Thursday, November 17, 2011

China's Economy Faces a Bumpy Road Ahead

Yuhan Xhang recommends caution when viewing the Chinese economic "miracle":
Over-reliance on investment and exports makes China’s economy very unbalanced, vulnerable, and unsustainable. Prolonged investment on a massive scale creates significant overcapacity in a range of sectors such as steel and solar heating, which diminishes productivity improvements. Additionally, huge investment including the 4 trillion renminbi stimulus plan leads to increasing debt. Much of the medium- and long-term bank lending for infrastructure flows to local quasi-government agencies. At the end of 2009, local debt incurred by China’s investment reached to 6 trillion renminbi (Lardy 2010) and now stands at 10.7 trillion or even more (New York Times 2011 and Wang and Hu 2011). It is not likely that those local quasi-government agencies will go bankrupt, because local governments repay the debt through household wealth transfers. Too much dependence on exports is also risky for China, as the West may start to save and consume much less. During the global economic crisis, the depression penetrated China’s 31 provinces, and in the fourth quarter of 2008, millions of migrant workers lost their jobs.

...Spurring private consumption and leveraging its share to 50% will also be a challenge. In 2012, private consumption will grow faster than GDP, supported by solid employment and wage growth and increased government social expenditures on pensions and healthcare (Wang and Hu 2011). But the Chinese stimulus programme and ongoing massive investment in the emerging strategic industries have already led to overcapacity and huge nonperforming loans, which will ultimately be paid off by Chinese households. Chinese private consumption will be hampered (Pettis 2011). In the past two decades, China’s consumer confidence index and consumer expectation index have trended downward overall. Future improvement depends on systemic reform.
In 2011–20, China’s economy will become even bigger, but its growth rate will somehow wane down..... _Voxeu
Although Xhang recommends caution, it is likely that he is himself a bit over-optimistic as to the true middle-term future for China. China's enormous investment bubble -- its "infrastructure to nowhere" -- will have to be dealt with, at the same time as China's dysfunctional and corrupt financial infrastructure will have to be reformed.

Failure to deal with either problem expeditiously and scrupulously will result in lingering and worsening problems over the long run.

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