TIME China

The Legacy of Tiananmen Is Holding Back China’s Economy

A security guard stands next to pictures of China's former President Jiang Zemin and late paramount leader Deng Xiaoping at an exhibition in Beijing
A security guard stands next to the pictures of China's former President Jiang Zemin, right, and late paramount leader Deng Xiaoping at an exhibition to celebrate the 90th anniversary of the founding of the Chinese Communist Party in 2011 Jason Lee—Reuters

To maintain its growth miracle, the Chinese leadership can no longer separate political and economic reform

As tanks rolled through the pro-democracy protesters on Tiananmen Square on June 4, 1989, the message from the Chinese Communist Party couldn’t have been clearer: Beijing would tolerate economic change, but not political change. A decade earlier, paramount leader Deng Xiaoping had embarked on the free-market reform that would spark China’s economic miracle.

But on that fateful June day, when he crushed the Tiananmen movement, Deng also eradicated any hope that political liberalization would accompany the government’s quest for prosperity. In fact, Deng believed political reform would undermine China’s economic progress, and the primary purpose of his shift towards “capitalism with Chinese characteristics” was to strengthen the Communist Party’s grip on power.

Twenty-five years later, the attitude of China’s leadership has remained unchanged. President Xi Jinping has proposed a sweeping slate of economic reforms that would hand more influence to private companies and free up flows of capital. On the political side, however, there are no signs that Xi feels any differently than Deng had in 1989. Xi has (arguably) grasped more power in his hands than any Chinese leader since Deng himself. The government tosses critics in prison, squashes any independent social movement, and has even intensified censorship of the Internet and social media. The Communist Party insists on reigning unchallenged.

Looking solely at China’s economic record, the Communist Party can make the case that capitalist success is not linked to democracy, as many in the West have always believed. Since 1989, China’s authoritarian leaders have engineered one of the greatest economic achievements in history. The economy is 20 times bigger today and now ranks as the world’s second largest. Hundreds of millions have been lifted out of poverty. Chinese companies, from telecom giant Huawei to PC maker Lenovo to e-commerce behemoth Alibaba, have become world-beaters. However, that fundamental question ­— can economic and political reform be separated? —­ has not gone away.

In fact, 25 years after Tiananmen, it is more relevant than ever. After three decades of rapid economic development, the Chinese economy is a vastly different place. Its growth has been based mainly on plentiful labor, low costs, and a (restricted) opening to foreign business. But that model has run out of steam. In fact, the economy is facing its biggest challenges since the start of Deng’s reforms more than three decades ago. Wages have escalated, eating into the competitiveness of China’s export machine. Debt has risen to dangerous levels. A property boom looks about to bust. An uncontrolled shadow banking sector has sparked widespread fears of a financial crisis.

Excess capacity haunts many industries. Private businessmen remain starved of capital and opportunities. Many of these dangers are the result of incomplete market reform. The bureaucrats of China’s “state capitalism” maintain too much control over the activities of banks and companies. They protect uncompetitive state enterprises and politically connected cronies, apply regulations erratically, and influence who gets bank finance and who does not.

To get itself out of this mess, the Communist Party is going to have to do what it doesn’t do so well: let go. Banks must be allowed to allocate money based on financial fundamentals, not political guanxi or bureaucratic fiat. Companies have to become more innovative and creative, which requires greater freedom of information. Protected and subsidized state industries have to be opened to private and foreign competition. Money must be allowed to flow more freely in and out of the country. Rule of law must be ensured to convince businessmen to take risks and invest in new ideas. That demands a more independent judiciary. The Communist Party is aware of the need for further reform.

In an important party plenum in November, Xi and his policy team pledged to loosen up capital markets, reform the financial sector and the courts, and support the private sector. Yet the pace of implementation has been glacial. The party has to make uncomfortable choices between holding fast to the levers of control and fixing a broken economy.

China’s leaders can no longer have it both ways. The banks cannot be expected to both allocate money more productively and still take orders from meddlesome cadres. Entrepreneurs cannot be expected to launch the next Google in an environment where the Internet is controlled, creative thinking is discouraged and the courts can’t protect them.

The verdict of Tiananmen, then, is coming under strain. If China is to lift itself into the ranks of the most advanced economies and rejuvenate its competitiveness, its people require the freedoms Tiananmen’s protesters fought for 25 years ago. The Communist Party has to wake to the fact that Tiananmen’s legacy is holding the nation back.


India’s Modi and China’s Xi: Frenemies, or Just Plain Enemies?

India's Prime Minister Narendra Modi comes out of a meeting room to receive his Bhutanese counterpart Tshering Tobgay before the start a bilateral meeting in New Delhi on May 27, 2014 Adnan Abidi—Reuters

With two nationalists in power, relations between the world’s two most populous nations could turn even frostier

Narendra Modi, the newly installed Prime Minister of India, has no shortage of problems to tackle. The slumping economy requires a hefty dose of difficult reforms to get moving again. Malnourishment, miserable health conditions and a lack of opportunity haunt hundreds of millions of poor. Corruption is out of control. Unrest is rampant in the country’s east. And then there is the pesky issue of foreign policy, especially the ongoing tensions with India’s neighbors. That means Pakistan, of course, but also that other Asian giant — China.

China and India would appear to have endless reasons to cooperate. The world’s two most populous nations are both developing nations eager to improve the welfare of their 2.6 billion people and attain their rightful position on the world stage. In the 1950s, in the early years of India’s independence, hopes were high that India and China would be close allies, a spirit captured in a phrase popular at the time — “Hindi, Chini, bhai bhai,” or “Indians and Chinese are brothers.” Those high expectations were dashed in 1962, when China armed forces invaded India over border disputes. The war was a humiliation for the Indians and left New Delhi’s relations with Beijing under a permanent dark cloud.

Still today, the two warily glare at each other over that contested border, their disagreements left unresolved. China continually presses its claims to pieces of Indian territory; India continues to annoy China by sheltering the Dalai Lama, the Tibetan spiritual leader Beijing considers a dangerous separatist. The last Indian administration, led by Congress’s Prime Minister Manmohan Singh, tried its best to appear friendly with China, smiling at BRIC summits and promoting greater economic exchange, but “Hindi, Chini, bhai bhai” remains a distant memory.

Now comes Modi. Though generally tight-lipped on foreign policy matters, India’s new leader is known as a nationalist figure, and therefore probably more prone to stand up to China, especially on sensitive issues like their continued border disputes. During a February visit to Arunachal Pradesh, a state in India’s far east that China claims as “South Tibet,” Modi took a hard line on the issue. “No power on earth can snatch away Arunachal Pradesh,” Modi boomed in a speech. “The world does not welcome the mind-set of expansion in today’s times. China will also have to leave behind its mind-set of expansion.”

On the other side, Chinese President Xi Jinping has been living up to his own reputation as a nationalist. He has embroiled China in a series of territorial disputes with Japan, the Philippines and, most recently, Vietnam. Xi made a similar stab at India only weeks after he formally took office. In April 2013, a contingent of Chinese soldiers set up a camp in a disputed region along the border between the two countries in Ladakh, setting up a tense confrontation that lasted several weeks. The incident eventually ended peacefully, but members of Modi’s Bharatiya Janata Party (BJP) were irate over what they saw as a wimpy response from the Congress government. “You may have some security options, you may have some diplomatic options, but being clueless is not an option,” the BJP’s Arun Jaitley, Modi’s Finance Minister, criticized at the time. Such strong words offer an indication of how Modi might respond in similar crises on his watch. “China has this inexplicable proclivity to needle India and test it with these minor provocations at inopportune times,” says Jeff Smith, a fellow at the American Foreign Policy Council and author of the book Cold Peace: China-India Rivalry in the Twenty-First Century. “If they continue you will have more pressure on a Modi government to respond with a little more machismo.”

Such an outcome, however, is not guaranteed. Beijing seems to be taking a surprisingly soft stance on Modi. After his strong comments in Arunachal Pradesh in February, the response from the often rabidly nationalist Chinese state media was unusually muted. A commentary in the state-run Global Times called Modi’s statement “harsh,” but went on to dismiss it as pre-election rhetoric. “There is no need to exaggerate the significance of Modi’s remarks,” the newspaper noted. China has so many other foreign policy headaches on its plate that it may not need to create another with Modi. Beijing is embroiled in a range of contentious issues with the U.S. — from cyberspying to trade spats — while its aggressive moves on territorial disputes in East Asia have alarmed many of its neighbors. Since Modi’s election, the Chinese press has been talking up the benefits of China-India cooperation. The China Daily, in an editorial congratulating Modi on his victory, stressed the two countries’ shared interests. “The common aspiration for prosperity and subsequent need for a peaceful environment for national development give the two neighbors additional reasons to forge a more constructive relationship,” the newspaper said.

Modi might feel the same. He swept to power on the hope that he could revive India’s economic growth, and Chinese investment and trade could help him do that. As chief minister of Gujarat, he already saw the value in tapping China’s economic strength. In 2011, he visited China and made a salesman’s pitch to woo Chinese companies to India. “Our job in the government is to create the right kind of environment for you to come and enjoy your creativity,” Modi pronounced in a speech in Chengdu.

There is even some talk that Modi’s nationalist credentials might make it easier for him to score a diplomatic breakthrough with China. One Chinese political commentator mused that Modi is “likely to become India’s ‘Nixon,’” referring to the hard-line U.S. President’s surprise accommodation with Mao in the 1970s. “There is a bigger window for material improvement in India-China relations under Modi, but there is also a bigger window for confrontation,” says Smith. Which route Modi and Xi choose will determine if “Hindi, Chini, bhai bhai” can become reality, or remain a distant dream.

TIME Thailand

Thailand Is Doing a Great Job of Screwing Up Its Potential

Thailand Politics
An antigovernment demonstrator cries before she leaves a protest site after soldiers staged a coup in Bangkok on Thursday, May 22, 2014. Sakchai Lalit—ASSOCIATED PRESS

And it's not alone. The coup in Thailand, and turmoil elsewhere, shows how developing nations are currently excelling at one thing: being their own worst enemies

For more than a half year now, Thailand has been gripped by chaos. Protesters from both sides of the political spectrum — the antigovernment Yellow Shirts and progovernment Red Shirts — have clogged the streets of Bangkok. The country’s highest court ousted the still widely popular Prime Minister, Yingluck Shinawatra. And, on Thursday, the military took control of the government.

The past six months of factional violence have seen some 28 deaths and 700 injuries. But there have been even wider casualties of another sort. The turmoil is sapping the nation’s economic strength, and everyone is hurting.

Months of uncertainty and effectively no functioning government have taken a toll on Thailand’s economy. GDP in the first quarter contracted by 2.1%. Investment, consumption and government spending were all down. Some $15 billion of fresh investment projects are on hold. Foreign tourists, a key source of jobs and income for many Thais, are being scared off.

Without a return to political stability, the situation may not improve. Research firm Capital Economics slashed its GDP forecast for 2014 to a mere 1% this week. Though the military’s intervention could prevent further violence, the outlook for Thailand’s political situation remains anything but clear.

“The military’s seizure of power does nothing for Thailand’s reputation among global investors or, indeed, tourists,” lamented Mark Williams, Capital’s chief Asia economist.

Thailand is representative of an alarming trend: politics are undermining the economic prospects of some promising emerging nations. Only a couple of years ago, the developing world seemed set to swamp the developed one. While the U.S. and Europe suffered through the fallout from the 2008 financial crisis, emerging economies like China, India, Brazil and Indonesia surged from strength to strength. But not anymore. The performance of the emerging world has tapered off. The IMF recently downgraded its forecast for growth in developing economies to 4.9% in 2014.

There are many reasons behind the slowdown. After years of rapid expansion, some economies have developed serious flaws that are dragging them down. In China, for instance, a distorted financial sector, rising debt and excess capacity are all weighing on growth. But politics are making matters much worse. Vietnam’s government has been left pleading this week with foreign companies to maintain their operations in the country after many factories were damaged in anti-China riots, sparked by a territorial dispute in the South China Sea. Without such foreign investment, Hanoi will have a harder time creating jobs and raising incomes. Russia’s aggressive designs on Ukraine have forced the U.S. and Europe to slap sanctions on the country, threatening to scare off much-needed investment in an economy already struggling with feeble growth. In Egypt, constant political upheaval since the start of the Arab Spring in 2011 has undermined growth, gutted the important tourism sector and left the government dependent on foreign aid.

The causes of all this upheaval are many, and in some cases, quite honorable — such as the quest of Egyptians for their proper democratic rights. Yet ultimately the fallout is the same. Businessmen won’t invest in startups or factories that spur growth and create jobs without security, confidence and clear policy direction. A paralyzed government like Thailand’s can’t provide any of that, while the significant geopolitical risk created by a regime like Russia’s often convinces executives to place their capital elsewhere.

For the poor, this is bad news. There has always been a link between good governance and accelerated development in the emerging world. Periods of exceptionally high economic growth in less-developed nations are often associated with periods of political stability and sound macroeconomic management. Sadly, too often that stability has been enforced by coercion — as in China. As the 25th anniversary of the crackdown on protesters in Tiananmen Square approaches in June, Beijing’s leaders still believe economic reform can only be achieved under an unreformed political system. Yet democracies have proved that they, too, can deliver the economic goods. India, Indonesia and, increasingly, the Philippines have shown that when democratic leaders display political will, build consensus and implement smart policies, they can generate growth rates that match the best produced by the toughest dictatorships.

The point is that the governments that have successfully raised incomes tend to put economics ahead of politics. But both democrats and autocrats are guilty of doing the opposite these days. Putin clearly possesses the power to implement much-needed reforms, but he’s chosen to pursue the foreign adventures that could undermine the economy rather than the foreign investment that could bolster the nation’s growth. The sad story of India over the past three years has been a government led by economic reformers that got too caught up in coalition politics and too divided on the direction of policy to press ahead with key reforms.

This week brought some hope that at least some political gridlock can be broken. The landslide election in India of a coalition led by the Bharatiya Janata Party has raised expectations that incoming Prime Minister Narendra Modi will be able to press through badly needed liberalization and restart India’s economic miracle. But such hopes can be dashed in a flash. In Bangkok, there had been optimism that the military would broker a settlement between the opposing Yellow and Red Shirts — then the coup squashed that hope.

The danger to the developing world is that its leaders will continue to place their narrow interests over the greater goal of economic progress. Improving the welfare of the common man is hard enough. Politicians shouldn’t spend their time making it even harder.

TIME China

Why Russia’s Putin and China’s Xi Want to Be Best Buddies

Russian President Vladimir Putin and Chinese President Xi Jingping attend a welcoming ceremony on May 20, 2014 in Shanghai.
Russian President Vladimir Putin and Chinese President Xi Jingping attend a welcoming ceremony on May 20, 2014 in Shanghai Sasha Mordovets—Getty Images

As relations with the West become increasingly strained, both leaders realize they can benefit a lot from setting aside distrust and forging closer ties

Vladimir Putin needs friends these days, and he has found at least one in China. The Russian President took a break from the crisis in Ukraine to visit Shanghai this week for the (creatively named) Conference on Interaction and Confidence-Building Measures in Asia. On Tuesday, he met Chinese President Xi Jinping, who, state media reported, “extended a warm welcome” to Putin. Xi said closer China-Russia ties were an “inevitable choice” and important for “realizing prosperity in both countries.”

Those words are much more than diplomatic politeness. Though Russia and China have routinely professed friendship over the past two decades, distrust has lingered between them, leftover from the ideological schisms and border disputes of the Cold War. But those old wounds appear to be healing. Calling China “our trusted friend” in comments ahead of his visit, Putin said the relationship between the two countries “has reached the highest level in all its centuries-long history.”

The warm sentiments will come as a relief to two leaders finding themselves increasingly isolated. Russia’s grab of Crimea from Ukraine led the West to slap sanctions on the country, while China’s aggressive stance on territorial disputes has alienated many of its neighbors, including Japan and the Philippines. Anti-China riots broke out in Vietnam last week, causing thousands of Chinese residents to flee, after a Chinese oil rig appeared in waters claimed by both nations. The disagreements have in both cases strained Russia’s and China’s ties with the U.S. That has left Moscow and Beijing in need of the diplomatic support on the world stage they can offer each other.

Economic necessity is also driving the two countries closer together. Russia’s once roaring economy is roaring no more. Growth was only 1.3% last year, and the IMF expects about the same meager performance in 2014. That leaves Putin in dire need of fresh investment and new customers for its exports, which China can readily supply. Trade between the two countries has exploded since the 1990s, while Chinese companies see Russia as a potential target of new business. Just this week, Chinese SUV maker Great Wall Motor announced plans to build a $340 million car factory in Russia.

From Russia’s perspective, the Ukraine crisis has only made boosting economic ties with China more imperative. Putin has already been signaling that he sees his country’s economic future in the East, not the West, writing in 2012 that Asia was “the most important factor for the successful future of the whole country.” The fallout from Putin’s moves in Ukraine has heightened the urgency of that shift. The European Union is Russia’s main trading partner and source of investment, and with relations strained, potential new cash from China is more important than ever.

China, meanwhile, is always on the lookout for new sources of raw materials like oil, timber and minerals for its manufacturing machine, and Russia has just what it craves. During his visit to Shanghai, Putin is hoping to finally complete a long-delayed contract for Russia’s giant Gazprom to supply natural gas to China for 30 years. That deal would include a new pipeline stretched between the countries. Even more, Russia and China can deal with each other free from an irritant they both encounter: the West. While the U.S. and Europe are always complaining about human rights, that doesn’t make the talking points when Russia and China are at the negotiating table.

A closer Russia-China relationship has major geopolitical implications for the West. Attempts by Washington and Brussels to pressure Putin over the Ukraine crisis will be made much more difficult as Moscow finds sources of investment, trade and diplomatic support from Beijing. China, meanwhile, has its own problems with the West,­ from trade disputes to cyberspying. On Monday, the U.S. Justice Department, in an unprecedented step, charged five Chinese military officers with hacking American computers to steal secrets. Fortunately for Putin and Xi, in this new world order, they have each other.

TIME India

Here’s How Narendra Modi Can Revive India’s Economic Miracle

What the likely next Prime Minister needs to get done is obvious, but whether he can press quickly on reform is not

Narendra Modi is set to win himself what may be the toughest job in the world. A coalition led by the Bharatiya Janata Party (BJP) is about to be declared the victor in India’s latest general election, and Modi, the controversial chief minister of the state of Gujarat, will almost certainly become the nation’s next Prime Minister. His mission: To revive one of the world’s most promising emerging economies. Can he do it?

Hopes are running in the stratosphere. After years of almost nonexistent economic reform under the outgoing, paralyzed Congress-led coalition government, business leaders are itching for change, and fully expect Modi to deliver. During his tenure in Gujarat, Modi earned a reputation as one of the nation’s most aggressive economic change-agents, streamlining the notoriously obstructive bureaucracy and making much-needed improvements in infrastructure. Now there is great anticipation that Modi will do the same on a national scale. The stock market in Mumbai and the value of India’s currency, the rupee, soared on the news of the BJP victory.

Modi will take over an economy badly in need of change. Growth in the last fiscal year is expected to clock in under 5% — well below the 8%-9% pace enjoyed only a few years ago. Such sluggish growth just won’t cut it if India intends to lift the incomes of its 1.1 billion, still generally poor people.

What Modi will have to do is no secret. More than two decades after Manmohan Singh (now the outgoing prime minister) began dismantling the web of controls on private enterprise known as the License Raj, the bureaucracy has struck back. The deregulation never went far enough, and that has allowed India’s meddlesome civil servants to impede the progress of critical investments. Many large-scale projects have stalled, while new ones have almost evaporated. Businessmen struggle to acquire land and get environmental approvals and other permits.

The World Bank ranks India a miserable 134th out of 189 countries on its ease of doing business index, which measures the difficulties faced starting a company, dealing with construction permits and other factors ­behind competitors like China or Indonesia. Without a boost to investment, the economy will continue to stagger. That means Modi will have to strip out red tape and streamline bureaucratic procedures to make it less burdensome for companies to invest and create jobs. On top of that, Modi will have to speed along improvements in the country’s strained infrastructure — from roads to ports to power — ­to bring down the costs and enhancing the efficiency of doing business.

Modi must also improve India’s competitiveness in labor-intensive manufacturing. With its large, young population and low wages, India could easily be attracting more the kind of textile and electronics factories that helped alleviate poverty and supercharge exports in China.

But that’s not happening. To change that, Modi will have to tackle the sensitive topic of labor market reform. Right now, complex regulations make it too difficult and costly to hire and fire workers, and that scares away factories and acts as a disincentive for businessmen to expand their operations. If Modi makes the laws more flexible and less confusing, the benefits could be huge. Goldman Sachs, in a March report, figured that if India undertook a thorough overhaul of its labor laws, 110 million desperately needed new jobs could be created over 10 years, adding some 1.2 percentage points onto annual GDP growth.

Can Modi deliver where his predecessor failed? The good news is that it appears his BJP might have won an outright majority in the lower house of parliament, which would allow Modi to form a more stable administration than the fractured coalitions that have stymied reforms for years.

“The new government will without a doubt be in a stronger position to push through reforms than anyone had thought likely,” commented economists Mark Williams and Miguel Chanco at research firm Capital Economics. The bad news is that, in India’s federal system, Modi will also require the cooperation of state governments, most of which the BJP does not control. He’ll also have to fight it out with powerful special interest groups, like unions, that will likely resist changes to labor laws and other market-friendly reforms.

The bigger problem may be the very hopes Modi has raised. Reviving an economy of the size and complexity of India, amid its often conflict-ridden political system, cannot happen overnight. The impact of many reforms, once introduced, will take years to register their full effect. “Modi does not have a magic wand to turn around the economic fortunes of the country,” warned Societe Generale economist Kunal Kumar Kundu. Great expectations can also be a great burden.


China’s Great Property Boom May Be Coming to a Desperate End

A laborer works on the scaffolding of a construction site for a new residential building in Beijing on May 8, 2014 Kim Kyung-Hoon—Reuters

Analysts have warned for years that China is in the midst of a gargantuan property bubble and the inevitable reckoning may have finally arrived as massive oversupply and a tightening of credit appears to be crushing the market—with consequences for the global economy

You know a property market is in trouble when developers stage long-jump contests to attract buyers. That’s what happened earlier this month in the eastern city of Nanjing. Looking to sell apartments in a new residential complex, a local newspaper reported that agents from the developer, Rongsheng Group, lined up potential customers behind a queue and asked them to leap forward. Those who jumped the farthest got the biggest rebates — up to $1,600.

Chinese newspapers these days are riddled with such tales of desperation. On May 9 in the central Chinese city of Changsha, pretty girls were enlisted to hand out 50,000 tea eggs to lure people into a housing fair. Developers in Shenzhen and Fuzhou are offering to sell apartments with no down payment. In Hangzhou in April, two real estate agents competing for buyers got into such a vicious fistfight that the police had to intervene.

Are we witnessing the end of China’s great property boom? For years now, some analysts have warned China was in the midst of a gargantuan property bubble, ready to burst at any moment, with dire consequences. But Chinese real estate defied the naysayers and continued to soar. Both developers and customers, bypassing restrictions imposed by policymakers to constrain the industry, continued to build, invest and propel prices higher.

Now, though, the inevitable reckoning may have finally arrived. Massive oversupply combined with a tightening of credit orchestrated by the government appears to be crushing the market. Government statistics show that the amount of unsold commercial and residential property hit an all-time record in March. “We are convinced that the property sector has passed a turning point and that there is a rising risk of a sharp correction,” analysts at investment bank Nomura commented in a May report.

Falling apartment prices spell bad news for China’s economy. Real estate is one of the main drivers of China’s growth, with property investment accounting for 16% of GDP by Nomura’s calculations. A downturn could dash hopes for a recovery of the world’s second largest economy, already suffering through its worst slowdown in more than a decade, and the impact would be felt across the world. Real estate investment in China affects global prices of commodities like iron ore, so a slowdown can send shockwaves from Australia to Brazil. Falling property prices could also subvert the wealth of the Chinese middle class, dampening consumption of everything from cars to coffee. That could hurt companies like General Motors, McDonald’s and Starbucks.

Beijing’s leaders got themselves into this mess with their go-slow approach to reform. In the country’s tightly controlled financial markets, the average Chinese citizen has few options when investing his or her newfound wealth. That has made property option No. 1 for investors, pushing up the market to dizzying heights. Now the declining market presents some tough choices for policymakers. A sharp downturn in property could lead to serious financial problems at the nation’s indebted developers, causing bad loans at the banks to rise. Developers that borrowed from the country’s poorly regulated shadow-banking industry could cause even worse problems for the financial industry. Depressed property could also present the government with a major social issue. With so many Chinese families having invested their savings in apartments, falling prices could lead to widespread discontent.

There is ample evidence to suggest that the deflating of Chinese property could turn very ugly. A Barclays economist warned that the “risks of a disorderly adjustment are real and rising.” Nomura points out that new housing starts, an important indicator of where the market is headed, plunged in the first quarter of 2014. Property sales declined too in 2013. “It is no longer a question of ‘if’ but rather ‘how severe’ the property market correction will be,” the investment bank asserted.

The question now is: What will Beijing do? So far, the country’s top leaders have been (wisely) allowing China’s overall growth to slow while they focus on controlling debt and reining in the out-of-control financial sector. A tumbling housing market, however, will put more pressure on the government to reverse course by loosening credit to pump up growth — a strategy that might alleviate pain in the short run, but only intensify the economy’s long-term problems of debt and excess capacity. The central bank this week already issued guidelines encouraging banks to speed up mortgage approvals and offer reasonable rates of interest for some home buyers.

China’s problems with property shine a spotlight on how the country’s continued foot-dragging in liberalizing and strengthening its financial sector and altering its investment-obsessed growth model are creating major threats to its stability. And it is yet more evidence of how China’s role in the world has jumped from being a critical support for growth amid a disastrous downturn in the West, to becoming a primary risk to the health of the global economy.

TIME Economy

The World’s Mania for Economic Data Is Pretty Silly

Getty Images

Want to double your GDP? That's easy. Just calculate it differently

In early April, Nigeria achieved an amazing feat. Overnight, its economy swelled by 89%. Just like that. The West African giant has been posting pretty impressive growth rates recently. But it wasn’t fresh investment, surging consumer spending or high oil prices that generated the GDP windfall. Nigeria can thank its statisticians.

Nigeria’s bookkeepers made a few changes to how they calculate GDP, updating the base year for determining prices and improving data collection. And voila! GDP almost doubles with a few clicks on a spreadsheet. This isn’t an economic magic trick or some kind of corrupt shell game. Economists have more confidence in the new figure than the old. Nigeria had not been refreshing the way it measures GDP as it should have been.

Confused yet? Global financial markets thrive upon data. Every new figure or percentage gets analyzed, reanalyzed, debated, discussed, dissected and analyzed some more. The reality, though, is that many important economic statistics aren’t as hard and fast as we tend to treat them to the point where we have to wonder how much use they are to understanding the world economy.

Take a look, for instance, at China. Much praise (or concern, depending on where you sit) has been lavished on China’s rapid ascent. But the Chinese data we use is riddled with question marks. Its GDP figures, for instance, just don’t add up. A recent report from Bank of America Merrill Lynch commented that the sum of the GDPs of China’s provinces doesn’t match national GDP, though the investment bank also noted that the discrepancy has narrowed recently, “perhaps due to less data rigging.”

China’s current trade data is also screwed up because companies were caught last year fabricating exports as a way to evade the country’s capital controls. Perhaps we should take the advice of China’s Premier, the No. 2 policymaker in the nation, who, earlier in his career, said Chinese GDP figures are “man-made” and “for reference only.”

Nevertheless, these statistics are taken as official. Then they are put through another round of numerical aerobics. Headlines turned heads in April when new figures from a World Bank report estimated that China’s economy was much larger than originally thought. The data suggested that China would overtake the U.S. as the world’s No. 1 economy as early as this year, much more quickly than anticipated. This prompted all sorts of talk about the decline of the West and a new world order led by China.

But again, we find ourselves in a statistical conundrum. To compare GDPs from country to country, the figures are usually converted from their national currencies into U.S. dollars using exchange rates. But some analysts believe that this method is flawed. Exchange rates, the thinking goes, fail to properly measure GDP since they fluctuate and can’t fully account for different prices in varied countries. So the International Comparison Program, coordinated by the World Bank, offered an alternative using “purchasing-power parity” (PPP), which adjusts for the prices of goods and services across economies.

The result: China’s GDP practically doubles, from $7.3 trillion in 2011 using exchange rates, to $13.5 trillion based on PPP. How’s that for different? (China’s economy is far from the only one inflated in this way. India’s tripled by the ICP’s calculations, to nearly $5.8 trillion.)

Which number is right? Derek Scissors of the American Enterprise Institute blasted the ICP, saying the PPP method “makes no sense.” PPP comparisons were devised to better understand personal incomes and consumption, and using them to compare economic size “stretches the idea of PPP beyond the breaking point.” Instead, Scissors recommends comparing economies not on GDP at all, but on a measure of national wealth.

Obviously, the experts don’t agree on which statistics to believe. That would be of purely academic interest if data weren’t taken so seriously. Economists and investors make all sorts of choices based on statistics that can change radically depending on who is doing the calculating.

It isn’t just GDP data that suffers in this way. U.S. financial markets gyrate wildly based on jobs data released by business-services firm ADP, since it is widely seen as an indicator for the official report from the U.S. government released at a later date. Yet ADP has proved a poor forecaster, even after an overhaul of its methodology, inspiring one economist to call the report “a joke.”

Policymakers are also stuck trying to make decisions based on conflicting data. William Galston, once an adviser to President Bill Clinton, recently argued for action to ensure workers are properly rewarded for their increased efficiency. Based on the stats he was using, workers were producing more, but wages haven’t been rising to properly compensate them for that extra contribution and that was widening inequality and creating a major economic headache.

“For the sake of economic growth, social mobility and political stability, we must think more boldly about reforging the connection between compensation and productivity,” he wrote. That led the Cato Institute to condemn Galston for employing “statistical fog” to promote “the worst economic policy idea of the past 40 years.” Cato argued that data upon which Galston based his argument was faulty, and by using supposedly superior methods, the imagined gap between wages and productivity vanishes.

What can we do? Economic statistics are what they are imperfect numbers based on imperfect data and twisted further by contending methods of analysis. Just keep that in mind next time you dip into a database.

TIME europe

The European Economy Needs Another ‘Whatever It Takes’ Moment

Belgium EU Daily Life
A homeless man rubs his eyes as another man passes by outside the E.U. Council building in Brussels on Monday, Nov. 18, 2013 Virginia Mayo—ASSOCIATED PRESS

European Central Bank president Mario Draghi's 2012 promise to do "whatever it takes" to save the euro was a turning point in the E.U.'s financial crisis. The same resolve is needed now

In July 2012, Mario Draghi, president of the European Central Bank, stood before investors at a London conference and made a proclamation that changed the fate of Europe. Fear in financial markets about the unsustainable debt mounting on euro-zone governments was threatening to tear apart the beloved monetary union. But Draghi would have none of that. His central bank “is ready to do whatever it takes to preserve the euro,” he stated bluntly.

That moment is widely regarded today as the turning point in Europe’s financial crisis. Since then, the turmoil that could have crushed the dream of European integration has receded. The yields on the sovereign bonds of Spain and Italy, which had risen to levels at which they would likely have required expensive bailouts, returned to normalcy, and the risk to the survival of the euro dramatically decreased.

Draghi’s strong statement worked because it showed a degree of resolve that had until then been lacking in efforts to quell the debt crisis. But ironically, the resolve that ended one stage of that crisis has only perpetuated the next stage: fixing the damage inflicted on the average European family.

The fact is that Europe has grown complacent in confronting its problems. The region’s political leaders are going about their business as if the crisis is over. It isn’t. Sure, the euro zone has climbed out of recession and, after six years of trauma, appears to be on the mend. The countries that required European Union-backed rescues are beginning to exit from them. But it’s hard to call what is happening a recovery.

The latest forecast from the International Monetary Fund estimates GDP in the euro zone will expand a mere 1.2% in 2014, compared with 2.8% for the U.S. Some of the most important European economies aren’t even moving at that lackluster pace. The IMF expects France to grow a mere 1%, and Italy only 0.6%. Meanwhile, with prices barely rising, concerns have arisen that the euro zone could plunge into debilitating deflation, which would make the debt burden of Europe’s weakest economies even heavier.

Europe has also made almost no progress in solving its gut-wrenching unemployment problem. The latest euro-zone jobless rate is a woeful 11.8% — a year earlier, it was 12%. For some countries, unemployment remains almost incomprehensible. Spain’s rate is 25.3% and Greece’s 26.7%. Youth unemployment, meanwhile, stands at 23.7% in the euro zone. On top of that, nearly 10 million people in the European Union lucky enough to hold at least part-time jobs are underemployed.

If this isn’t a crisis, what is? In the U.S., such depressing statistics would probably spark political and social upheaval. Yet Europe’s politicians don’t seem particularly alarmed. No one is scrambling to urgent leadership conferences as they had during the old stage of the debt crisis. Two years ago, there had been a push for a strategy to boost growth and ease the pain for the euro zone’s weakest economies. That has remained mere talk. Italy’s Finance Minister recently complained that the E.U. paid no more than “lip service” to creating growth and jobs.

The reforms that could aid the millions of jobless and restore better growth are moving at a crawl. In Italy, newly installed Prime Minister Matteo Renzi (the country’s fourth leader since 2011) is attempting to restart an effort to liberalize the over-regulated economy after two years of minimal progress, but it is far from certain the country’s politicians, beholden to special interests, will act with the urgency required.

Even those measures that have been implemented often fall short. The Organisation for Economic Co-operation and Development recently praised Spain’s labor-market reforms, which allow firms to hire and fire workers more easily, for helping to create jobs. But the report then went on to say that more was needed, especially to assist young workers. (Youth unemployment in Spain is a staggering 53.9%.)

Nor has there been a big rush to press ahead with the integration within Europe that could give the region’s economy a boost. The German government is reviving a push for more centralized governance in the euro zone, including a budget commission that would have the power to veto national spending plans – the type of measure many economists see as critical to stabilizing the monetary union. But efforts to use integration as a tool to boost growth and jobs remain sidelined. A recent report from the European Parliament showed that by reducing remaining barriers to cross-border business in sectors like e-commerce, the E.U. could add a badly needed $1.1 trillion onto its GDP.

There are other ways, too, in which the varied nations of the union can help each other, if they so chose. A promising initiative from Berlin to offer young people across Europe language and job training to work in Germany has been a wild success – so much so that the program got overwhelmed.

We need to see more such efforts. But the problem in Europe today is the same that has plagued the region’s efforts to fight its economic crisis from the very beginning. Despite lofty talk of “more Europe,” each country’s national politics get in the way. That continues to undercut the intra-Europe cooperation that would produce long-term benefits but requires short-term sacrifice. Germany angrily rebuffs criticism that its export-led growth model – which produces a larger current account surplus than China’s – hurts its euro-zone partners, when changing that model, by, for instance, liberalizing its own tightly wound domestic service sector, would ultimately benefit everyone.

Back when Draghi made his now famous pledge, many bankers (especially in Germany) worried that when pressure from markets receded, Europe would slip back into its usual do-nothing mode and lackadaisically allow the region’s problems to persist. The trials of millions of European families don’t seem to be sufficient to stir the continent’s leaders to action. Europe needs another “whatever it takes” promise – this time to do “whatever it takes” to create growth and jobs. Though apparently, nobody has the guts to make it.

TIME Economy

China Could Overtake the U.S. as the World’s No. 1 Economy This Year

A worker walks past a steel factory in Beijing
A worker walks past a steel factory in Beijing on April 1, 2013 Kim Kyung Hoon—Reuters

New data from the World Bank suggests China could surpass the U.S. as the world’s biggest economy as early as this year, a day that was always meant to arrive after China began its quest for wealth in the 1980s, but it will just veil the reality of its economic weaknesses

China’s economy is catching up to the U.S.’s much more quickly than anticipated. That’s according to a new report from the International Comparison Program of the World Bank.

The study recalibrates GDP statistics based on updated estimates of “purchasing-power parity” — a measure of what money can actually buy in different economies. In the process, the economy of China comes out far larger than we had previously thought. Its GDP surges to $13.5 trillion in 2011 (the latest year available), compared with the $7.3 trillion calculated using exchange rates. That catapults China’s economy much closer to that of the U.S. — at $15.5 trillion. Forecasting ahead, these figures show that China could overtake America as the world’s largest economy as early as this year.

This day, of course, was always going to arrive. The ascent of China to the world’s No. 1 slot has been inevitable ever since the country embarked on its great quest for wealth in the 1980s. With a population heading toward 1.4 billion, the question has been when, not if, China will topple the U.S. from its lofty perch. Still, we can’t ignore the historic significance of that switch. The U.S. has been the globe’s unrivaled economic powerhouse for more than a century. The fact that China will replace the U.S. at the top is yet another signal of how economic and political clout is rapidly shifting to the East from the West.

That quickly gets everyone’s passions boiling over. To many Chinese, becoming No. 1 is vindication for what they feel has been two centuries of humiliation at the hands of an aggressive West and proof that its authoritarian, state-capitalist economic model is superior to the democratic, free-enterprise systems of the U.S. and Europe. In the U.S., losing the top spot is seen as a symbol of America’s decline on the world stage.

Yet we shouldn’t get ourselves too worked up. These new figures don’t mean as much as many people think. Leaving aside the obvious statistical questions the report raises about the value of GDP figures generally, where the U.S. and China rank misses the more important point: bigger isn’t necessarily better.

Even if China does become No. 1, that would just be a mask covering up the reality of the economy’s weaknesses. Some of the factors that have been driving GDP upward are also signs of China’s deteriorating economic health — investment in excess capacity, the construction of wasteful real estate projects and the buildup of crazy levels of debt. China is losing its cost competitiveness but still lags badly in the managerial expertise, technology and financial professionalism necessary to develop a truly advanced economy.

Beijing’s leadership is embarking on an ambitious program of reform to make the state-led economy more market-oriented and give private business greater sway. But the challenges of implementing these reforms are huge and could cause a dramatic economic slowdown, or even worse. Many economists and analysts (myself included) have openly wondered if China is heading toward a full-blown financial crisis.

On the flip side, if the U.S. slips from its No. 1 position, it doesn’t spell doom. The U.S. still has a substantial lead in innovation, and its dominant position in many industries and sectors is not about to vanish. New York City will remain the world’s premier financial center, and the dollar will reign supreme on the world stage for some time to come. Still, wherever the U.S. ranks, its economy too is badly in need of reform. Better infrastructure, a smarter tax code, an improved education system and more determined efforts to close the income gap would also strengthen the economy’s foundation for growth.

So we shouldn’t get too stuck on who is No. 1 and who isn’t. Ultimately it’s what you do with your economy, and not its size, that matters.

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