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Chinese growth might be unsustainable

October 30th, 2009 · No Comments

It’s the mirror image of that in the US, but equally awkward…

The one country (guess which) spends, the other one produces and invests. China doesn’t only invest it’s current account surplus into dollar denominated assets (to keep it’s currency cheap), it also buys up assets abroad, like energy resources and companies.

On first sight, it seems like a much more sensible economic model than what the US was doing (until recently), consumption beyond means, financed by excessive borrowing against assets.

To a certain extent, the crisis has changed the American model more fundamentally than the Chinese model. The US now had to rely on large government intervention, playing the role of default guarantor to put a floor on asset prices and under the financial system and to fill the gap left by the American consumer.

The latter was unavoidable. Without public stimulus (which is arguably too small), the US economy could have easily fallen in a debt-deflationary spiral of really, and we mean really scary proportions. Since the US government can borrow at much lower cost compared to the private sector, and is able to invest in such a way (at least in theory) as to create the most ‘bang for the buck’, the stimulus is also efficient.

In China, the proportionally even bigger stimulus is actually more of the same. Here it substitutes for the collapse in exports, and so far it seems to have done so pretty successfully.

As the problem in the American model is that it saves and invests too little, the problem in the Chinese model is exactly the opposite. American economic growth is for 70% dependent on consumption, Chinese growth was, for the first half of this year, for 88% dependent on investment.

Neither of them are sustainable, and in a way, the US has embarked on addressing the problem at least to some extent, while China has only increased its efforts within the confines of its old model..

Roach: China Growth Unsustainable

Thursday, October 29, 2009 8:04 AM
By: Julie Crawshaw    

China may face an economic slowdown in the middle of next year because the nation’s growth model is unsustainable, says Morgan Stanley Asia chairman Stephen Roach.

“Macro imbalances are particularly acute right now,” Roach told Bloomberg.

“China’s economy risks slowdown again around mid-2010.”

“China’s growth model is much more about supply than demand,” Roach notes.

“It’s not a sustainable model for China. It’s not a sustainable model for any nation.”

Economic growth in China accelerated to 8.9 percent last quarter, fueled by government stimulus spending of $585 billion and $1.27 trillion of new bank lending.

This government-fueled economic rebound is causing complacency in China, which still faces “tough challenges in years ahead,” Roach says.

What Roach describes at the “imbalance” created by China’s overdependence on exports to fuel economic growth was made worse, not better, by government stimulus, raising concerns about overcapacity and asset bubbles.

In September, China’s exports were down 15.2 percent from a year ago, the smallest decline in nine of the eleven consecutive months of export declines, reports.

China has seen modest improvements in exports and retail sales, but investment continues to constitute the overwhelming bulk of the country’s growth, with about 88 percent of the country’s GDP growth in the first half is tied to investment spending.

Tags: China · Reform Capitalism