Economy

Chinese bubble economy: The bulls versus the bears

Patrick Collinson

The first myth is that China is an export economy. It is not, writes Patrick Collinson.

Foxconn Technology Group Chairman Terry Gou speaks during the groundbreaking ceremony for the company's headquarters in Shanghai, China. (AP)

Diana Choyleva is the bear in the China shop. The analyst from Lombard Street Research in London believes that last week’s gross domestic product (GDP) figures for China – which revealed growth slowing to a three-year low – are an early warning signal of the hard landing to come.

All that is propping up the economy is gargantuan investment in infrastructure financed by state-directed banks that look more and more like Western banks just before the collapse of 2008. Westerners are so awed by the China dream that they cannot see the coming China-geddon. The excesses that have driven the West into a financial crisis are gripping the Chinese economy, too.

“China’s miracle growth is over,” said Choyleva, adding that if Chinese policy-makers got it right they might, just, see the country’s growth halve to 5% or below. Get it wrong and the consequences could be devastating – not just for China but for the rest of the world too.

Liquidity crisis
”[China] can no longer rely on abroad to buy its excess production. The US will consume less and produce more. The years of current account surpluses are over, rendering the growth model obsolete.”

Meanwhile, the banks that have been the lynchpin of growth are insolvent and their bad loans will eventually lead to a liquidity crisis.

But Choyleva’s is a lone voice. At brokerage CLSA, one of the Asian region’s biggest investment banks, China macrostrategist Andy Rothman said the wall of worry came from a fundamental misunderstanding.
 
The first myth is that China is an export economy. It is not. Over the past decade, although it enjoyed GDP growth of 10% a year, only 1% of that was from exports.

Perspective
According to Rothman, it is not an unbalanced export-only economy, instead, it is the world’s best domestic-consumption story. It is being driven by “phenomenal” increases in wages for average workers; incomes are up by 173% over the past 11 years.

That also puts the so-called property bubble into perspective. The price of an apartment in a major Chinese city has leapt by nearly 10% a year for many years. But as incomes are rising even faster – by about 13% a year – it is not the issue it became in the West.

Better still, it is not on the never-never list. Mortgages are still in their infancy in China. One in five first-time buyers purchase with cash. The average down payment is 30% – a long way from the 100% loans that became common in the United States and the United Kingdom. – © Guardian News & Media 2012

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