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China Is Weak And Bloated By Government Investment, Experts Say


Let's ask what's really happening in China's economy. China devalued its currency last week.


And that cuts the price of Chinese goods sold abroad, and it raises the price of U.S. and other products sold in China. It spurred a particular reaction in the United States, exemplified by Republican presidential candidate Donald Trump.


DONALD TRUMP: I think you have to do something to rein in China. They devalued their currency today. They're making it absolutely impossible for the United States to compete.

GREENE: That is one perspective. Here's another.

INSKEEP: It comes from two Americans who counsel investors in China. One is Anne Stevenson-Yang.

ANNE STEVENSON-YANG: The image is water building up behind a very thin retaining wall and in danger of spilling over.

INSKEEP: Americans are thinking of China as some diabolical competitor, and you're saying they're actually desperate right now?

STEVENSON-YANG: Exactly. And I think what's happening now is not to the disadvantage of U.S. companies but instead ultimately to their advantage.

INSKEEP: Stevenson-Yang of J Capital Research has lived in Beijing for about 25 years. We found her in New York, where she sat with Patrick Chovanec of Silvercrest Asset Management. Both see a country where the stock market is sliding despite government efforts to prop it up. The currency drop was just one of many efforts. Ever since the financial crisis, China has boosted its economy by investing billions in new infrastructure. That's great - up to a point. But it's hard to keep investing so much year after year.

PATRICK CHOVANEC: And that investment boom created huge amounts of capacity in housing and infrastructure, and there's no end user for it.

STEVENSON-YANG: Yeah. And when you travel around China, this becomes very evident. You have airports that have one or two flights a week. You have roads that go nowhere. You have lots and lots of empty cities, you know, huge apartment complexes that are 10 percent full or 5 percent full or no percent full. So you have marinas with no boats. You - it's just crazy.

CHOVANEC: Well, and, Anne, I know you've studied the steel industry closely.

STEVENSON-YANG: Yeah, right.

CHOVANEC: Huge overcapacity, basically have half the capacity in the world.

STEVENSON-YANG: Exactly. And China produces about eight times as much steel as the United States does for landmass that's roughly the same. You know, you need a little more because you have more population, but you don't need that much more. So what's going to happen with all this capacity is a very deep concern.

INSKEEP: Anne Stevenson-Yang, speaking as someone who lives in Beijing and has for many years, what does it feel like when you're talking to people now? How have conversations changed, if at all, in the last year or two?

STEVENSON-YANG: Up to about two years ago, no matter how dramatic the distortions - you know, the empty cities and things like that - still, the average Chinese person would say the Chinese government will fix it. They'll never let prices drop. Investing in an apartment because I know the prices will never fall, I'll always be able to sell it. Now the confidence in the government has really, really dissipated. And I think the recent explosions in Tianjin, sadly coming at the same time, are sort of China's Katrina. It's an obvious symbol of corruption and incompetence and really undermines public confidence.

INSKEEP: It has often been pointed out that the trade-off that this government seems to have made with its people is don't worry about political freedom because you're not going to have any, but we're going to deliver economic improvement. Is it a dangerous situation for this government to have an economic slowdown now?

CHOVANEC: It's kind of a tricky issue because a lot of the unrest that has taken place within China - and there are lots of incidents and unrest that take place - have actually come from the boom, not the bust. They've come from land grabs. They've come from pollution. So, yes, there's concern that the bust will lead to unrest, but there's a lot of unrest that's come from the boom as well. There's another basis on which the Communist Party rests its legitimacy and authority besides delivering the goods and the economy, and it is nationalism.

And it's the sense that China is strong and standing up to the world after a century of humiliation. And so to the degree that they lose the story that be quiet and life will get better, they may have to rely more heavily on the nationalist crutch. And that, I think, is worrying for people who see China being more assertive against Japan, being more assertive in the South China Sea. They may be willing to take more risks to show, look, things may not be going well with the economy, but China is strong.

INSKEEP: What does all of this mean for American companies doing business in China?

STEVENSON-YANG: Well, there's short term and there's long term. So short term, those companies that drive significant profit from China, of course, will have less profit from China because they have to repatriate it at a disadvantageous rate. And those that export commodities to China - ones that - companies that are exporting, say, soy and corn and hogs and things like that - have to export at a more disadvantageous rate. But over the longer term, I think what this signifies is that China becomes - the government becomes less able to support and subsidize its preferred companies and Chinese companies have to start competing on a more equal footing.

INSKEEP: Thanks to you both.


CHOVANEC: Great to be with you.

INSKEEP: Patrick Chovanec is managing director at Silvercrest Asset Management. Anne Stevenson-Yang is the founder of J Capital Research. Transcript provided by NPR, Copyright NPR.