Is the Asian giant on the brink of collapse, or finding its new economic direction? Christopher Adams travelled to China to find opinions are divided

Like many Chinese engineering feats, it's hard to find a fitting superlative to describe Kunming's new airport.

With two runways, nearly 90 gates and a terminal covering more than 420,000 sq m, when it opened in 2012 it became China's fourth-largest airport.

The engineering company that helped create the Sydney Opera House, Arup, was involved in the design and a reported US$3.6 billion ($5.4 billion) was pumped into its construction.

And all of this in a city that's small by Chinese standards, with a population of just under 4 million.


The long-term strategy is for Kunming Changshui International to become an aviation hub linking the airport with nearby Southeast Asia and the rest of the world.

But it didn't appear to be operating anywhere close to capacity when The Business passed through last month. Many of the airbridges were sitting empty. Despite that, the passengers boarding this reporter's flight to Shanghai were inexplicably bussed out to our waiting aircraft.

Kunming Changshui is a temple to the heavy infrastructure investment that has bolstered Asia's biggest economy in recent years.

The sprawling, pagoda-shaped facility is just one of a vast number of projects -- including railway lines, bridges, roads and industrial developments-- unleashed after the global financial crisis with the aim of maintaining economic growth.

Back then, the country appeared to be the world's saviour, providing a hungry market for products ranging from Australian iron ore to New Zealand milk powder.

All was not what it seemed, though. The infrastructure splurge was fuelled by a credit binge of epic proportions.

China's debt-to-GDP ratio reached nearly 260 per cent at the end of last year, up from 155 per cent in 2008, according to an estimate by the Economist magazine.

That's roughly comparable with the eurozone and United States, but much higher than many of the country's emerging market peers.

Estimates vary wildly on how much of China's debt has turned sour.

Official figures say non-performing loans hit a 10-year high of 1.27 trillion yuan ($288 billion) last year, about 1.8 per cent of total lending. Some analysts, however, put the proportion much higher, at possibly 8 or even 9 per cent.

China's GDP growth came in at 6.9 per cent last year, the slowest pace in 25 years, according to widely questioned government figures.

The official line is that Beijing wants to rebalance the economy towards domestic consumption, and away from the investment-led expansion that created monuments such as Kunming's new airport.

But in a worrying development, the credit taps appear to have been reopened in a bid to maintain growth.

We've hung on too long to the ideal ... to the dream of what we hoped China would be

New lending reportedly surged by 6.2 trillion yuan in the first quarter of this year, more than 50 per cent faster than the same period of 2015.

Companies, particularly state-owned borrowers in the heavy industrial sectors, are taking on more and more debt just to cover existing loan repayments.

Fears are growing that such monumental credit expansion will lead to a bust -- either a major financial crisis or a less spectacular descent into the kind of economic malaise that has dogged Japan over the past couple of decades.

"Every major country with a rapid increase in debt has experienced either a financial crisis or a prolonged slowdown in GDP growth," Goldman Sachs' chief investment strategist for China, Ha Jiming, wrote in a report this year.

That's a worry for the world, and more particularly for countries -- including New Zealand and Australia -- which have made big bets on the Chinese economy.

Even Beijing is now publicly acknowledging the debt challenge.

In an article published last month on the front page of the People's Daily, regarded as a mouthpiece of the ruling Communist Party, an unnamed "authoritative figure" said maintaining growth though ramping up credit was like "growing a tree in the air" and sustained high leverage could trigger a financial crisis.

Many observers saw the article as an attack on the economic policies of the State Council, China's Cabinet, headed by Premier Li Keqiang.

One foreign economics correspondent in Shanghai remarked to The Business that China was verging on its "inflection point".

Prospects for e-commerce are strong, says JD Worldwide's Tony Qiu. Photo / Christopher Adams
Prospects for e-commerce are strong, says JD Worldwide's Tony Qiu. Photo / Christopher Adams

Overcapacity in heavy industry, dominated by state-owned enterprises, is one of the biggest challenges.

The country's surplus steelmaking capacity is thought to be larger than the combined production of the metal in Japan, the United States and Germany.

It's a myth that China is teetering on the verge of crisis -- this is a very integrated and solid economy

At highly indebted "zombie" state-owned enterprises, as many as 5 to 6 million workers are expected to be laid off over the next two to three years as part of China's efforts to address industrial overcapacity.

Beijing-based Kiwi Rodney Jones, principal of Wigram Capital Advisors, says New Zealand is too complacent about the economic risks facing the world's most populous nation and hasn't invested enough in understanding them.

"We've hung on too long to the ideal ... to the dream of what we hoped China would be rather than dealing with the reality of what's happened," says Jones, whose firm provides macroeconomic advice to hedge funds. "The fact is, the economic challenge is now profound."

He says it is possible that China's debt-to-GDP ratio has already surged past 300 per cent if the shadow finance sector is taken into account.

And the country is getting a lot less bang for its buck these days when it comes to credit-driven growth.

It's a myth that China is teetering on the verge of crisis -- this is a very integrated and solid economy.

"Right now it takes six to seven dollars of credit to create one dollar of GDP -- that's just not sustainable," Jones says. "Provincial banks are under tremendous strain."

He says a financial crisis is inevitable and New Zealand needs to look more critically at China. "We need to seek truth from facts," Jones says. "We need to stop being in la-la land."

But walking the streets of Shanghai, Beijing or even Kunming, you don't get a sense that anything is awry.

The high streets are bustling with armies of shoppers and the countless Starbucks are doing a brisk trade.

Chinese e-commerce giant Alibaba, regarded as a barometer of consumer sentiment, reported a 39 per cent jump in revenue, to 24.2 billion yuan, for the first quarter of this year.

Those dynamics provide ammunition for the "China bulls" -- commentators and analysts with a positive view of the nation's economic trajectory.

One of them is ANZ's acting chief economist for Greater China, Raymond Yeung.

In the Australasian bank's offices high above Shanghai's Pudong financial district, he points out the window.

"You've come here and seen what is happening on the ground," Yeung says. "Basically we can rule out the scenario of a hard [economic] landing -- this is certainly not true."

He takes solace from growth in China's service sector. "It's now more than half of the economy," Yeung says. "The service sector is booming."

Still, he concedes that China's debt levels are "an issue".

"This a key challenge," Yeung says. "This is one of the risks that we're seeing."

China Skinny's Mark Tanner is upbeat on consumer demand. Photo / Christopher Adams
China Skinny's Mark Tanner is upbeat on consumer demand. Photo / Christopher Adams

He says the Government's main economic policy directives this year are reducing debt, "de-stocking" in the real estate sector and addressing industrial overcapacity.

"It's obviously not easy to deal with these three tasks," Yeung says. "It's testing the Government's execution."

Investment adviser David Mahon, of Mahon China, is another China bull and says predictions of an impending collapse have been a regular feature of commentary on the Chinese economy for 30 years.

"China has an underlying economy with strong consumer demand," says Mahon, a New Zealander who has been based in Beijing since the 1980s. "The businesses -- manufacturing and service companies -- are largely profitable, certainly solvent and reasonably well-managed. The domestic economy is deep and varied enough that China's trade with itself has always been the engine that's driven this place."

Out of more than 170 sectors in the Chinese economy, he says only six are really struggling, including steel, glass manufacturing and mining.

"It's a myth that China is teetering on the verge of crisis -- this is a very integrated and solid economy," Mahon says, adding that most of the country's debt is internal.

But he says it's a mistake to provide credit-driven stimulus to "non-commercial" parts of the economy -- from municipal authorities being given the right to issue bonds, to loans for vast infrastructure projects.

"Those things are wasting a lot of money in China but that debt balloon is backed by US$3.2 trillion of reserves and an aggregate domestic household savings rate of 50 per cent," Mahon says. "There's plenty of money there and they could do this [stimulus] for four years but then the banks would have a cash crisis."

Mahon says the Chinese authorities won't let the debt load reach crisis level.

They know it's unsustainable to keep using investment as a means to run an economy.

Mark Tanner, of Shanghai-based market research company China Skinny, says he remains upbeat on the outlook for Chinese consumer demand, especially for imported food and beverage products from countries including New Zealand.

"If you're in the right area, I'd certainly be very bullish about China right now," he says.

Tanner says wages continue to rise in big cities like Shanghai.

And while China faces a demographic challenge because of its ageing population, he says spending among young Chinese -- many of whom are only children thanks to the one-child policy -- is bolstered by the property portfolios they stand to inherit from their parents and grandparents.

"I don't think consumption is going to slow down any time soon."

Indeed, e-commerce -- as illustrated by Alibaba's strong first-quarter result -- continues to boom.

In Beijing, The Business visited the newly-built headquarters of Nasdaq-listed online retailer, Alibaba's major Chinese rival, where the average age of staff members is around 27. It employs about 110,000 staff across China, roughly 60,000 of them involved in delivering goods to online shoppers.

JD Worldwide general manager Tony Qiu says China's slowdown will impact all sectors, but the outlook for remains strong.

"E-commerce is still a very healthy business because we have much higher than average growth rates compared with any other industry in China and other e-commerce industries around the world," he says. "We are very optimistic."

And the economic headwinds don't appear to have put a dent in Chinese tourism spending.

Almost 345,000 Chinese visitors arrived in New Zealand in the year to November, a 34 per cent increase on 2014. Chinese visitors spent $2.2 billion on personal travel in this country last year, according to Statistics NZ.

David Mahon, chairman of Mahon China. Photo / Christopher Adams
David Mahon, chairman of Mahon China. Photo / Christopher Adams

Tourism New Zealand's general manager for Asia, David Craig, says much of China's middle class is unaffected by the decline in the country's "sunset industries".

"Many of them are more connected to the growing consumer economy, which is just over 50 per cent of the total economy at the moment," Craig says. "In the tier 1 cities, household incomes are still rising and a number of studies suggest that for the upper middle class, wealth will continue and they are increasingly aspirational in their purchasing habits."

Air New Zealand's regional manager for Asia, Scott Carr, is similarly bullish. The airline has daily flights to Shanghai, which has a population of around 24 million, while Air China flies a Beijing-Auckland service in alliance with Air NZ.

"I don't fly to China, I fly to Shanghai," Carr says. "If you think that big macro story about factories out in the wop-wops is a problem, it is, and most of the consumers here in Shanghai might get hit by it in a couple of years time if it's really, really bad. But there's still opportunity in our business cycle to execute here and access consumers -- it's just so big."

Fonterra also remains confident about its most important market.

The dairy giant's managing director for Greater China, Christina Zhu, says the country is moving into the "deep water" zone of economic reform.

"Everybody understands it's hard and there is no guarantee of success for any single programme," she says. "But the direction the country has to go in is very clear because there's no other way. You can't go back and become a closed economy like we were 35 years ago."

Jones, of Wigram Capital, says embracing a truly free market is the only answer for China.

"But embracing the market means opening up and allowing our companies to compete here on an equal footing ... and they aren't willing to do this."

New Zealand's exposure

Exports: $11.3b -- 16 per cent of total exports

• That included $2.4b in dairy products

Imports: $10.4b

Two-way trade: $21.7b

(Year to December 2015)