As the United States and Europe struggle with debt crises, China’s economy appears in robust health, but analysts say its growth model is too dependent on investment and cannot be sustained.
Sitting on foreign exchange reserves worth nearly $3.2 trillion and with breakneck growth of 9.5 percent in the second quarter, the world’s second largest economy appears to have breezed through the global financial crisis.
“Clearly China is becoming a larger percentage of the world economy and its growth rate is higher than the developed world,” said Fraser Howie, co-author of “Red Capitalism: the Fragile Financial Foundation of China’s Extraordinary Rise”.
“It is becoming stronger as a result of that but I would argue that much of that strength is misleading,” he told AFP.
When the global economic crisis hit its huge export industry in 2008-9, China unleashed a torrent of credit to finance new highways, high-speed railways and real-estate projects, in a bid to stimulate domestic demand.
Now, experts warn China’s growth has become too reliant on investment.
“If you look at infrastructure projects, it is very clear that the banks have looked at them as risk-free lending because they’re guaranteed by the government,” said Patrick Chovanec, associate professor at Beijing’s Tsinghua University. “It does create growth but it also creates big problems down the road in terms of bad debt.”
China’s state auditor said last month that local governments held a massive 10.7 trillion yuan ($1.65 trillion) in debt at the end of 2010, warning there was a risk some might default.
Several days later, global ratings agency Moody’s said authorities may have understated that debt burden by as much as $541.6 billion, adding the proportion of bad loans could be higher than previously forecast. “The problem is not really what took place in 2009 and (China’s) initial response to the global financial crisis, the problem is that in 2010 and continuing on into this year, it became the new normal,” said Chovanec.
“It became the new growth model, but it is not a sustainable growth model,” he added.
Spooked by inflation, which hit a three-year high of 6.4 percent in June, China has been trying to stem the flood of credit by hiking interest rates, amid fears rising prices could cause social unrest.
It has also increased the amount of money banks must set aside several times.
But Michael Pettis, professor at Peking University’s Guanghua School of Management, believes that “China’s growth has become so unbalanced that it is going to be extremely difficult for it to change to a new growth model”.
The government has stipulated in its new five-year economic blueprint that it wants consumption to play a bigger role in growth, by increasing people’s purchasing power and further developing services and social security.
But month after month, economic indicators show that investment and exports still continue to rise faster than consumption.
The government does have powerful levers in its possession to adjust the direction of its economy. For instance, it controls the majority of large companies in the country.
As such, state-owned enterprises (SOEs) have better access to credit. But for many economists, this is a poor allocation of resources as the more competitive private sector is the main source of employment in China.
Analysts doubt that China, faced with a new debt crisis in the developed world, will be able to implement the same measures it did in the 2008 international financial crisis.
“Can China do the same again this time? Well, yes, it could - more cheap money flooding the system to build unproductive things,” said Howie.
“But ultimately that is a waste of resources and the model will eventually fail.”
Published in The Express Tribune, July 25th, 2011.
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fake paper money economies of the world coming to an end because of more greed and lies about every thing intrest syetem war against god.
Actually Indians are trying to compare their Call Center Industry Progress with Multi Dynamic Economy of China. Ohhh american economy is in crisis now, what will happen to this 70 billion dollar Call center industry.....................................
I think you have a limited idea of what areas are included in the Western region. Western China includes Xian and that huge mega city. China is also developing Xinjiang and parts of region..
Confucius say: "Make haste slowly....slowly...slowly". China to slow down speed of bullet trains http://www.deccanherald.com/content/153540/china-slow-down-speed-bullet.html China is going at a break-neck speed which is quite unsustainable in the long run. But, we should let it discover it in its own good time. The political system is the Achilles' heel of China. No cult - and Communism is a cult - ever lasts!
CHINA: 2000-2010: Export oriented becuase all manufacturing went to China 2010-2020: Further manufacturng units will move from Europe to China because of crisis 2020-2030: China will become the largest economy, with highest exports in almost all sectors and will declare itself SUPER POWER. By 2025 China will float whole USD reserves in market thus total crash of US currency By 2020: China will have enough reserves of oil & gas under control 45% of Kazakhstan 40% of African reserves 30% of Iran reserves.
(the statistics of Power Shift Strategy)
Sajida-Made in China still has the same meaning. I was there for a few months recently and the clothes in the stores had buttons falling off them and the alarm clocks were missing hands...and these were all new products. Western China doesn't have water, china as a whole is aging. Perhaps west China grew 13 percent, if indeed it grew that much, because of mining efforts...anything else i sincerely doubt. If you shut off the internet for more than half a year as you did to Xinjiang your economy isn't going to have healthy growth.
@stiglitz How has that train system been going the last two weeks... kind of hard to imagine how trains that fly off bridges are going to help the country much. All the cement used in them is suspect also, so is everything just going to fall apart in 5-10 years? If no one fills the trains, fills the cities being built and cna't afford to live in the ones already there does that sound healthy to you? Western power only since 1600? Apparently you've never heard of the Greeks, Romans, Etruscans, Minoans, Carthaginians...you remember Zoroaster was a priest 3700 years ago for a religion already in existence while huangdi isn't really evidenced to be more than a myth. How many people in Europe do you really think cared about China 2000 years ago even though the Europeans went to China first because of their expanse?
Western civilization can't be insignificant if China is trying to copy it (and Japan-to which China owes immeasurable amounts of its knowledge to) wholesale.
It seems that all readers are great economists and chinese economists are ducks .China can change its economic pattern from an export oriented to consymption oriented as they boast a population of 1.3 billion.Remember ...when someone aims for big ,some critics always come in their way.
60% of China's GDP is from Construction which is led by local officials borrowing cheap money and building empty cities and shopping malls [1]. Now they are in a bind, if they slow down the Construction, the GDP will fall, and if they continue they are just digging themselves even deeper in to debt. Hence a "treadmill to hell.- James S. Chanos". Some believe "China Is Not a Bubble: It's the Hindenburg"[2] As a graduate student in the US from India, I personally had many Chinese friends and so I know that ordinary Chinese people don't make much money and cant afford the new and very expansive apartments, 65 million of which are sitting empty in China. China's bubble is going to pop soon. And the ensuing social unrest can be huge and crippling. If it happens the foreign companies are going to flee and look for other more safer places to invest their money. In the best case the economy is going to slow down severely and the ensuing social unrest will be non-violent. Pakistan should try to make peace with India and it can be the country that attracts a lot of investment, post Chinese crash. Instead of boasting about their all weather friends, to threaten the west and India, it could become the part of a very successful South Asian economic ecosystem. Just think about it... [1] http://www.youtube.com/watch?v=rPILhiTJv7E [2] http://seekingalpha.com/article/259775-china-is-not-a-bubble-it-s-the-hindenburg
These experts fail to realize China is investing in its western development. China is no Japan. China also has whole lot more room to develop. http://news.xinhuanet.com/english2010/china/2011-07/24/c_131006102.htm West China's economy to grow 13 pct this year: report And China is also going up value chain. http://www.ctv.ca/generic/generated/static/business/article2107206.html Made in China takes on whole new meaning http://citiwire.net/post/1119/ Rethinking Urban Policy With China at Our Back http://www.newgeography.com/content/002307-more-hyperbole-ghost-cities-china More Hyperbole on Ghost Cities in China