On the day the Olympic Games opened, the Shanghai stock exchange closed at its 19-month low

Today China is in the news because of the Olympic Games in Beijing. It has been in the news since over a decade because of the unprecedented economic and social developments that are taking place in the ancient country. Without any doubt, the world will duly be impressed by the carefully stage-managed Beijing Games. Not without reason China celebrates this huge and costly event as the global recognition for the powerful return of the Middle Kingdom onto the world stage. To draw attention to the realities behind the Chinese miracles exactly at this festive moment may look like being a spoilsport. However, it may create a useful balance to all the enthusiasm during the forthcoming days.
Some 30 years ago, a Chinese who owned 10,000 yuan renminbi was considered rich. Today, China has a solid middle class of around 100 million households with assets of at least 60,000 yuan renminbi. Some 30 years ago, the area of Pudong in Shanghai had nothing but ricefields and a few decrepit factories. Today, this financial centre of China has several hundred skyscrapers and wide avenues that compete with the best in the US.
These are indeed miracles that deserve the admiration of the world. However, there are also some realities to be considered. China, like India, suffers at the moment from a bout of inflation. If one believes the official statistics, the current inflation rate is slightly lower than in India. Nevertheless, all those countless Chinese savers who have put their money into bank accounts are, at present interest rates, bound to lose out. Not without reason, the government fears that persistent inflation could lead to popular unrest. This is particularly dangerous in a system which, unlike India, has no safety valves. The people cannot get rid of the politicians that are responsible for the inflation. There are no elections, there is no Parliament that could take government and the leadership of the Communist Party to account.
Of course, China, like India, can claim that rise in world prices, notably for raw materials and for energy, are fuelling inflation. But, in China’s case, there are important homemade factors, too. If China were to adopt a more realistic external value of its currencies, it could neutralise some of the inflationary pressures. However, unlike in India, when it comes to monetary policy, the central bank, that is to say the People’s Bank of China, is not independent, but under the
strict control of the party leadership.
The construction that has taken place not only in Shanghai but in practically every major provincial town is impressive indeed. Shenzhen, which some three decades ago was an anonymous village in Guangdong province, can today compete with the skyline of neighbouring Hong Kong.
Once again, it is useful to do a reality check on these truly miraculous developments. Travelling through China, it is easy to see that many of the huge construction projects have been left half finished. Office towers and apartment complexes, even extensive shopping malls, are nothing but empty shells of cement and steel, without even the windows having been put in. The patina on the cement is an indication of how many rainy seasons have passed.
One wonders on whose books these “white elephants” are kept, which institution is left with these obviously unproductive assets. To these wasted projects one has to add the evident overheating of the high-end property markets in major Chinese cities.
The world is, at present, focused on the bad loan crisis in the US, which is the result of a real estate market that over years had lost contact with reality. When a few years ago major Chinese banks such as the Bank of China or the Industrial and Commer-cial Bank of China prepared their IPOs, they received state funds to improve their credit portfolio. Billions from the country’s foreign exchange reserves were injected to make the volume of bad loans the banks held more palatable to the investor.
Today the question must be asked which new bad credits are being accumulated by the Chinese banking system, created by a real estate market which on the one side is overpriced and on the other side is threatened by an excess of supply of properties in its high-end segments.
It is significant that on the day the Olympic Games opened, the Shanghai stock exchange suffered another setback and closed at its 19-month low. Maybe a reality check is already in the pipeline.
Many of the Chinese miracles have been made possible not only by a determined and visionary leadership, but also by innovative accounting. Major Chinese banks have impressed the world with multi-billion global IPOs. However, on a closer look, one would rather put one’s money on the conservative Indian banks, which are not prone to supporting miracles.

The writer is the Far East correspondent of Swiss daily Neue Zurcher Zeitung