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China correspondent Stephen McDonell journeys through China to try to find out just how sustainable the country’s incredible growth – more than 10 percent every year – really is.

“They consume the lowest share of GDP ever recorded. It’s not at all practical - it’s not logical and it’s not sustainable.” Professor Michael Pettis.

Along the way McDonell visits shipyards, prestige real estate developments and an incredible “ghost city” – a whole town in Inner Mongolia built from scratch, complete with theatre, museum and library, and row after row of apartment blocks – almost all of them empty.

It’s a concrete example of the way the Chinese economy works – from the top down. State owned banks provide loans to more state owned companies who build and develop, paying taxes to local authorities – possibly where no demand actually exists.

“This place is either a bold piece of planning for the future which is yet to reach fruition… or a very large white elephant.”
China correspondent, Stephen McDonell, talking about the ghost city of Kang Ba Shi.

Chinese authorities believe if they build it, people will come.

But Professor Michael Pettis, a former Wall St banker who now teaches at China’s most prestigious university, says the country is far too reliant on foreign consumption. That’s a problem when both Europe and the US are in the financial doldrums.

There is a solution though, as McDonell discovers, and it’s found within China itself.

Beijing skyscrapers

Music

00:00

MCDONELL: China’s striking capital - at the heart of a blistering economy - is a city full of possibilities. Beijing’s bright lights drag people here as if they were insects, hoping to get a piece of what this booming city has to offer.

00:17

Band rocking out in van

Music

00:35

MCDONELL:  For the boys who make up the band Rustic, this is a place of rock and roll dreams. They drifted into Beijing from nearby Hebei Province two years ago and they have no doubt that tomorrow belongs to them.

00:46

Drummer

WO JUE DE: [Drummer from band] “It’s not an issue of being afraid. If you are capable, you will get a job. After all, there’s no such thing as a free lunch”.

01:11

Band members in van

MCDONELL: And their songs cover all the big issues.

01:25

Bass player

BASS PLAYER: “Girls, money, beer, life”.

01:32

Van arrives at D22. Band performs

Music

01:40

MCDONELL: It’s true that you’ll find youthful exuberance anywhere in the world, but in China, when you paddle on to the big wave of life, you’re doing so in a country that just doesn’t seem to have a reverse gear and these children of the children of the children of the Revolution seem justifiably optimistic that this country will continue to grow economically and offer its people all the rewards that such growth brings.

01:44

Music

02:16

JING JI: [Lead Singer of band Rustic] “I know nothing about the economy. I am a person living at the bottom.

Lead singer

I know nothing, but I can feel everything is progressing. It will become better and better”.

02:28

Band perform

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02:37

MCDONELL: But there are those who are not so sure that China’s economy can keep up this pace.

PROFESSOR MICHAEL PETTIS: “Many people

02:40

Pettis/Band perform

believe that we’ve reached a point in China where we’re producing stuff or investing in infrastructure that is not economically viable. That, in the future, we’re not going to be able to use this stuff and we’re still going to have to pay for it”.

02:49

Street vendors/ Pettis walks

MCDONELL: Into the world of unbridled optimism about China’s economic future steps Professor Michael Pettis. While others see nothing but improvement here, wherever he goes he sees imbalance. This former Wall Street banker is now a leading authority on the Chinese economy and while he’s not yet predicting a collapse, he definitely sees trouble ahead for China.

03:14

PETTIS:  “In the US they consume too much, they consume far more than they produce. China has the opposite problem, in China they produce far more than they consume and they consume the lowest share of GDP ever recorded.

03:41

Pettis. Super: PROFESSOR MICHAEL PETTIS, Peking University

It’s not at all practical, it’s not logical and it’s not sustainable for such a large economy like China to depend so heavily on foreign demand for its goods”.

03:57

Pettis teaching

[Teaching students] “There is a big debate about how effective that is in a country with a currency regime”.

MCDONELL: Michael Pettis has given up the big bucks to teach economics at China’s most prestigious academic establishment, Peking University.

04:07

And he has a cautionary message for these leaders of the future. China needs to buy more of its own stuff and stop trying to sell as much to countries like the United States or it’ll face a serious debt crisis.

PROFESSOR MICHAEL PETTIS: “You don’t have an infinite capacity for borrowing. If the US could borrow infinitely then we could keep this game going on forever, but it can’t,

04:23

Pettis

so at some point it has to stop and that stopping means rebalancing. So one way or the other China will rebalance. It’s not an option”.

04:48

Ship building

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04:57

MCDONELL: If Professor Pettis is right, then this is what you might call over capacity - the massive Waigaoqiao Shipyard is one of the largest in China.

05:05

This state owned company produces a new ship every two weeks. To build these giants of the sea, it relies on a workforce of twenty thousand people and employment stability is the government’s number one priority.

05:20

Music

05:38

MCDONELL:  Companies like this not only dragged China through the world economic crisis, but other countries as well.  And in more ways that one. Here ships like this one are being built to carry iron ore to China. In China, that iron ore is turned into steel, and steel is then brought here to make ships, which in turn go back to pick up more iron ore and around and around goes the economic cycle.

05:40

But how long will  China maintain this same level of demand for the raw materials of other countries?

PROFESSOR MICHAEL PETTIS: “We do have a problem with too many ships, too much steel.

06:18

Pettis. Super:
PROFESSOR MICHAEL PETTIS, Peking University

At some point you have to sell this stuff and if you have difficulty selling the stuff then at some point in the future you’re going to write it down and take losses. You’re going to have a negative impact”.

06:31

Return  to ship building

MCDONELL: The world economic crisis led to a collapse in international demand for Chinese goods, so China launched a massive $800 billion stimulus package. It brought forward building projects and ordered state controlled banks to increase loans.

06:40

TAO YING: “The ship owners didn’t want new ships.

07:00

Tao Ying

We were running out of cash and we could go and get bank loans”.

07:04

Ship building

MCDONELL: Tao Ying is Chief Engineer at Waigaoqiao Shipyard. He says the problem of overcapacity in his industry is real. He says China, South Korea and Japan produce one hundred million tonnes a year, when the actual demand is only tens of millions, leaving an estimated overcapacity of sixty or seventy million tonnes.

07:09

TAO YING: “For a solution, the key issue is the status of the world’s economy. If the world’s economy keeps going down overcapacity will become huge. Some enterprises might withdraw from the market and stop making ships.

07:36

Tao Ying

But judging by recent months we’ve seen an increase in our orders. We can tell the world’s economy is getting better. In fact, confidence in the economy has definitely returned”.

07:55

Ship building

MCDONELL: Yet many ship buyers are in Europe, and there are now worrying signs emerging in that part of the world.

08:11

Shanghai buildings

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08:19

Skyline

MCDONELL: Some say the best example of excess capacity in China is the real estate market. Flashy financial capital Shanghai, there’s been an explosion in both the number of new properties and also the price of them. There’s concern that this is a bubble getting ready to burst.

08:31

Shanghai World Financial Center

Dominating the new part of town, known as Pudong, is the tallest building in mainland China, the Shanghai World Financial Center. Chinese people call it “the bottle opener” and the outlook from its roof is truly something to behold.

08:59

View from Shanghai World Financial Center

Nearly half a kilometre above ground, you can see how much money is going into real estate in Shanghai. The view from here would seem to suggest that China’s building boom could almost go on forever.

09:22

McDonell with Michiho Kishi on roof area

The Japanese company, Mori Building, constructed this giant skyscraper. In exploring the tower with company spokesman Michiho Kishi, you do get a feeling that you’re on top of the world.

09:35

“If I came to this side of the river twenty years ago, what would I have seen here?”

09:54

MICHIHO KISHI: “The only things you were able to see in this area 20 years ago was a shipyard and a dock”.

09:59

MCDONELL: “But no towers at all, no tall buildings?”

10:06

MICHIHO KISHI: “Nothing, almost nothing. It looks like the countryside”.

10:08

Shanghai building activity

MCDONELL: In just two decades, a small forest of towers has emerged on Shanghai’s east bank. But recently some developers tempted by high prices, are said to be building far more than what’s needed.

10:14

Michiho Kishi

“What do you think about these predictions of some economists that we have a real estate bubble problem in China?”

MICHIHO KISHI: “Actually the current situation I can say is partially a bubble, partially a real economy”.

10:28

MCDONELL: “So it is partially bubble you think at the moment?”

MICHIHO KISHI: “Yes, exactly so. Especially the residential market seems part of the bubble economy, because now there is a real demand from people living in Shanghai. They can’t afford a residence to buy – especially younger people”.

10:44

Young couples

MCDONELL: The Chinese Government is worried and is now bringing in price controls and making loans harder to get. This has reassured people like Michiho Kishi.

11:05

MICHIHO KISHI: “We are very sure that Shanghai will be the centrepiece of the whole eastern Asian economy.

11:18

Michiho Kishi

So we can survive in this market”.

11:26

River/Building shots

MCDONELL: With its huge commercial clout, Shanghai can get through any crisis like this, but other cities might be on shakier ground.

11:32

Transition to Kang Ba Shi

The new city of Kang Ba Shi in Inner Mongolia has been ridiculed by Chinese people as a ghost city. Here there are no traffic jams. You’re not likely to bump into people you don’t like in the street, or anyone for that matter.

11:43

Apartment blocks

There are rows and rows of new apartment blocks. Nearly all of them are empty, and still they keep on building.

12:07

Building site

YANG XIAO GANG: [Local Real Estate Agent] “The city’s future will be great. There will be a lot of people.

12:23

Yang Xiao Gang

The ghost city will not exist anymore”.

12:27

Apartment blocks

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12:30

McDonell with Yang Xiao Gang

MCDONELL: Yang Xiao Gang is a local real estate agent who says he hasn’t any problems selling flats in this area.

12:43

Yang Xiao Gang/ Around Kang Ba Shi

YANG XIAO GANG: “All the apartments are sold out. Business has been good. All over Kang Ba Shi, real estate projects are being sold pretty quickly”.

MCDONELL: “It seems though that not many people are here in this area.

12:50

Yang Xiao Gang

Why is that?”

YANG XIAO GANG: “The main reason is that this is a new town, so the infrastructure facilities are not fully built yet.

13:07

New apartment blocks

However, more people will move here in the future”.

MCDONELL: Yet some say Kang Ba Shi is an example of government policies creating a bubble.

13:19

Building activity – more apartment blocks

Local authorities encourage building work to earn tax revenue. State owned enterprises are often the developers and can conclude to control prices. State owned banks have been told to hand out the loans, and many of these flats have been bought with cash giving local coal company bosses somewhere to park their riches. They have no intention of living in them. So it’s hard to measure if this would-be city can be justified by actual demand, or what might happen to prices when they need to sell later.

13:29

Civic statuary

The centre of town is quite a long way from what you might call bustling. This place is either a bold piece of planning for the future, which is yet to reach fruition, or a very large white elephant. But somebody seems pretty sure that this place will work.

14:07

Civic buildings

The heart of the city has a swag of new public buildings, including a theatre, a museum and a library. All they need now is people.

14:30

Pettis  with Shadow Reserve Bank group

Monitoring developments like this is an elite group. It’s not a normal class, this is known as the “Shadow Reserve Bank”.

14:47

PROFESSOR MICHAEL PETTIS: “They act like they are the Central Bank of China. These fifteen students and then a few observers probably know more about central banking and monetary issues than

15:05

Pettis

all but, you know, two or three hundred people in the world that work at central banks.”

15:18

Pettis  in Shadow Reserve Bank class

MCDONELL: You can only join this group when somebody leaves and even then you have to be voted on. Lately, they’ve been discussing ways in which ordinary households are subsidising big corporations in China.

15:25

PROFESSOR MICHAEL PETTIS: “If my wages are low, that takes income away from me and it gives income to whoever employs me. If interest rates are low, savers, who are basically the households”…

15:42

Pettis. Super:

MCDONELL: “Ordinary families”.

15:55

PROFESSOR MICHAEL PETTIS, Peking University

PROFESSOR MICHAEL PETTIS: “Ordinary families.... they earn much less on their savings then they should have earned and that is used to subsidise borrowers, who in the case of China are mostly manufacturers or real estate developers or infrastructure investments.

Hangzhou – Gardens and temples

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16:13

MCDONELL: Hangzhou is one of the cultural jewels of China. Here the ancient gardens and temples of emperors sit beside a modern thriving city. People from all over China come to visit, and many of the locals are quite affluent.

16:33

McDonell to camera/ locals

But here, like in all Chinese cities, are the working class. We’ve come to visit some of them to see if they’re enjoying the fruits of China’s economic success.  The theory goes that ordinary people in places like this are effectively subsidising big business. That if you keep a lid on people’s living standards, you’re also ensuring that the wheels of industry keep turning.

16:52

Fang De Fang on street

Fang De Fang is retired and tops up his pension by fixing people’s houses.

FANG DE FANG: “I don’t spend much myself.

17:21

Fang De Fang

I usually only spend money on cigarettes and the like. We live economically and won’t waste money other than on daily expenses.

17:31

Fang De Fang with friends

We save more than we consume”.

MCDONELL: Shanghai is only two hour’s drive from here, but Fang De Fang has never been there. In his case, you can see some of the problems that Chinese manufacturers face in trying to sell more goods locally.

17:40

People on street

FANG DE FANG: “For ordinary people, if we didn’t have this pressure on us we might be able to spend our money.

18:01

Fang De Fang

We need this little bit of savings in case anyone in the family suddenly gets ill”.

18:11

Zhao Guang Sheng fixing bikes on street

MCDONELL: And all around this area you hear the same story. Zhao Guang Sheng describes his life here as ‘crawling’, and says that without community support he couldn’t keep his bike repair stall open.

18:16

“How would you describe your life recently?”

18:33

Zhao Guang Sheng

ZHAO GUANG SHENG: “Difficult”.

MCDONELL: “Why is that?”

ZHAO GUANG SHENG: “Life is difficult… business is difficult. I have to get up very early, and go to bed really late.

18:36

Zhao Guang Sheng fixing bikes on street

I’m under a lot of pressure. What happens if I fall over and the family has no income?”

18:49

MCDONELL: People like Zhao Guang Sheng will only start spending on non-essentials if the government provides a better social safety net.

ZHAO GUANG SHENG: “I don’t have medical insurance”.

19:00

Zhao Guang Sheng

MCDONELL: “What happens if you’re not well?”

ZHAO GUANG SHENG: “I have to buy any medicine myself. I have no choice”.

MCDONELL: “Do you have enough money for that?”

ZHAO GUANG SHENG: “How could I have enough? Medicines are really expensive”.

19:11

Shi You Ling selling fruit and vegetables

SHI YOU LING: “I am selling vegetables. How can I make money?

19:27

Shi You Ling

Life is very hard”.

19:35

Shi You Ling selling fruit and vegetables

MCDONELL: The Chinese Government keeps the value of its currency low, in part because they want the likes of Shi You Ling and her customers to buy more local goods - but for this you need spare money.

19:39

Shi You Ling

SHI YOU LING: “We’re renting a place to live in, and for business. We have no choice”.

MCDONELL: “You haven’t bought a place?”

SHI YOU LING: “No”.

MCDONELL: “Why?”

SHI YOU LING: “We can’t afford it. The price is too high. We just can’t afford it”.

19:52

Man on bike/ people on street

FANG DE FANG: “To make consumption incentives work, ultimately people at the bottom need to have more money. Not everyone has money.

20:10

Fang De Fang

Right now, the rich are too rich and the poor are too poor”.

20:30

Hangzhou people shots on lake

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20:38

MCDONELL: Even so, most people are better off than they’ve ever been before, and plenty of them do seem to think that things can only get better.

20:43

Zhao Guang Sheng

ZHAO GUANG SHENG: “I am optimistic about my life. I am still pretty happy – I look for fun amongst the hardship”.

20:52

‘Rustic’ rock band performing

Music

21:06

Pettis at D22 listening to band

MCDONELL: Back in Beijing, we see another side of our former Wall Street banker, Michael Pettis. He runs the band venue D22. It’s a bar that specialises in giving unknown bands like Rustic a place to get their start.

21:18

PROFESSOR MICHAEL PETTIS: “What’s happening in China is something that maybe happens once every hundred years or so. You don’t really get too many chances to participate in something like this. It just

21:43

Pettis

won’t stop being more interesting. Every year it was more interesting than the last, so it’s become very, very difficult to leave”.

21:53

Band performing

MCDONELL: And for Rustic, they’ve just won the world’s Battle Of The Bands in London, securing prize money, a recording deal and a tour of Britain.

22:01

Music

22:12

Bass player

BASS PLAYER: “It doesn’t matter whether people appreciate us. We’re still very young”.

22:19

WO JUE ZHE: “I think we will have a bright future in China.

22:27

Drummer

We are very young. This is the most important thing”.

22:30

Lead singer

JING JI: “I have a lot of confidence for my future, but I don’t know if I can get successful or not but, I will keep doing”.

22:42

Train

Music

22:48

MCDONELL: That seems to be the motto of the whole country, to just keep on going,

22:53

Band performing/Shipbuilding

and this place does have a remarkable ability to confound the critics, to absorb any potential economic glitches and still charge ahead. The question is, how long can they keep up this pace?

22:57

Credits

Reporter: Stephen McDonell

Camera:   Robert Hill

Editor: Simon Brynjolffssen

Producer:  Charles Li

23:27