
0:34:20 > 0:34:23It's generational. But things are getting better.
0:34:29 > 0:34:32FANS CHANT
0:34:36 > 0:34:39So just tell me, what have the rather passionate fans on our right
0:34:39 > 0:34:41been shouting?
0:34:41 > 0:34:44Actually, they were just shouting, "The referee is a moron." OK.
0:34:44 > 0:34:48That's a very traditional English chant, the referee's a moron.
0:34:48 > 0:34:52What else have they been shouting? You know, many F-words.
0:34:52 > 0:34:56Oh, really? There's quite a lot of swearing in Mandarin, is there?
0:34:56 > 0:34:58Yeah, many swearings, yeah.
0:34:58 > 0:35:02OK, I feel very much at home here. Yeah. Yeah.
0:35:06 > 0:35:09Now, the government says it's cracking down on corruption
0:35:09 > 0:35:12and dampening the construction and housing market booms.
0:35:12 > 0:35:16But in this Chinese premier league football stadium,
0:35:16 > 0:35:21that's not even a tenth full, it's easy to fear the worst.
0:35:21 > 0:35:23House prices have been going up and up and up.
0:35:23 > 0:35:25Do you think they'll continue to go up?
0:35:25 > 0:35:28I really don't know when this is going to stop,
0:35:28 > 0:35:31when it's going to fall, because
0:35:31 > 0:35:35there are many times people... expecting the price will drop
0:35:35 > 0:35:39but it never happens till now, so it's really a mystery.
0:35:39 > 0:35:42Because one of the things I've noticed going around the city
0:35:42 > 0:35:45is all the buildings with no lights on,
0:35:45 > 0:35:49which suggests that they've been built but nobody lives there.
0:35:49 > 0:35:51What do you think is going on?
0:35:51 > 0:35:53I think the problem is that most of the people,
0:35:53 > 0:35:56they cannot afford to buy those houses,
0:35:56 > 0:36:00but a few people, they own too much, too many houses.
0:36:00 > 0:36:02What about young people like yourself?
0:36:02 > 0:36:04How easy is it to buy a house?
0:36:04 > 0:36:06I can say it's not easy.
0:36:06 > 0:36:11With our salary, you can afford a house
0:36:11 > 0:36:15if you can work for, like, 50 years.
0:36:23 > 0:36:27Almost five years after the beginning of the great stimulus,
0:36:27 > 0:36:31in the summer of 2013, everything looked brilliant in China.
0:36:34 > 0:36:37Growing faster than any other big competitor
0:36:37 > 0:36:41and already the world's number two economy, its gleaming modern cities
0:36:41 > 0:36:45were full of magnificent skyscrapers and swanky shopping malls.
0:36:47 > 0:36:49No people in history have been enriched on the scale
0:36:49 > 0:36:51and at the speed of China's.
0:36:56 > 0:37:01But then, in the middle of 2013, alarms started to sound
0:37:01 > 0:37:05in the important markets used by banks to raise money.
0:37:05 > 0:37:08We've got breaking news coming out of China...
0:37:08 > 0:37:11Could it be 2008 all over again...for China?
0:37:11 > 0:37:15China's biggest squeeze on credit in at least a decade.
0:37:16 > 0:37:21Overnight, interest rates and interbank lending rates shot up to
0:37:21 > 0:37:25extraordinary high levels which are most unusual in the case of China.
0:37:25 > 0:37:28So, at the time, there was a real scare
0:37:28 > 0:37:32that this was the beginning of China's credit crunch.
0:37:32 > 0:37:35A full-blown credit crunch, an inability to borrow
0:37:35 > 0:37:37would have been fatal for some Chinese banks
0:37:37 > 0:37:40and very expensive for the Chinese government,
0:37:40 > 0:37:43which would have felt the need to bail out the bigger banks.
0:37:43 > 0:37:45China's economy would have juddered to a halt
0:37:45 > 0:37:47as the flow of loans froze.
0:37:47 > 0:37:50The financial markets in China and outside
0:37:50 > 0:37:53were expecting the People's Bank of China, the central bank,
0:37:53 > 0:37:57to continue to add liquidity and the People's Bank of China didn't do it.
0:37:57 > 0:38:00In fact, the credit squeeze had initially been engineered
0:38:00 > 0:38:03by the government as a temporary thing to warn banks
0:38:03 > 0:38:06that the days of cheap credit were over.
0:38:06 > 0:38:09The central bank was keen to, you know, place
0:38:09 > 0:38:12some limits on the growth of credit.
0:38:12 > 0:38:14Sitting behind that, there was undoubtedly some desire
0:38:14 > 0:38:18to say let's start pulling back the growth of credit,
0:38:18 > 0:38:23both in the formal banking system and the shadow banking system.
0:38:28 > 0:38:30But markets went haywire,
0:38:30 > 0:38:32taking on a dangerous life of their own.
0:38:32 > 0:38:36The all-powerful government was losing its grip.
0:38:36 > 0:38:40Fearing the worst, China's central bank, the People's Bank of China,
0:38:40 > 0:38:44pumped new money, liquidity, back into the banks.
0:38:44 > 0:38:47Conditions returned to near normal,
0:38:47 > 0:38:49but the world had been put on notice
0:38:49 > 0:38:52of the frail financial heart of China's economy.
0:38:52 > 0:39:00Give me an idea of the scale of the lending that we've seen since 2008.
0:39:01 > 0:39:03It's off the charts, really.
0:39:03 > 0:39:06Most people are aware we've had a credit boom in China
0:39:06 > 0:39:08but they don't know the scale.
0:39:08 > 0:39:12At the beginning of all of this, in 2008, the Chinese banking sector
0:39:12 > 0:39:16was roughly ten trillion US dollars in size.
0:39:16 > 0:39:21Right now, it's on the order of 24 to 25 trillion US dollars.
0:39:21 > 0:39:25That incremental increase of 14 to 15 trillion US dollars
0:39:25 > 0:39:30is equivalent to the size of the entire US commercial banking sector,
0:39:30 > 0:39:33which took more than a century to build.
0:39:33 > 0:39:37So that means China will have replicated the entire US system
0:39:37 > 0:39:39in the span of half a decade.
0:39:43 > 0:39:46China's total indebtedness is now equivalent to twice the value
0:39:46 > 0:39:49of everything it produces, twice its GDP,
0:39:49 > 0:39:54up from 125% just five years ago.
0:39:54 > 0:40:00Now, there's no example in history of that kind of debt explosion
0:40:00 > 0:40:03not leading to tears before bedtime.
0:40:10 > 0:40:13Too much debt, too much investment?
0:40:13 > 0:40:16The solution, if there is one,
0:40:16 > 0:40:19requires an abandonment of an important Chinese tradition.
0:40:19 > 0:40:22Oh, my goodness! Oh, my goodness.
0:40:22 > 0:40:23Wow!
0:40:25 > 0:40:28So...beautiful.
0:40:30 > 0:40:33The way it picks up all the eddies and the currents of the air.
0:40:33 > 0:40:34Just astonishing.
0:40:36 > 0:40:39The old China still lives on,
0:40:39 > 0:40:41not just in its colourful traditions
0:40:41 > 0:40:44but in the principles on which the economy is based.
0:40:52 > 0:40:55Unlike businesses and local governments,
0:40:55 > 0:40:58Chinese people squirrel away their money,
0:40:58 > 0:41:00saving almost like no-one else.
0:41:00 > 0:41:02The recent memory of grinding poverty
0:41:02 > 0:41:06and the lack of a comprehensive welfare state or pensions
0:41:06 > 0:41:09encourage the Chinese not to spend.
0:41:09 > 0:41:11Instead, Chinese households save
0:41:11 > 0:41:14almost a third of everything they earn,
0:41:14 > 0:41:18whereas we in the UK save something like a 20th.
0:41:20 > 0:41:22Oh, almost!
0:41:24 > 0:41:26The big and simple point is this -
0:41:26 > 0:41:29China's economy is dangerously unbalanced, too dependent
0:41:29 > 0:41:34on debt-fuelled investment with not enough spending or shopping.
0:41:38 > 0:41:45So, the Chinese economy has to become more balanced
0:41:45 > 0:41:51and I can tell you, from my own experience, it's not easy.
0:41:51 > 0:41:53Whoa, my goodness!
0:41:53 > 0:41:55Whoa!
0:42:00 > 0:42:02The way to make the economy more balanced
0:42:02 > 0:42:06is for the Chinese to become a bit more like us decadent,
0:42:06 > 0:42:08spendthrift Westerners.
0:42:08 > 0:42:12They'd be sensible not to become AS hooked on consumption as we are,
0:42:12 > 0:42:15but they do need to consume a great deal more
0:42:15 > 0:42:19if they don't want the good economic times to disappear.
0:42:19 > 0:42:22My goodness, look at this wonderful stuff.
0:42:24 > 0:42:27This is definitely my kind of China -
0:42:27 > 0:42:30teeming commerce, deals on every side.
0:42:30 > 0:42:33My blood is up, I've got to buy something.
0:42:34 > 0:42:36Garish underpants?
0:42:36 > 0:42:39Hmm, not sure. I might have to come back.
0:42:44 > 0:42:47What do you think? Feels like my size. Is there a mirror?
0:42:48 > 0:42:52Certainly suits the Harry Worth look.
0:42:52 > 0:42:53OK, I quite like it.
0:42:53 > 0:42:55Yeah, I think probably that one.
0:42:55 > 0:42:59So we've got... Perfect, thank you very much. Thank you.
0:43:00 > 0:43:02And I'm rather pleased with that.
0:43:02 > 0:43:06I've got a bit of a bargain and a rather stylish one to boot.
0:43:08 > 0:43:11China's government has for years recognised that a more
0:43:11 > 0:43:15sustainable economy requires more shopping and consumer spending
0:43:15 > 0:43:18but, although consumption has been growing,
0:43:18 > 0:43:21it still only accounts for a third of China's economy,
0:43:21 > 0:43:24compared with two-thirds in much of the West.
0:43:24 > 0:43:26As for that investment binge,
0:43:26 > 0:43:29well, it represents a half of China's economy.
0:43:29 > 0:43:31Or, to put it another way,
0:43:31 > 0:43:35there simply aren't enough hours in the day for Chinese people
0:43:35 > 0:43:39to shop and replace investment with consumption
0:43:39 > 0:43:42as the engine of growth any time soon.
0:43:42 > 0:43:46That's why the investment in white elephants goes on
0:43:46 > 0:43:50and the dangerous credit bubble continues to grow.
0:43:50 > 0:43:51Banks are still expanding.
0:43:51 > 0:43:56This year, credit growth is still twice as fast as GDP growth
0:43:56 > 0:43:59and the stock of credit is twice as large as the entire economy.
0:43:59 > 0:44:03So there is no way... People who are more positive on China
0:44:03 > 0:44:06think that they'll find a way to grow out of this problem.
0:44:06 > 0:44:09Mathematically, there is no way to grow out of this problem
0:44:09 > 0:44:13when credit is twice the size of the economy and growing twice as fast.
0:44:16 > 0:44:21By allowing and encouraging the mother of all lending sprees
0:44:21 > 0:44:23to keep the economy growing,
0:44:23 > 0:44:27the Chinese government is placing an enormous bet.
0:44:27 > 0:44:30The longer it goes on, the bigger the interest bill,
0:44:30 > 0:44:33the greater the risk that borrowers -
0:44:33 > 0:44:36households, local government, developers -
0:44:36 > 0:44:40won't be able to pay their bills,
0:44:40 > 0:44:44and the bigger the danger that when the bill arrives,
0:44:44 > 0:44:47China won't be able to afford it.
0:44:52 > 0:44:56Here in Wuhan, one of China's most indebted cities,
0:44:56 > 0:44:58they don't seem desperately concerned about
0:44:58 > 0:45:02the impending arrival of the bill. Mayor Tang is an optimist.
0:45:03 > 0:45:10I've seen quite a few different numbers for the debt of Wuhan
0:45:10 > 0:45:13and I'm privileged now to be with a man who knows.
0:45:13 > 0:45:16What is the real figure for the debt of Wuhan?
0:45:25 > 0:45:28TRANSLATION: We are currently carrying out an audit
0:45:28 > 0:45:30as required by the central government.
0:45:33 > 0:45:35I can't disclose the figure at the moment
0:45:35 > 0:45:37until that audit is complete.
0:45:38 > 0:45:41Then we'll be able to report the total amount
0:45:41 > 0:45:44and the structure, in detail, to the public.
0:45:46 > 0:45:49And you can't give me an estimate, a ball-park figure?
0:45:50 > 0:45:54If I give you a figure today, it'll be based on my perspective.
0:45:54 > 0:45:56But the audit departments of the central government,
0:45:56 > 0:45:58the provincial government, even the local government,
0:45:58 > 0:46:00all have their own audit rules.
0:46:00 > 0:46:04When the audit is finished, there'll be a uniform answer.
0:46:04 > 0:46:08So I can't give you a figure today. It might cause confusion.
0:46:10 > 0:46:12But the debt is safe and controllable
0:46:12 > 0:46:16and we believe we're able to pay it back. It's not a problem.
0:46:21 > 0:46:25Back at Wuhan Iron Steel, management is perhaps more realistic
0:46:25 > 0:46:29about the price they're paying for being part of the great stimulus.
0:46:29 > 0:46:33And WISCO, as it's called, is at least in profit, just,
0:46:33 > 0:46:36unlike many of its competitors.
0:46:41 > 0:46:44TRANSLATION: Many iron and steel companies in China
0:46:44 > 0:46:45are in difficulties.
0:46:47 > 0:46:48Some are running at a loss.
0:46:51 > 0:46:55The ones who are able to bear it and make a minor profit are very few.
0:47:03 > 0:47:07In 2008, the huge state-owned enterprises like WISCO
0:47:07 > 0:47:09were seen as part of the solution.
0:47:09 > 0:47:12Now suffering from huge overcapacity,
0:47:12 > 0:47:16they're not profitable enough to make money for the government
0:47:16 > 0:47:20and are not efficient enough to be truly competitive in world markets.
0:47:20 > 0:47:22The government wants to shake them up
0:47:22 > 0:47:24to make them more properly commercial.
0:47:24 > 0:47:29But that would mean making millions and millions of people unemployed,
0:47:29 > 0:47:32and that would dilute the glue holding together a Communist Party
0:47:32 > 0:47:37which rewards officials with cushy jobs in state-controlled companies.
0:47:40 > 0:47:43Everywhere you look, there are symptoms of the unbalanced nature
0:47:43 > 0:47:48of this economy, made worse by the lending and investment splurge
0:47:48 > 0:47:51that was supposed to rescue China in 2008.
0:47:51 > 0:47:55An overheated property market looks like another
0:47:55 > 0:47:57big accident waiting to happen.
0:47:57 > 0:48:01Right now, everybody who bought houses are happy
0:48:01 > 0:48:04because the housing prices have been going up.
0:48:04 > 0:48:07They felt they've been, you know, doing the right decision.
0:48:07 > 0:48:11I think one scary moment would be,
0:48:11 > 0:48:14you know, a trigger point where someone panicked
0:48:14 > 0:48:16and saying, "Now look, you know,
0:48:16 > 0:48:20"I don't know whether this is going to go on for too long.
0:48:20 > 0:48:22"I'm going to have to, you know, sell my units
0:48:22 > 0:48:25"and lock in my profits."
0:48:25 > 0:48:29And if enough numbers of people are thinking that way,
0:48:29 > 0:48:31this, I think, will become a trigger point for
0:48:31 > 0:48:33a major correction in the market.
0:48:33 > 0:48:36So when you use the phrase "a major correction",
0:48:36 > 0:48:41what do you mean by that? If China does not act on it quickly
0:48:41 > 0:48:44and change the course of direction,
0:48:44 > 0:48:50then a major drop, a significant drop in housing price
0:48:50 > 0:48:53is very likely, you know, down the road.
0:48:57 > 0:49:00If house prices were to collapse, some owners wouldn't be able to
0:49:00 > 0:49:03repay their debts, causing more pain for the banks,
0:49:03 > 0:49:06and millions of Chinese who invested in property
0:49:06 > 0:49:07as a substitute for a pension
0:49:07 > 0:49:10could direct their anger at the government.
0:49:10 > 0:49:14What I found perhaps most compelling on this latest visit to China
0:49:14 > 0:49:17was a widespread sense of trepidation
0:49:17 > 0:49:21that something dark might be round the corner.
0:49:21 > 0:49:24And there was also, among the younger generation,
0:49:24 > 0:49:27a more questioning and arguably more cynical attitude
0:49:27 > 0:49:29than I've seen before.
0:49:33 > 0:49:37Of course, conspicuous dissidents are still routinely harassed
0:49:37 > 0:49:40and imprisoned, but protest comes in many guises.
0:49:41 > 0:49:45Meet Wuhan's first and original punk rocker, Wu Wei.
0:50:02 > 0:50:05Are you positive about the huge changes
0:50:05 > 0:50:09there have been here in Wuhan in recent years?
0:50:09 > 0:50:12It's good, the development?
0:50:12 > 0:50:14I don't think so.
0:50:14 > 0:50:20It's good for the government, for the officers and for some rich men.
0:50:20 > 0:50:27Some people get power. So, that's not good for normal Chinese.
0:50:27 > 0:50:30The poor still poor, the rich get more rich.
0:50:30 > 0:50:36A lot of people in the West, and indeed some people here,
0:50:36 > 0:50:42say that part of the problem is there is a lot of corruption
0:50:42 > 0:50:44in the Communist Party,
0:50:44 > 0:50:46people taking money from these deals
0:50:46 > 0:50:49and getting richer within the system.
0:50:49 > 0:50:51Do you think there is a lot of corruption?
0:50:51 > 0:50:58Yes. Corruption is so...seriously in China.
0:50:58 > 0:51:01You know? Everywhere.
0:51:01 > 0:51:04And is there any prospect for change?
0:51:07 > 0:51:09It's a big question.
0:51:11 > 0:51:18For me, I don't think there's any...any...ways to change.
0:51:18 > 0:51:21If...if still one party here,
0:51:21 > 0:51:23the Gong Chan Dang,
0:51:23 > 0:51:28they still get the power, no, they'll never change.
0:51:28 > 0:51:33No. So, if they want to change, they have to change themselves.
0:51:48 > 0:51:50This is the most dangerous economic moment for China
0:51:50 > 0:51:54since it embarked on its unprecedented experiment
0:51:54 > 0:51:57of introducing capitalism into a communist state
0:51:57 > 0:51:59more than 30 years ago.
0:51:59 > 0:52:03In the best case, the miracle ends with a sharp deceleration
0:52:03 > 0:52:06of the sustainable rate of growth.
0:52:06 > 0:52:10What level of growth should China be looking forward to
0:52:10 > 0:52:15over the next few years, that is a sustainable level of growth?
0:52:15 > 0:52:20A sustainable level of growth means, I suspect,
0:52:20 > 0:52:25a quality different in the content of the growth.
0:52:25 > 0:52:28But 7, 8% is not realistic, is it? No, it's not.
0:52:28 > 0:52:31I think China could do very well
0:52:31 > 0:52:36if the quality of the growth is transformed to higher value add.
0:52:36 > 0:52:39You're really looking at 4% is fine.
0:52:43 > 0:52:46At worst, if property prices plunge,
0:52:46 > 0:52:51if local governments and developers renege on debts and banks collapse,
0:52:51 > 0:52:53there could be a serious crash.
0:52:59 > 0:53:01I don't think anybody really knows how long
0:53:01 > 0:53:05this credit genie can stay outside the bottle.
0:53:05 > 0:53:08I mean, my own view is that
0:53:08 > 0:53:12China in 2014 is maybe
0:53:12 > 0:53:16where the West was in 2005/2006.
0:53:16 > 0:53:21So it's not an imminent danger of a financial implosion
0:53:21 > 0:53:25but it's drawing nearer all the time.
0:53:25 > 0:53:28It's a brave man who, after the experience of the last 35 years,
0:53:28 > 0:53:32bets against the ability of the Chinese to manage problems.
0:53:32 > 0:53:36But this is a major imbalance, it's a very major imbalance.
0:53:36 > 0:53:40We have never seen such an increase of credit
0:53:40 > 0:53:43anywhere in the world before without that producing
0:53:43 > 0:53:48some sort of financial crisis or crunch at the end.
0:53:48 > 0:53:52The problem is what we're seeing happening in China
0:53:52 > 0:53:55is beyond anything we've ever seen,
0:53:55 > 0:53:57and at some point, it does start to call into question
0:53:57 > 0:54:00what is the ability of the government here
0:54:00 > 0:54:02to really support something this big.
0:54:02 > 0:54:07It's not like it happened for five years and now it's stopped.
0:54:07 > 0:54:10It happened for five years and we're still going on.
0:54:10 > 0:54:13So this debt burden is just growing.
0:54:17 > 0:54:22Just before Christmas, the threat of a credit crunch returned,
0:54:22 > 0:54:25when the important price banks pay to borrow from each other
0:54:25 > 0:54:27soared again.
0:54:28 > 0:54:33So what's the big plan of China's relatively new leadership?
0:54:33 > 0:54:36Well, to shine a light on the scale of the debt problem
0:54:36 > 0:54:38and introduce more capitalism,
0:54:38 > 0:54:40more private sector ownership, more competition.
0:54:42 > 0:54:47But it's not clear how or whether this will curb
0:54:47 > 0:54:49the dangerous lending and frenetic building,
0:54:49 > 0:54:52especially when so many officials and apparatchiks
0:54:52 > 0:54:55are being enriched by the status quo.
0:54:56 > 0:55:01That's the hardest thing there is in any economy, any country,
0:55:01 > 0:55:05any political system and particularly where you have a system
0:55:05 > 0:55:09that's been as successful as theirs has for a period of time,
0:55:09 > 0:55:13you get strong vested interests who don't want change.
0:55:13 > 0:55:17The good news is, we've got very strong leaders in China.
0:55:17 > 0:55:19The bad news is,
0:55:19 > 0:55:22they've got some really difficult challenges ahead of them.
0:55:22 > 0:55:25I believe they will surprise
0:55:25 > 0:55:28with their ability to get things done.
0:55:28 > 0:55:30As China becomes richer and more complex
0:55:30 > 0:55:32and more sophisticated,
0:55:32 > 0:55:36and as people become more connected
0:55:36 > 0:55:41through their own social networking systems and so on,
0:55:41 > 0:55:46it becomes more difficult for China to conduct economic reform
0:55:46 > 0:55:50without major political change as well.
0:55:50 > 0:55:56I have a strong feeling that the Chinese leadership today is
0:55:56 > 0:55:59very enthusiastic about economic reform,
0:55:59 > 0:56:02very adamant that there will be no political reform.
0:56:02 > 0:56:05I don't think you can have one without the other.
0:56:10 > 0:56:14Fast-growing, hungry China has shaped the world,
0:56:14 > 0:56:16not always to our benefit.
0:56:16 > 0:56:20Its exporters crushed our manufacturers.
0:56:20 > 0:56:24Its desperate need for resources led to huge rises in the price
0:56:24 > 0:56:27we all pay for food, for energy, for commodities.
0:56:27 > 0:56:33Its influence in Asia and Africa has shifted the global balance of power.
0:56:33 > 0:56:35So would an economically weakened China
0:56:35 > 0:56:38actually be good for us in the West?
0:56:38 > 0:56:42Well, maybe, but a China suddenly incapable of providing
0:56:42 > 0:56:46the rising living standards its people now see as their right
0:56:46 > 0:56:49and destiny would be less confident, less stable
0:56:49 > 0:56:52and perhaps, for the world, more dangerous.
0:56:59 > 0:57:01There are those who say that
0:57:01 > 0:57:06the normal rules of economics don't apply to China. After all,
0:57:06 > 0:57:11there is no real precedent for an economy as big as China's
0:57:11 > 0:57:14growing for as long as China has grown
0:57:14 > 0:57:18and growing as fast as China has grown.
0:57:18 > 0:57:23It's what economists would call Chinese exceptionalism -
0:57:23 > 0:57:27the idea that China is an exception to the normal rules.
0:57:27 > 0:57:33So perhaps the explosion of lending here in China
0:57:33 > 0:57:40won't be as dangerous as it would be in other, more normal economies.
0:57:40 > 0:57:45But serious people have been making those arguments about booms
0:57:45 > 0:57:48and bubbles for centuries -
0:57:48 > 0:57:52from the tulip mania of hundreds of years ago
0:57:52 > 0:57:56to the internet bubble of the late '90s, through to
0:57:56 > 0:58:00the explosion of bank lending in the West just a few years ago.
0:58:00 > 0:58:03Normally, the rules of gravity apply -
0:58:03 > 0:58:07what goes up must eventually come down.