Growing at breakneck speeds, China’s
economy is changing the
world just by the sheer size and volume of its mass. This year, China recorded a 9.1%
growth in its economy which has been seen in other nations before, but never in a country with over a billion people. As investors, economists, and world leaders turn towards China, one critical question is on everyone’s mind- is this growth sustainable?
Naturally, burgeoning
market economies tend to grow faster than older economies which have reached the limits of their resources and added value. China’s growth is not so surprising in terms of economics and marginal utility, but its market share in world markets is rapidly transforming industrial policy everywhere around the world. The question of whether China’s growth is sustainable, or even healthy for that matter, lies within a few areas that Chinese premier Wen Jiabao recently addressed at an economics conference in London.
One issue that Wen put special emphasis on was China’s banking system. The Chinese banking system is a centralized system that is run in Beijing but has branches across the nations. To the dismay of many in Beijing, local banks are often hard pressed by businesses to give out
loans which, many times, are not paid back. This “soft-budget constraint” is a by-product of association with a centralized system that is not subject to market force competition. Unfortunately, it looks like China is nowhere near becoming a democracy or freeing up all its enterprises. As a result, poor credit runs rampant in the Chinese economy, potentially creating bubbles in hot growth sectors such as real estate. Wen told the London audience that China faces a great challenge regarding this issue and must address it with strong interventionalist policy, cracking down on bad lenders and bad loans. A common westerner approach, raising interest rates is not an option for Chinese banks whose non-performing loans can run up to 45% of its total loans, so Wen still contends that his state driven crackdowns are most effective. To the western observer, however, a weakening Communist party hold on the exploding Chinese economy will most likely prove inadequate in controlling bad credit.
Another problem, Wen spoke on was the heavy investment in fixed assets such as real estate and a gridlocked transportation system. In these assets, rising prices can only hurt all industries and investors in the sector.
In all, Wen’s assessment of the rapidly expanding Chinese economy is both frank and accurate. Most of the London audience of UK executives and business leaders were impressed with Wen’s honesty. Others, however, feared that Wen was leaving other socio-economic, issues out. Issues such as badly needed agricultural reform, pollution, and human rights issues that inevitably arise with the growth of economies.
China has come a long way, but in order to get to where the Chinese leaders like Wen Jiabao desire, many reforms not just economic, but social as well, must be enacted.
Published: July 01, 2005
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