How China Fooled the World - with Robert Peston This World


How China Fooled the World - with Robert Peston

Similar Content

Browse content similar to How China Fooled the World - with Robert Peston. Check below for episodes and series from the same categories and more!

Transcript


LineFromTo

China has been booming for more than 30 years,

0:00:090:00:12

consistently the world's fastest-growing major economy.

0:00:120:00:16

This is urban renewal Chinese-style.

0:00:160:00:19

The sheer scale of what they're attempting here is unbelievable.

0:00:190:00:26

While we've been trapped in a global recession,

0:00:260:00:29

China has been expanding massively.

0:00:290:00:32

While the Western world was going to go through economic purgatory,

0:00:320:00:35

at least China could continue growing

0:00:350:00:38

at 10% per annum, which it did.

0:00:380:00:41

But the Chinese were pursuing a risky strategy

0:00:410:00:45

to achieve such impressive growth.

0:00:450:00:47

I had no doubt what their strategy would be.

0:00:470:00:51

I did not imagine one on the scale and scope that they pursued.

0:00:510:00:58

They essentially gave instructions to their banks to...

0:00:580:01:01

The phrase was, "Open your wallets wide and get lending."

0:01:010:01:05

Now China's economy has become dangerously hooked

0:01:050:01:09

on debt-fuelled growth.

0:01:090:01:11

China will have replicated the entire US commercial banking sector

0:01:110:01:15

within the span of half a decade.

0:01:150:01:17

And suddenly, China doesn't look quite so economically invincible.

0:01:170:01:22

Nothing can surely stop China becoming evermore powerful,

0:01:220:01:26

ever richer...or can it?

0:01:260:01:28

Weighed down by its vast debts,

0:01:300:01:33

China's economical miracle may be ending.

0:01:330:01:36

Its boom shaped the world and so, too, would a crash.

0:01:360:01:40

There's no example in history

0:01:400:01:43

of that kind of debt explosion not leading to tears before bedtime.

0:01:430:01:48

Hubei Province, in the heart of China.

0:02:020:02:05

TRANSLATED TANNOY ANNOUNCEMENT:

0:02:100:02:14

You've probably never heard of Hubei's capital city, Wuhan,

0:02:220:02:26

but it's one of hundreds of giant cities across China undergoing

0:02:260:02:30

an almost unbelievable transformation.

0:02:300:02:33

While we've been forced to tighten our belts,

0:02:460:02:48

cities like Wuhan have been building and expanding

0:02:480:02:51

as if there's no tomorrow.

0:02:510:02:53

Blooming heck! This is amazing!

0:02:550:02:58

Since 1980, China has grown faster and more consistently

0:03:010:03:05

than any big economy the world has seen.

0:03:050:03:08

It became an exporting powerhouse, feeding our shopping addiction

0:03:080:03:12

by making all that lovely cheap stuff we crave,

0:03:120:03:15

to become the second-largest economy in the world.

0:03:150:03:19

Today, Wuhan is a city turbocharged for urban renewal.

0:03:330:03:38

A city being remade before our eyes.

0:03:380:03:42

Flattening, excavating, pile-driving, hoisting, building.

0:03:500:03:55

Wuhan's ten million citizens want it all -

0:03:550:03:58

new homes, skyscrapers,

0:03:580:04:00

a gleaming new transport system, the good life -

0:04:000:04:03

and there's one man promising to deliver it.

0:04:030:04:06

So I've come to the Wuhan Citizens' Home,

0:04:110:04:15

a vast palace whose aim primarily is to show off

0:04:150:04:19

the ambitions of this giant city.

0:04:190:04:22

And I've come to meet the man who's spending ?60 billion a year

0:04:220:04:26

modernising Wuhan, Mayor Tang.

0:04:260:04:29

Mayor Tang has power and financial muscle

0:04:300:04:33

that London's Mayor, Boris Johnson, cannot even dream of.

0:04:330:04:36

In Wuhan's enormous town hall,

0:04:390:04:41

there's a big hello from Mayor Tang's army of an entourage.

0:04:410:04:46

Well, hello, Mayor Tang. Thank you so much for welcoming us here today.

0:04:460:04:51

'Tang has the grandest of all grand designs -

0:04:510:04:55

'to transform Wuhan into an ultramodern mega-city,

0:04:550:05:00

'challenging mighty Shanghai as China's second city.'

0:05:000:05:04

So, what do we have here? Oh, my goodness!

0:05:040:05:07

I'm not sure I've ever seen a model

0:05:070:05:10

quite as extraordinarily detailed as this one.

0:05:100:05:14

TRANSLATION: It's the plan approved by the State Council.

0:05:160:05:19

It shows the comprehensive layout of the city in 2020.

0:05:190:05:23

Hundreds of apartment blocks, industrial zones, ring roads,

0:05:250:05:29

bridges, railways and a second international airport, all new.

0:05:290:05:35

TRANSLATION: This 1,200 square metre model shows an actual area

0:05:350:05:39

of more than 200 square kilometres.

0:05:390:05:42

We'll build all this by 2020.

0:05:420:05:44

'The rate of development spending here, ?200 billion over five years,

0:05:490:05:54

'is more than double what we'll spend for the entire UK.'

0:05:540:05:58

TRANSLATION: We believe that within the next 10 to 20 years,

0:06:020:06:05

Wuhan will become a very important city

0:06:050:06:07

for China's economic development.

0:06:070:06:09

A very significant landmark city.

0:06:090:06:11

So we should seize the chance to prepare ourselves

0:06:160:06:18

for the opportunities ahead.

0:06:180:06:20

If we miss this historic chance,

0:06:200:06:22

we won't have another opportunity to do it.

0:06:220:06:25

Mayor Tang believes the day will come when Wuhan is as familiar

0:06:280:06:32

to the world as Paris, Tokyo or London.

0:06:320:06:36

I've been to China many times and witnessed its explosive growth,

0:06:430:06:47

but what's going on here in Wuhan is beyond anything I've ever seen.

0:06:470:06:51

Great blocks being erected, roads being dug up,

0:06:510:06:54

cranes literally everywhere you look.

0:06:540:06:57

The kind of radical surgery that's being undertaken on this vast city

0:06:570:07:03

is beyond anything I've ever experienced.

0:07:030:07:05

But can such spending and building be sustained?

0:07:070:07:10

Are the foundations of Wuhan's and China's economic transformation

0:07:120:07:16

as robust as they seem?

0:07:160:07:18

To understand what's really going on here,

0:07:180:07:21

we need to revisit the devastation in our own backyard

0:07:210:07:24

just over five years ago.

0:07:240:07:26

Is your money safe?

0:07:300:07:32

Something of a financial hurricane.

0:07:320:07:34

One of the ugliest days I have ever seen.

0:07:340:07:37

September 2008.

0:07:370:07:39

A shattering financial crisis

0:07:390:07:40

triggered by the demise of Lehman Brothers

0:07:400:07:43

led to the worst slump in the West for more than 70 years.

0:07:430:07:47

Those with their hands on the levers feared the worst.

0:07:470:07:51

In the US, we really were on the brink.

0:07:510:07:54

We were, I think, quite close to having a...

0:07:540:08:00

a collapse of the financial system that was catastrophic

0:08:000:08:03

and the economic consequences could have been very comparable

0:08:030:08:07

to that of the Great Depression.

0:08:070:08:10

It's been another tumultuous morning on the markets.

0:08:100:08:14

Nightmare on Wall Street. Very, very bad.

0:08:140:08:17

SHOUTING

0:08:170:08:20

The tsunami may have started in America and Britain,

0:08:200:08:23

but it was felt thousands of miles away on the shores of China.

0:08:230:08:27

This was a time of great uncertainty for people in China

0:08:270:08:32

because they were very dependent on exports.

0:08:320:08:35

And as our economies turned down,

0:08:350:08:37

it really exposed this weakness to them.

0:08:370:08:41

When we went broke in the West,

0:08:450:08:47

we stopped buying all those wonderfully cheap goods from China.

0:08:470:08:51

They were confronted with this massive global crisis

0:08:510:08:56

that resulted in a collapse in demand

0:08:560:08:58

for all the stuff they were making.

0:08:580:09:00

So you had massive stockpiles of goods building up,

0:09:000:09:03

you had companies closing down, you had people getting laid off.

0:09:030:09:07

Chinese factories hit the off switch.

0:09:080:09:11

Millions of Chinese workers were put onto the streets,

0:09:110:09:14

wondering if they would ever work again.

0:09:140:09:17

I was in China at the time

0:09:170:09:20

and witnessed the extraordinary spectacle of laid-off workers

0:09:200:09:24

trooping back to their dirt-poor farms in the country.

0:09:240:09:27

Mass unemployment sparked protests.

0:09:300:09:33

China's unelected Communist Party began to fear

0:09:330:09:36

that they might escalate and shake its undemocratic grip on power.

0:09:360:09:40

They were very worried that what had gone wrong

0:09:420:09:45

within the advanced economies' financial systems

0:09:450:09:48

was going to have a big knock-on effect to China

0:09:480:09:51

and therefore to Chinese employment

0:09:510:09:53

and therefore to the whole sustainability

0:09:530:09:56

of the social peace and the political system.

0:09:560:09:58

The Chinese are extremely sensitive

0:09:580:10:01

to the social implications of weakening growth

0:10:010:10:04

because, obviously, high growth is really what gives

0:10:040:10:07

the Communist Party its legitimacy in the eyes of its citizens.

0:10:070:10:11

The world's two economic superpowers,

0:10:120:10:15

the US and China, were in deep trouble.

0:10:150:10:19

America's Treasury Secretary, Hank Paulson, was desperate

0:10:220:10:25

to persuade his Chinese government counterparts

0:10:250:10:28

that they were in it together.

0:10:280:10:30

My counterpart at the time, a very senior Chinese minister,

0:10:310:10:35

Wang Qishan, said to me,

0:10:350:10:37

"You know, you used to be my teacher when it came to financial markets.

0:10:370:10:41

"Now my teacher doesn't seem to be so smart."

0:10:410:10:44

The hotline between Beijing and Washington,

0:10:440:10:47

between Hank Paulson and senior Chinese,

0:10:470:10:50

very senior Chinese government officials,

0:10:500:10:52

were running on a daily basis.

0:10:520:10:54

The Chinese were very concerned about the health of the US economy,

0:10:540:10:58

and Hank Paulson painted a picture of truly dire consequences

0:10:580:11:04

to flow from the collapse of the system.

0:11:040:11:08

There was just a kind of an automatic reaction,

0:11:080:11:10

which is that we cannot afford to allow growth

0:11:100:11:14

to drop from what had been double-digit rates,

0:11:140:11:16

9 or 10% per annum,

0:11:160:11:18

to the kind of maybe 4 or 5%

0:11:180:11:20

that was then on the radar screen at that time.

0:11:200:11:23

So, under pressure from America

0:11:250:11:28

for China to save not only itself, but the world,

0:11:280:11:31

the Chinese government took emergency measures

0:11:310:11:35

to stimulate the economy to get growth going again.

0:11:350:11:39

Less than two months after Lehman's collapse,

0:11:440:11:46

China unveiled its rescue plan, vowing to be fast and forceful.

0:11:460:11:52

They just hit the accelerator on investment.

0:11:520:11:56

Investment is one of those things

0:11:560:11:58

which at least in a state-dominated economy you can just switch on.

0:11:580:12:03

I had no doubt what their strategy would be,

0:12:030:12:09

the kind of stimulus programme they did.

0:12:090:12:12

I did not imagine one on the scale

0:12:120:12:15

and scope that they pursued.

0:12:150:12:19

Even before the crash, China was investing and building

0:12:280:12:32

at a rate that was off the scale in terms of magnitude.

0:12:320:12:36

But rather than cut back, as many had expected,

0:12:360:12:39

China now went on the kind of construction binge

0:12:390:12:41

that would have daunted even Egypt's pharaohs.

0:12:410:12:45

If you cast your mind back to 2007/2008,

0:12:450:12:49

pretty much economists all over the world were saying

0:12:490:12:52

Chinese investment was unsustainably large.

0:12:520:12:56

The investment rate, far from falling

0:12:560:12:59

in the way that people had suggested was necessary,

0:12:590:13:03

went up from about the low 40% of GDP to 50%.

0:13:030:13:08

A ?400 billion stimulus

0:13:100:13:13

drove the biggest building programme in history.

0:13:130:13:16

A new skyscraper every five days.

0:13:180:13:21

More than 30 new airports.

0:13:220:13:25

Metro systems underway in 25 cities.

0:13:280:13:31

Over 6,000 miles of high-speed railway track AND all the stations.

0:13:340:13:39

The three longest bridges in the world.

0:13:420:13:44

26,000 miles of motorways.

0:13:470:13:50

All in five years.

0:13:500:13:53

This is urban renewal Chinese-style.

0:14:000:14:04

A bit more ambitious than what we typically get up to in the West.

0:14:040:14:07

The sheer scale of what they're attempting here is unbelievable!

0:14:080:14:14

An ambitious city like Wuhan

0:14:170:14:19

needs a modern, comprehensive transport system.

0:14:190:14:22

These are the foundations of its new metro.

0:14:220:14:24

TRANSLATION: There are 500 workers here, if you include the managers.

0:14:290:14:33

We work day and night in four teams over three shifts.

0:14:340:14:37

When did you start building here

0:14:390:14:40

and when will the station be finished?

0:14:400:14:43

Our project started on July 13th 2011.

0:14:430:14:46

The completion date will be September 2014.

0:14:460:14:50

This huge station, if completed on time,

0:14:520:14:54

will have taken three years to build -

0:14:540:14:57

half the time it's taking to finish

0:14:570:14:59

one of London's new Crossrail stations -

0:14:590:15:01

and by 2017, Wuhan will have five new subway lines

0:15:010:15:05

and 133 miles of new track.

0:15:050:15:08

It's just one of 10,000 construction sites here.

0:15:100:15:14

But how can so much spending and building happen so fast?

0:15:140:15:18

Well, one reason is because the Chinese government

0:15:200:15:22

still owns so much of the economy.

0:15:220:15:25

Despite our image of a new China driven by raw capitalism,

0:15:250:15:29

some of the old communist ways live on.

0:15:290:15:32

Giant state-owned companies

0:15:320:15:33

bossed by the super-powerful Communist Party

0:15:330:15:36

are still at the heart of China's economy.

0:15:360:15:39

After the great crash of 2008

0:15:390:15:41

is a time to put on the hard hats.

0:15:410:15:44

The global economy, the Chinese economy were melting down,

0:15:440:15:48

and the Chinese government took evasive action.

0:15:480:15:51

It pulled the levers at its disposal.

0:15:510:15:54

This is Wuhan Iron Steel,

0:16:020:16:04

one of the world's biggest steel companies.

0:16:040:16:07

Sprawling mill shops more than half a mile long.

0:16:090:16:12

36 million tonnes of iron and steel spewed out every year,

0:16:170:16:21

equivalent to an Eiffel Tower every two hours.

0:16:210:16:25

Nationalised by Chairman Mao, it's a paternalistic throwback

0:16:260:16:30

in today's China that Mao himself might find familiar.

0:16:300:16:33

Over 100,000 workers on its books who can't be sacked.

0:16:350:16:39

TRANSLATION: My parents and grandparents

0:16:460:16:48

all worked at Wuhan Iron Steel.

0:16:480:16:50

I'm a genuine third-generation employee.

0:16:500:16:53

I know the company well and feel very attached to it.

0:16:530:16:57

They're looked after from cradle to grave.

0:16:580:17:01

Everything is provided for them.

0:17:010:17:03

And their loyalty? Well, it's total.

0:17:030:17:05

TRANSLATION: A state-owned enterprise is like the head of a family.

0:17:060:17:10

They care about their employees in every way.

0:17:100:17:12

Food, clothes, accommodation, transport,

0:17:120:17:16

marriage, children, everything.

0:17:160:17:18

You don't get that in a private company.

0:17:180:17:21

For all the growth in China's private sector,

0:17:240:17:27

state-owned enterprises are still the major players

0:17:270:17:30

in everything from steel to oil,

0:17:300:17:33

shipping, electricity and banking.

0:17:330:17:35

When the government unleashed all that spending after the crash,

0:17:350:17:38

it instructed those state-owned companies

0:17:380:17:40

to rapidly expand and build new factories.

0:17:400:17:44

This created employment and it also meant that the building boom

0:17:460:17:49

would be fuelled by a glut of cheap materials.

0:17:490:17:52

State-owned companies like Wuhan Iron Steel

0:17:590:18:02

re-energised China's flagging economy.

0:18:020:18:06

The economic slow-down in China was rapidly forgotten.

0:18:060:18:09

The boom times returned faster than seemed humanly possible.

0:18:090:18:15

The reaction to China's stimulus programme

0:18:150:18:18

was one of widespread relief,

0:18:180:18:22

and that China would be the world's salvation.

0:18:220:18:26

That while the Western world was going to go through

0:18:260:18:29

a kind of a form of economic purgatory,

0:18:290:18:32

that, at least, you know, China could continue

0:18:320:18:34

growing at 10% per annum,

0:18:340:18:37

which it did in the rebound in 2010.

0:18:370:18:40

All we could do was watch and marvel.

0:18:430:18:47

Without Chinese expansion,

0:18:470:18:49

the entire world economy would have been flat as a pancake.

0:18:490:18:54

Now, we may think it's been tough for us over the past few years,

0:18:540:18:59

but if the Chinese economy had been in recession as well,

0:18:590:19:03

well, life for us in Britain

0:19:030:19:05

and in much of the West would have been even tougher.

0:19:050:19:09

But the revival wasn't all that it seemed,

0:19:150:19:18

because only a fraction of the money

0:19:180:19:20

needed for the investment splurge

0:19:200:19:22

came from taxpayers and state funds.

0:19:220:19:24

Most of it was borrowed from banks.

0:19:270:19:31

The only lever they had which could make a difference

0:19:310:19:35

within months rather than years

0:19:350:19:37

is to hit the investment and hit the credit button,

0:19:370:19:40

and they essentially gave instructions to their banks to...

0:19:400:19:44

The phrase was, "Open your wallets wide and get lending."

0:19:440:19:48

It was really just pushing on an open door.

0:19:480:19:50

They just said, "We want you to lend a lot of money."

0:19:500:19:52

And the banks were very obliging.

0:19:520:19:54

But that was really the beginning

0:19:540:19:56

of what subsequently became a credit orgy, really.

0:19:560:19:59

A gushing torrent of money flowed from banks to developers

0:20:040:20:07

and state-owned companies.

0:20:070:20:09

In just the first year of the stimulus programme,

0:20:090:20:12

Chinese banks lent almost ?1 trillion,

0:20:120:20:16

double the target they'd been set by the government.

0:20:160:20:19

And that's equivalent to all the debt on the books

0:20:190:20:22

of Britain's biggest retail bank, Lloyds.

0:20:220:20:24

And that was just what the unreliable official figures

0:20:240:20:28

were saying.

0:20:280:20:29

Now, by 2010, Beijing did begin to worry

0:20:330:20:35

that the lending binge was getting out of hand

0:20:350:20:38

and the government ordered banks to slow down,

0:20:380:20:41

but it turned out that the Communist Party's top officials

0:20:410:20:45

weren't quite as powerful as they thought.

0:20:450:20:48

There's an old dictum from Chinese history

0:20:480:20:51

about the emperor is far away and the mountains are high,

0:20:510:20:54

which kind of speaks to the topic of the central government in Beijing

0:20:540:20:59

having difficulty getting its ideas and its views implemented

0:20:590:21:04

by local and provincial governments,

0:21:040:21:07

and that's certainly proven to be the case into modern times.

0:21:070:21:11

When investment can no longer be financed directly by the banks,

0:21:150:21:19

local governments and developers found other sources of money.

0:21:190:21:22

New lending institutions called shadow banks

0:21:220:21:25

were created and enlarged.

0:21:250:21:28

Lending by the formal banking system

0:21:280:21:31

and, in particular, the state-owned banks which dominate the system,

0:21:310:21:35

whereas that began to slow down at least somewhat,

0:21:350:21:39

what is called a shadow banking system

0:21:390:21:43

emerged to, as it were, supplement it.

0:21:430:21:46

So these off-balance-sheet entities

0:21:460:21:48

were able to go to the banks, borrow copious amounts of money

0:21:480:21:53

so that they built themselves up into enormous borrowing entities.

0:21:530:21:58

There were a whole series of developments

0:21:580:22:00

which, for people who have gone through the financial crisis,

0:22:000:22:04

are eerily reminiscent of some of the off-balance-sheet vehicles,

0:22:040:22:09

the SIVs and the conduits, as we used to call them,

0:22:090:22:12

which proliferated in the pre-crisis shadow banking system.

0:22:120:22:16

So that raging torrent of credit wasn't stemmed,

0:22:160:22:20

but because it was now growing outside of the official banks,

0:22:200:22:23

it was even harder for Beijing to see and control.

0:22:230:22:28

The point is that hundreds of billions of pounds of lending

0:22:280:22:31

is not going through the big banks.

0:22:310:22:33

It's being provided by other institutions, known as shadow banks,

0:22:330:22:37

some of them set up by local authorities

0:22:370:22:40

to finance huge developments.

0:22:400:22:42

And the point about that lending via the shadow banks is,

0:22:420:22:46

it's very hard to see. So, to that extent,

0:22:460:22:49

a huge proportion of China's big debts are hidden.

0:22:490:22:54

That picture was quite disturbing to us

0:22:580:23:01

because it means that more and more of this credit

0:23:010:23:03

is shifting into these hidden channels

0:23:030:23:06

in essentially a shadow financial system.

0:23:060:23:09

And we don't have data on that,

0:23:090:23:10

we don't really know who's doing the lending,

0:23:100:23:13

who the borrowers are, what the quality of assets is,

0:23:130:23:15

what sectors of the economy the money is going to.

0:23:150:23:18

China had become dangerously addicted to debt.

0:23:190:23:23

A lot of that lending was for modernising China.

0:23:310:23:34

And let's be in no doubt,

0:23:360:23:38

much of the development is badly needed.

0:23:380:23:41

In transport, for example.

0:23:420:23:44

OK. So I think I want Line 1...

0:23:440:23:47

'A decent metro isn't a luxury

0:23:470:23:50

'in a city of more than 10 million people like Wuhan,

0:23:500:23:53

'but it's not cheap, at more than ?30 billion.'

0:23:530:23:56

Why is nothing coming out? This doesn't make any sense to me.

0:23:560:24:00

'There'll be another two million people here in Wuhan

0:24:000:24:03

'within ten years, maybe more.'

0:24:030:24:05

I've got it. OK.

0:24:050:24:07

HE LAUGHS

0:24:070:24:09

It's the great demographic story of our time.

0:24:090:24:12

400 million people relocating from Chinese farms to cities

0:24:120:24:16

over the last 30 years, and they need to get around.

0:24:160:24:19

I can watch the football on a screen in the metro.

0:24:260:24:30

Not bad, is it?

0:24:300:24:32

And they need somewhere to live.

0:24:340:24:36

Nearly ten million homes each year are being built in China,

0:24:450:24:49

often huge apartment blocks in the suburbs, like this one.

0:24:490:24:53

Cheap credit, a rapidly expanding urban population

0:24:570:25:00

and a growing middle class have created a potent mix,

0:25:000:25:03

which has led to soaring property prices.

0:25:030:25:06

It's reminiscent of the housing market booms

0:25:060:25:09

that preceded the busts we've seen recently

0:25:090:25:12

in Ireland, Spain and America.

0:25:120:25:14

In some Chinese cities,

0:25:140:25:16

house prices are still rising by up to 20% a year.

0:25:160:25:20

This is what China is all about.

0:25:220:25:26

Remaking the landscape, modernising the country,

0:25:260:25:29

generating wealth at breakneck speed.

0:25:290:25:33

Just here will rise

0:25:330:25:35

the third or second-tallest building in the world -

0:25:350:25:38

the developers are being a bit coy about quite how high it'll climb -

0:25:380:25:42

surrounded by almost a million square metres of

0:25:420:25:46

new offices and new homes.

0:25:460:25:49

It'll be a ?3 billion urban status symbol,

0:25:510:25:54

whose point is to shout Wuhan's importance to the rest of the world.

0:25:540:25:59

Extremely kind of you.

0:25:590:26:01

TRANSLATION:

0:26:030:26:06

It's quite phenomenal.

0:26:060:26:07

Lovely. Thank you.

0:26:100:26:12

This development is directed at the top of the market.

0:26:130:26:17

TRANSLATION: This is the show home living room.

0:26:210:26:24

It has a balcony. The view is lovely.

0:26:240:26:27

You can see the Yangtze and Hankou district on the other side.

0:26:270:26:30

It's a very good view.

0:26:310:26:33

This room is the master bedroom.

0:26:370:26:39

Behind you is the bathroom and next to that is a wardrobe.

0:26:390:26:43

It's a very comfortable room.

0:26:430:26:45

It's good to have the wine glasses on the bed all ready.

0:26:470:26:50

Fantastic.

0:26:500:26:52

So is this a typical apartment for the buildings

0:26:530:26:56

or is this one of the more luxurious, top-of-the-range ones?

0:26:560:27:00

Normally, our show homes are pretty typical.

0:27:050:27:08

At 188 square metres, this is a typical apartment -

0:27:080:27:12

three bedrooms and two living rooms.

0:27:120:27:14

Its best feature is the lovely view.

0:27:170:27:19

You can see directly to the Yangtze.

0:27:190:27:21

So, what would be the price of this apartment?

0:27:240:27:26

The total price for this flat is three million RMB.

0:27:260:27:30

So three million RMB is approximately ?300,000.

0:27:300:27:36

What sort of person, what sort of people would buy this flat?

0:27:360:27:40

Our customers have one thing in common

0:27:400:27:43

and that is they are looking for a better life.

0:27:430:27:46

How are you doing with selling these properties?

0:27:460:27:49

Is there much demand?

0:27:490:27:50

Yes, I should say.

0:27:500:27:53

There is quite a big demand and sales are very good.

0:27:530:27:56

In a city where the average wage is not much more than ?4,000 a year,

0:27:580:28:02

there aren't many who can raise 70 times that salary

0:28:020:28:06

to buy an apartment like this one.

0:28:060:28:08

Here's the shocking paradox of China's house-building frenzy -

0:28:080:28:12

it's the rich minority who are buying most of the new properties

0:28:120:28:16

and often keeping those homes empty,

0:28:160:28:19

treating them as investments, rather than living in them.

0:28:190:28:23

Wuhan is the norm, it's not the exception,

0:28:230:28:25

because if you go to other cities, many of those cities

0:28:250:28:28

are doing exactly the same thing as Wuhan is doing.

0:28:280:28:31

So, in my view, the over-supply situation

0:28:310:28:35

is quite widespread in China in the housing market.

0:28:350:28:40

So our estimate, which obviously may not be 100% accurate,

0:28:400:28:44

but our best estimate is around 15%.

0:28:440:28:49

So, 15% of properties in a country as enormous as China

0:28:490:28:53

you think are empty?

0:28:530:28:56

Yes. Grand houses have a higher vacancy rate.

0:28:560:29:00

So the more expensive the property, the bigger the vacancy rate?

0:29:000:29:04

Yes. They're owned, but people don't live in them. Yes.

0:29:040:29:08

One of the things that's been feeding into this problem is

0:29:080:29:12

the political structure here that encourage local governments

0:29:120:29:17

to just undertake project after project after project

0:29:170:29:22

to show something, even though the economic returns on that

0:29:220:29:27

may not justify the credit to begin with.

0:29:270:29:30

The problem isn't just homes and apartments

0:29:300:29:33

too expensive for people to live in.

0:29:330:29:35

The white elephants from a boom that's gone too far

0:29:350:29:39

are everywhere to be seen.

0:29:390:29:42

In Huainan, where average annual income is ?1,800 a year,

0:29:420:29:46

they're spending ?180 million on a new Olympic-themed sports complex...

0:29:460:29:50

..a fitting sister for an exhibition hall

0:29:520:29:55

built with a bold musical flourish.

0:29:550:29:57

In the largely rural district of Mentougou,

0:29:570:30:01

they've splashed out on government offices modelled on the Kremlin.

0:30:010:30:05

In Ganzhou, there's no danger of not knowing what time it is.

0:30:060:30:10

But the prize for ambition probably goes to Kangbashi in Inner Mongolia.

0:30:100:30:16

It's home to just 100,000 people

0:30:160:30:18

but it's built the kind of municipal palaces, a sports centre,

0:30:180:30:21

museum, a concert hall that would make London or New York proud.

0:30:210:30:25

And the bill?

0:30:250:30:27

Just ?24 billion in debts to repay.

0:30:270:30:31

So, why can't Beijing just force the provinces to stop the excesses?

0:30:360:30:41

Well, the building boom has made

0:30:430:30:45

thousands and thousands of local party officials very rich.

0:30:450:30:48

There used to be a little village here.

0:30:500:30:53

Now it's a playground for China's new rich, who live in the swanky

0:30:530:30:57

mansions and new apartments that have recently been built.

0:30:570:31:00

Now, when these sorts of developments take place,

0:31:000:31:02

there are big profits for the local authorities,

0:31:020:31:06

who expropriate the land and then sell it on to the developers and,

0:31:060:31:10

allegedly, there are big backhanders for well-placed officials.

0:31:100:31:14

We don't know if that's what happened in this case

0:31:140:31:17

but it is what local people believe.

0:31:170:31:19

Fan Yang is an environmentalist and local campaigner

0:31:280:31:31

who grew up near here.

0:31:310:31:33

When the development was happening, what did people feel about it?

0:31:330:31:38

Were there protests or did it go through smoothly?

0:31:380:31:41

As I know, there are many people not really happy about it.

0:31:410:31:46

Even till now, there are still people trying to do something

0:31:460:31:50

to stop this kind of thing to happen again.

0:31:500:31:54

If you look around East Lake,

0:31:540:31:56

are there other developments like this one going on now?

0:31:560:31:59

Yeah, actually all around East Lake

0:31:590:32:03

there are many similar construction sites happening.

0:32:030:32:07

As somebody who grew up here,

0:32:070:32:08

do you like what's happened to your back yard?

0:32:080:32:12

Not really, because I still prefer the more natural part of East Lake.

0:32:120:32:19

This is becoming the rich man's paradise,

0:32:190:32:22

so it's really kind of exclusive now.

0:32:220:32:26

The whole system of development by local authorities

0:32:290:32:34

has enriched the people who run those local authorities,

0:32:340:32:38

not in a way that's easy to see

0:32:380:32:40

but, nonetheless, everybody knows it happens.

0:32:400:32:43

Can the central government really reform a system

0:32:430:32:47

that is enriching so many local party members?

0:32:470:32:51

They're already beginning to do this.

0:32:510:32:53

How many local officials have gone to jail

0:32:530:32:57

or have been given sentences by the courts in the last six months?

0:32:570:33:02

It's been incredible.

0:33:020:33:03

And the process has actually just begun and

0:33:030:33:06

the Chinese expression is...

0:33:060:33:09

"To kill the chicken to scare the monkey," in other words.

0:33:090:33:13

So that is, in fact, what is happening on the disciplinary side.

0:33:140:33:20

On the other side, in terms of enrichment or local officials,

0:33:200:33:26

I think it's a generational issue

0:33:260:33:28

because China has been poor for a long, long time

0:33:280:33:32

and when people have opportunities to make some money,

0:33:320:33:35

they go out and make money.

0:33:350:33:37

And this is where also the entrepreneurial spirit comes in.

0:33:370:33:40

I think what is really important in this particular context

0:33:400:33:45

is the educational, cultural,

0:33:450:33:48

social and moral standards of local officials.

0:33:480:33:53

The senior level are very sophisticated

0:33:530:33:57

but not necessarily will their policies be implemented

0:33:570:34:01

properly at the local levels because you simply don't have,

0:34:010:34:05

out of the 1.3 billion, enough people who are sophisticated

0:34:050:34:10

and educated and moral enough to cover all the county level.

0:34:100:34:16

But that's not something that can be addressed very quickly.

0:34:160:34:20

It's generational. But things are getting better.

0:34:200:34:23

FANS CHANT

0:34:290:34:32

So just tell me, what have the rather passionate fans on our right

0:34:360:34:39

been shouting?

0:34:390:34:41

Actually, they were just shouting, "The referee is a moron." OK.

0:34:410:34:44

That's a very traditional English chant, the referee's a moron.

0:34:440:34:48

What else have they been shouting? You know, many F-words.

0:34:480:34:52

Oh, really? There's quite a lot of swearing in Mandarin, is there?

0:34:520:34:56

Yeah, many swearings, yeah.

0:34:560:34:58

OK, I feel very much at home here. Yeah. Yeah.

0:34:580:35:02

Now, the government says it's cracking down on corruption

0:35:060:35:09

and dampening the construction and housing market booms.

0:35:090:35:12

But in this Chinese premier league football stadium,

0:35:120:35:16

that's not even a tenth full, it's easy to fear the worst.

0:35:160:35:21

House prices have been going up and up and up.

0:35:210:35:23

Do you think they'll continue to go up?

0:35:230:35:25

I really don't know when this is going to stop,

0:35:250:35:28

when it's going to fall, because

0:35:280:35:31

there are many times people... expecting the price will drop

0:35:310:35:35

but it never happens till now, so it's really a mystery.

0:35:350:35:39

Because one of the things I've noticed going around the city

0:35:390:35:42

is all the buildings with no lights on,

0:35:420:35:45

which suggests that they've been built but nobody lives there.

0:35:450:35:49

What do you think is going on?

0:35:490:35:51

I think the problem is that most of the people,

0:35:510:35:53

they cannot afford to buy those houses,

0:35:530:35:56

but a few people, they own too much, too many houses.

0:35:560:36:00

What about young people like yourself?

0:36:000:36:02

How easy is it to buy a house?

0:36:020:36:04

I can say it's not easy.

0:36:040:36:06

With our salary, you can afford a house

0:36:060:36:11

if you can work for, like, 50 years.

0:36:110:36:15

Almost five years after the beginning of the great stimulus,

0:36:230:36:27

in the summer of 2013, everything looked brilliant in China.

0:36:270:36:31

Growing faster than any other big competitor

0:36:340:36:37

and already the world's number two economy, its gleaming modern cities

0:36:370:36:41

were full of magnificent skyscrapers and swanky shopping malls.

0:36:410:36:45

No people in history have been enriched on the scale

0:36:470:36:49

and at the speed of China's.

0:36:490:36:51

But then, in the middle of 2013, alarms started to sound

0:36:560:37:01

in the important markets used by banks to raise money.

0:37:010:37:05

We've got breaking news coming out of China...

0:37:050:37:08

Could it be 2008 all over again...for China?

0:37:080:37:11

China's biggest squeeze on credit in at least a decade.

0:37:110:37:15

Overnight, interest rates and interbank lending rates shot up to

0:37:160:37:21

extraordinary high levels which are most unusual in the case of China.

0:37:210:37:25

So, at the time, there was a real scare

0:37:250:37:28

that this was the beginning of China's credit crunch.

0:37:280:37:32

A full-blown credit crunch, an inability to borrow

0:37:320:37:35

would have been fatal for some Chinese banks

0:37:350:37:37

and very expensive for the Chinese government,

0:37:370:37:40

which would have felt the need to bail out the bigger banks.

0:37:400:37:43

China's economy would have juddered to a halt

0:37:430:37:45

as the flow of loans froze.

0:37:450:37:47

The financial markets in China and outside

0:37:470:37:50

were expecting the People's Bank of China, the central bank,

0:37:500:37:53

to continue to add liquidity and the People's Bank of China didn't do it.

0:37:530:37:57

In fact, the credit squeeze had initially been engineered

0:37:570:38:00

by the government as a temporary thing to warn banks

0:38:000:38:03

that the days of cheap credit were over.

0:38:030:38:06

The central bank was keen to, you know, place

0:38:060:38:09

some limits on the growth of credit.

0:38:090:38:12

Sitting behind that, there was undoubtedly some desire

0:38:120:38:14

to say let's start pulling back the growth of credit,

0:38:140:38:18

both in the formal banking system and the shadow banking system.

0:38:180:38:23

But markets went haywire,

0:38:280:38:30

taking on a dangerous life of their own.

0:38:300:38:32

The all-powerful government was losing its grip.

0:38:320:38:36

Fearing the worst, China's central bank, the People's Bank of China,

0:38:360:38:40

pumped new money, liquidity, back into the banks.

0:38:400:38:44

Conditions returned to near normal,

0:38:440:38:47

but the world had been put on notice

0:38:470:38:49

of the frail financial heart of China's economy.

0:38:490:38:52

Give me an idea of the scale of the lending that we've seen since 2008.

0:38:520:39:00

It's off the charts, really.

0:39:010:39:03

Most people are aware we've had a credit boom in China

0:39:030:39:06

but they don't know the scale.

0:39:060:39:08

At the beginning of all of this, in 2008, the Chinese banking sector

0:39:080:39:12

was roughly ten trillion US dollars in size.

0:39:120:39:16

Right now, it's on the order of 24 to 25 trillion US dollars.

0:39:160:39:21

That incremental increase of 14 to 15 trillion US dollars

0:39:210:39:25

is equivalent to the size of the entire US commercial banking sector,

0:39:250:39:30

which took more than a century to build.

0:39:300:39:33

So that means China will have replicated the entire US system

0:39:330:39:37

in the span of half a decade.

0:39:370:39:39

China's total indebtedness is now equivalent to twice the value

0:39:430:39:46

of everything it produces, twice its GDP,

0:39:460:39:49

up from 125% just five years ago.

0:39:490:39:54

Now, there's no example in history of that kind of debt explosion

0:39:540:40:00

not leading to tears before bedtime.

0:40:000:40:03

Too much debt, too much investment?

0:40:100:40:13

The solution, if there is one,

0:40:130:40:16

requires an abandonment of an important Chinese tradition.

0:40:160:40:19

Oh, my goodness! Oh, my goodness.

0:40:190:40:22

Wow!

0:40:220:40:23

So...beautiful.

0:40:250:40:28

The way it picks up all the eddies and the currents of the air.

0:40:300:40:33

Just astonishing.

0:40:330:40:34

The old China still lives on,

0:40:360:40:39

not just in its colourful traditions

0:40:390:40:41

but in the principles on which the economy is based.

0:40:410:40:44

Unlike businesses and local governments,

0:40:520:40:55

Chinese people squirrel away their money,

0:40:550:40:58

saving almost like no-one else.

0:40:580:41:00

The recent memory of grinding poverty

0:41:000:41:02

and the lack of a comprehensive welfare state or pensions

0:41:020:41:06

encourage the Chinese not to spend.

0:41:060:41:09

Instead, Chinese households save

0:41:090:41:11

almost a third of everything they earn,

0:41:110:41:14

whereas we in the UK save something like a 20th.

0:41:140:41:18

Oh, almost!

0:41:200:41:22

The big and simple point is this -

0:41:240:41:26

China's economy is dangerously unbalanced, too dependent

0:41:260:41:29

on debt-fuelled investment with not enough spending or shopping.

0:41:290:41:34

So, the Chinese economy has to become more balanced

0:41:380:41:45

and I can tell you, from my own experience, it's not easy.

0:41:450:41:51

Whoa, my goodness!

0:41:510:41:53

Whoa!

0:41:530:41:55

The way to make the economy more balanced

0:42:000:42:02

is for the Chinese to become a bit more like us decadent,

0:42:020:42:06

spendthrift Westerners.

0:42:060:42:08

They'd be sensible not to become AS hooked on consumption as we are,

0:42:080:42:12

but they do need to consume a great deal more

0:42:120:42:15

if they don't want the good economic times to disappear.

0:42:150:42:19

My goodness, look at this wonderful stuff.

0:42:190:42:22

This is definitely my kind of China -

0:42:240:42:27

teeming commerce, deals on every side.

0:42:270:42:30

My blood is up, I've got to buy something.

0:42:300:42:33

Garish underpants?

0:42:340:42:36

Hmm, not sure. I might have to come back.

0:42:360:42:39

What do you think? Feels like my size. Is there a mirror?

0:42:440:42:47

Certainly suits the Harry Worth look.

0:42:480:42:52

OK, I quite like it.

0:42:520:42:53

Yeah, I think probably that one.

0:42:530:42:55

So we've got... Perfect, thank you very much. Thank you.

0:42:550:42:59

And I'm rather pleased with that.

0:43:000:43:02

I've got a bit of a bargain and a rather stylish one to boot.

0:43:020:43:06

China's government has for years recognised that a more

0:43:080:43:11

sustainable economy requires more shopping and consumer spending

0:43:110:43:15

but, although consumption has been growing,

0:43:150:43:18

it still only accounts for a third of China's economy,

0:43:180:43:21

compared with two-thirds in much of the West.

0:43:210:43:24

As for that investment binge,

0:43:240:43:26

well, it represents a half of China's economy.

0:43:260:43:29

Or, to put it another way,

0:43:290:43:31

there simply aren't enough hours in the day for Chinese people

0:43:310:43:35

to shop and replace investment with consumption

0:43:350:43:39

as the engine of growth any time soon.

0:43:390:43:42

That's why the investment in white elephants goes on

0:43:420:43:46

and the dangerous credit bubble continues to grow.

0:43:460:43:50

Banks are still expanding.

0:43:500:43:51

This year, credit growth is still twice as fast as GDP growth

0:43:510:43:56

and the stock of credit is twice as large as the entire economy.

0:43:560:43:59

So there is no way... People who are more positive on China

0:43:590:44:03

think that they'll find a way to grow out of this problem.

0:44:030:44:06

Mathematically, there is no way to grow out of this problem

0:44:060:44:09

when credit is twice the size of the economy and growing twice as fast.

0:44:090:44:13

By allowing and encouraging the mother of all lending sprees

0:44:160:44:21

to keep the economy growing,

0:44:210:44:23

the Chinese government is placing an enormous bet.

0:44:230:44:27

The longer it goes on, the bigger the interest bill,

0:44:270:44:30

the greater the risk that borrowers -

0:44:300:44:33

households, local government, developers -

0:44:330:44:36

won't be able to pay their bills,

0:44:360:44:40

and the bigger the danger that when the bill arrives,

0:44:400:44:44

China won't be able to afford it.

0:44:440:44:47

Here in Wuhan, one of China's most indebted cities,

0:44:520:44:56

they don't seem desperately concerned about

0:44:560:44:58

the impending arrival of the bill. Mayor Tang is an optimist.

0:44:580:45:02

I've seen quite a few different numbers for the debt of Wuhan

0:45:030:45:10

and I'm privileged now to be with a man who knows.

0:45:100:45:13

What is the real figure for the debt of Wuhan?

0:45:130:45:16

TRANSLATION: We are currently carrying out an audit

0:45:250:45:28

as required by the central government.

0:45:280:45:30

I can't disclose the figure at the moment

0:45:330:45:35

until that audit is complete.

0:45:350:45:37

Then we'll be able to report the total amount

0:45:380:45:41

and the structure, in detail, to the public.

0:45:410:45:44

And you can't give me an estimate, a ball-park figure?

0:45:460:45:49

If I give you a figure today, it'll be based on my perspective.

0:45:500:45:54

But the audit departments of the central government,

0:45:540:45:56

the provincial government, even the local government,

0:45:560:45:58

all have their own audit rules.

0:45:580:46:00

When the audit is finished, there'll be a uniform answer.

0:46:000:46:04

So I can't give you a figure today. It might cause confusion.

0:46:040:46:08

But the debt is safe and controllable

0:46:100:46:12

and we believe we're able to pay it back. It's not a problem.

0:46:120:46:16

Back at Wuhan Iron Steel, management is perhaps more realistic

0:46:210:46:25

about the price they're paying for being part of the great stimulus.

0:46:250:46:29

And WISCO, as it's called, is at least in profit, just,

0:46:290:46:33

unlike many of its competitors.

0:46:330:46:36

TRANSLATION: Many iron and steel companies in China

0:46:410:46:44

are in difficulties.

0:46:440:46:45

Some are running at a loss.

0:46:470:46:48

The ones who are able to bear it and make a minor profit are very few.

0:46:510:46:55

In 2008, the huge state-owned enterprises like WISCO

0:47:030:47:07

were seen as part of the solution.

0:47:070:47:09

Now suffering from huge overcapacity,

0:47:090:47:12

they're not profitable enough to make money for the government

0:47:120:47:16

and are not efficient enough to be truly competitive in world markets.

0:47:160:47:20

The government wants to shake them up

0:47:200:47:22

to make them more properly commercial.

0:47:220:47:24

But that would mean making millions and millions of people unemployed,

0:47:240:47:29

and that would dilute the glue holding together a Communist Party

0:47:290:47:32

which rewards officials with cushy jobs in state-controlled companies.

0:47:320:47:37

Everywhere you look, there are symptoms of the unbalanced nature

0:47:400:47:43

of this economy, made worse by the lending and investment splurge

0:47:430:47:48

that was supposed to rescue China in 2008.

0:47:480:47:51

An overheated property market looks like another

0:47:510:47:55

big accident waiting to happen.

0:47:550:47:57

Right now, everybody who bought houses are happy

0:47:570:48:01

because the housing prices have been going up.

0:48:010:48:04

They felt they've been, you know, doing the right decision.

0:48:040:48:07

I think one scary moment would be,

0:48:070:48:11

you know, a trigger point where someone panicked

0:48:110:48:14

and saying, "Now look, you know,

0:48:140:48:16

"I don't know whether this is going to go on for too long.

0:48:160:48:20

"I'm going to have to, you know, sell my units

0:48:200:48:22

"and lock in my profits."

0:48:220:48:25

And if enough numbers of people are thinking that way,

0:48:250:48:29

this, I think, will become a trigger point for

0:48:290:48:31

a major correction in the market.

0:48:310:48:33

So when you use the phrase "a major correction",

0:48:330:48:36

what do you mean by that? If China does not act on it quickly

0:48:360:48:41

and change the course of direction,

0:48:410:48:44

then a major drop, a significant drop in housing price

0:48:440:48:50

is very likely, you know, down the road.

0:48:500:48:53

If house prices were to collapse, some owners wouldn't be able to

0:48:570:49:00

repay their debts, causing more pain for the banks,

0:49:000:49:03

and millions of Chinese who invested in property

0:49:030:49:06

as a substitute for a pension

0:49:060:49:07

could direct their anger at the government.

0:49:070:49:10

What I found perhaps most compelling on this latest visit to China

0:49:100:49:14

was a widespread sense of trepidation

0:49:140:49:17

that something dark might be round the corner.

0:49:170:49:21

And there was also, among the younger generation,

0:49:210:49:24

a more questioning and arguably more cynical attitude

0:49:240:49:27

than I've seen before.

0:49:270:49:29

Of course, conspicuous dissidents are still routinely harassed

0:49:330:49:37

and imprisoned, but protest comes in many guises.

0:49:370:49:40

Meet Wuhan's first and original punk rocker, Wu Wei.

0:49:410:49:45

Are you positive about the huge changes

0:50:020:50:05

there have been here in Wuhan in recent years?

0:50:050:50:09

It's good, the development?

0:50:090:50:12

I don't think so.

0:50:120:50:14

It's good for the government, for the officers and for some rich men.

0:50:140:50:20

Some people get power. So, that's not good for normal Chinese.

0:50:200:50:27

The poor still poor, the rich get more rich.

0:50:270:50:30

A lot of people in the West, and indeed some people here,

0:50:300:50:36

say that part of the problem is there is a lot of corruption

0:50:360:50:42

in the Communist Party,

0:50:420:50:44

people taking money from these deals

0:50:440:50:46

and getting richer within the system.

0:50:460:50:49

Do you think there is a lot of corruption?

0:50:490:50:51

Yes. Corruption is so...seriously in China.

0:50:510:50:58

You know? Everywhere.

0:50:580:51:01

And is there any prospect for change?

0:51:010:51:04

It's a big question.

0:51:070:51:09

For me, I don't think there's any...any...ways to change.

0:51:110:51:18

If...if still one party here,

0:51:180:51:21

the Gong Chan Dang,

0:51:210:51:23

they still get the power, no, they'll never change.

0:51:230:51:28

No. So, if they want to change, they have to change themselves.

0:51:280:51:33

This is the most dangerous economic moment for China

0:51:480:51:50

since it embarked on its unprecedented experiment

0:51:500:51:54

of introducing capitalism into a communist state

0:51:540:51:57

more than 30 years ago.

0:51:570:51:59

In the best case, the miracle ends with a sharp deceleration

0:51:590:52:03

of the sustainable rate of growth.

0:52:030:52:06

What level of growth should China be looking forward to

0:52:060:52:10

over the next few years, that is a sustainable level of growth?

0:52:100:52:15

A sustainable level of growth means, I suspect,

0:52:150:52:20

a quality different in the content of the growth.

0:52:200:52:25

But 7, 8% is not realistic, is it? No, it's not.

0:52:250:52:28

I think China could do very well

0:52:280:52:31

if the quality of the growth is transformed to higher value add.

0:52:310:52:36

You're really looking at 4% is fine.

0:52:360:52:39

At worst, if property prices plunge,

0:52:430:52:46

if local governments and developers renege on debts and banks collapse,

0:52:460:52:51

there could be a serious crash.

0:52:510:52:53

I don't think anybody really knows how long

0:52:590:53:01

this credit genie can stay outside the bottle.

0:53:010:53:05

I mean, my own view is that

0:53:050:53:08

China in 2014 is maybe

0:53:080:53:12

where the West was in 2005/2006.

0:53:120:53:16

So it's not an imminent danger of a financial implosion

0:53:160:53:21

but it's drawing nearer all the time.

0:53:210:53:25

It's a brave man who, after the experience of the last 35 years,

0:53:250:53:28

bets against the ability of the Chinese to manage problems.

0:53:280:53:32

But this is a major imbalance, it's a very major imbalance.

0:53:320:53:36

We have never seen such an increase of credit

0:53:360:53:40

anywhere in the world before without that producing

0:53:400:53:43

some sort of financial crisis or crunch at the end.

0:53:430:53:48

The problem is what we're seeing happening in China

0:53:480:53:52

is beyond anything we've ever seen,

0:53:520:53:55

and at some point, it does start to call into question

0:53:550:53:57

what is the ability of the government here

0:53:570:54:00

to really support something this big.

0:54:000:54:02

It's not like it happened for five years and now it's stopped.

0:54:020:54:07

It happened for five years and we're still going on.

0:54:070:54:10

So this debt burden is just growing.

0:54:100:54:13

Just before Christmas, the threat of a credit crunch returned,

0:54:170:54:22

when the important price banks pay to borrow from each other

0:54:220:54:25

soared again.

0:54:250:54:27

So what's the big plan of China's relatively new leadership?

0:54:280:54:33

Well, to shine a light on the scale of the debt problem

0:54:330:54:36

and introduce more capitalism,

0:54:360:54:38

more private sector ownership, more competition.

0:54:380:54:40

But it's not clear how or whether this will curb

0:54:420:54:47

the dangerous lending and frenetic building,

0:54:470:54:49

especially when so many officials and apparatchiks

0:54:490:54:52

are being enriched by the status quo.

0:54:520:54:55

That's the hardest thing there is in any economy, any country,

0:54:560:55:01

any political system and particularly where you have a system

0:55:010:55:05

that's been as successful as theirs has for a period of time,

0:55:050:55:09

you get strong vested interests who don't want change.

0:55:090:55:13

The good news is, we've got very strong leaders in China.

0:55:130:55:17

The bad news is,

0:55:170:55:19

they've got some really difficult challenges ahead of them.

0:55:190:55:22

I believe they will surprise

0:55:220:55:25

with their ability to get things done.

0:55:250:55:28

As China becomes richer and more complex

0:55:280:55:30

and more sophisticated,

0:55:300:55:32

and as people become more connected

0:55:320:55:36

through their own social networking systems and so on,

0:55:360:55:41

it becomes more difficult for China to conduct economic reform

0:55:410:55:46

without major political change as well.

0:55:460:55:50

I have a strong feeling that the Chinese leadership today is

0:55:500:55:56

very enthusiastic about economic reform,

0:55:560:55:59

very adamant that there will be no political reform.

0:55:590:56:02

I don't think you can have one without the other.

0:56:020:56:05

Fast-growing, hungry China has shaped the world,

0:56:100:56:14

not always to our benefit.

0:56:140:56:16

Its exporters crushed our manufacturers.

0:56:160:56:20

Its desperate need for resources led to huge rises in the price

0:56:200:56:24

we all pay for food, for energy, for commodities.

0:56:240:56:27

Its influence in Asia and Africa has shifted the global balance of power.

0:56:270:56:33

So would an economically weakened China

0:56:330:56:35

actually be good for us in the West?

0:56:350:56:38

Well, maybe, but a China suddenly incapable of providing

0:56:380:56:42

the rising living standards its people now see as their right

0:56:420:56:46

and destiny would be less confident, less stable

0:56:460:56:49

and perhaps, for the world, more dangerous.

0:56:490:56:52

There are those who say that

0:56:590:57:01

the normal rules of economics don't apply to China. After all,

0:57:010:57:06

there is no real precedent for an economy as big as China's

0:57:060:57:11

growing for as long as China has grown

0:57:110:57:14

and growing as fast as China has grown.

0:57:140:57:18

It's what economists would call Chinese exceptionalism -

0:57:180:57:23

the idea that China is an exception to the normal rules.

0:57:230:57:27

So perhaps the explosion of lending here in China

0:57:270:57:33

won't be as dangerous as it would be in other, more normal economies.

0:57:330:57:40

But serious people have been making those arguments about booms

0:57:400:57:45

and bubbles for centuries -

0:57:450:57:48

from the tulip mania of hundreds of years ago

0:57:480:57:52

to the internet bubble of the late '90s, through to

0:57:520:57:56

the explosion of bank lending in the West just a few years ago.

0:57:560:58:00

Normally, the rules of gravity apply -

0:58:000:58:03

what goes up must eventually come down.

0:58:030:58:07

Download Subtitles

SRT

ASS