China announced a series of steps last week to attempt to stabilize its economy. China's economy is in trouble, and the recent moves are part of Act I in what threatens to be a long drama. And for outsiders, there's no way to judge the extent of the trouble and what specifically is going wrong.
Suppose you're in charge of an air traffic control system that has to track and guide the takeoff and landing of thousands of aircraft every day. Now imagine there's one huge plane whose instruments aren't working, and whose crew has the habit of not telling the control tower what it's really doing. Not a pretty situation -- but a fair analogy for where China is economically right now.
History teaches us that dictatorships breed endemic misreporting. This is because most officials live in fear of retribution for real or imagined sins, and they understand that the way to get ahead is to stick to the party line and tell their bosses what they want to hear. And so everyone who works with official Chinese statistics assumes those figures are "cooked."
The Chinese economy is large; its gross domestic product is roughly $8 trillion. The broad outline of the problem is this: For several decades China has grown by investing in production for export -- and exports did indeed grow rapidly. But following the global crash of 2008, demand for Chinese exports declined. So the Chinese government poured money into domestic investments for housing, new factories and infrastructure like airports, roads and rail lines. Most of this money came one way or another from state-backed credit, so the incentive for economic actors was to get hold of lots of those loans and not worry much about risk; after all, the state was behind the massive investment drive and wouldn't want companies or local government vehicles to go belly up.
But for the economy to grow and the state-backed loans to be repaid, those investments have to produce a return. And it looks now like there may be too many new ports, too much expensive new housing, too many new factories whose goods don't have buyers -- and too many bad loans.
The Chinese government has a wide range of tools with which to address these problems. The leadership has the equivalent in U.S. terms of the powers of the president, Congress, the Federal Reserve, most of the private banking system and the Supreme Court combined, as well as a handsome stash of foreign reserves it can use to keep the currency stable. The government can do virtually anything it wants in terms of both fiscal and monetary policy.
But part of the challenge for China's leaders is to figure out what to do when the information telling them where the economy is going is unreliable because the layers of officials below them are reluctant to give them accurate reports.
Recent bankruptcies and spikes in overnight interbank lending rates are signs that there are some rough adjustments ahead for China's economy. The impact of those on the already fragile global economy will be negative. So the rest of the world needs to prepare a response along three lines. First, get the International Monetary Fund ready to help the Chinese stabilize their economy. Second, identify and insulate financial system links that might allow weak Chinese banks to contaminate European and American banks. And third, get serious about putting in place strong, sensible growth policies of their own.
It's hard to say when, where or how the overheated Chinese economy will have its hard landing. But these three steps are commonsense measures that should not wait.
Peter Goldmark, a former budget director of New York State and former publisher of the International Herald Tribune, headed the climate program at the Environmental Defense Fund.