China is not a “bubble economy”, but facing challenges
China is not a “bubble economy”, but it is an economy prone to bubbles. There is a big difference.
Over the last decade many have predicted imminent doom for China. They have been wrong. China’s economy has kept growing in the wake of the west’s financial crisis. Despite this, risks have mounted. Rising wages and commodity prices are fuelling inflation. High food prices hit the poor hard. China has faced several challenges over recent decades, and come out on top. Its institutions and policy tools have worked well. Now, its immediate challenges are more intense than ever.
First, the need to rebalance its economy is greater than before. It is always quoted by Chinese policymakers. China must shift from investment and exports towards consumption. This domestic imbalance has not improved in the last two years.
The global recession showed China can no longer rely on selling low value-added goods to heavily indebted western consumers. Labor dividend is diminishing in China as some other neighbor countries like Vietnam, Cambodia are expected to take the place of China to become the manufacturing center of the world in next couple of decades.
Excessive investment, which has soared to 44 per cent of GDP, is prone to booms and busts by many economies. The animal spirits driving investment can change abruptly, if productivity disappoints, growth expectations dip or the cost of funding rises.
Second, private sector economy is booming in China and it makes government difficult to control. China has to find a way to balance the booming regional economies, alongside the growing private sector, and its SOE-led economy.
Third, China’s vulnerability arises from its under-developed financial sector. Saving rate is still high. Besides the traditional cultural reason, there are limited options for household savings: low interest-bearing bank accounts; equities, where governance concerns persist; or real estate, where prices are already sky-high in many cities. The lack of an adequate social safety net and the need to pay for education and healthcare also stress the problem.
China is developing its financial sector, but not fast enough to keep pace with its economy. Although its bond market has grown over the last decade, from $202bn to $2,700bn, corporate bond issuance remains low. China needs deeper and broader domestic capital markets to efficiently use its high domestic savings and to absorb increasing inflows.
The other sources of China’s instability are its low interest rates and weaker than needed currency. China needs to avoid the lethal combination of cheap money, leverage and one-way expectations, particularly in property, that hit the west. These factors make the economy prone to bubbles and raise the risk of a near-term setback – either as the bubble bursts or, more likely, as policymakers act.
If there were a setback, the market impact would be significant. There would be much comment about China’s growth being a bubble. That would be wrong. China’s growth is for real. Any slowdown would be temporary and present a buying opportunity. It would highlight that the business cycle exists in China, and that while the trend is up, one should expect setbacks along the way.
Over the last decade many have predicted imminent doom for China. They have been wrong. China’s economy has kept growing in the wake of the west’s financial crisis. Despite this, risks have mounted. Rising wages and commodity prices are fuelling inflation. High food prices hit the poor hard. China has faced several challenges over recent decades, and come out on top. Its institutions and policy tools have worked well. Now, its immediate challenges are more intense than ever.
First, the need to rebalance its economy is greater than before. It is always quoted by Chinese policymakers. China must shift from investment and exports towards consumption. This domestic imbalance has not improved in the last two years.
The global recession showed China can no longer rely on selling low value-added goods to heavily indebted western consumers. Labor dividend is diminishing in China as some other neighbor countries like Vietnam, Cambodia are expected to take the place of China to become the manufacturing center of the world in next couple of decades.
Excessive investment, which has soared to 44 per cent of GDP, is prone to booms and busts by many economies. The animal spirits driving investment can change abruptly, if productivity disappoints, growth expectations dip or the cost of funding rises.
Second, private sector economy is booming in China and it makes government difficult to control. China has to find a way to balance the booming regional economies, alongside the growing private sector, and its SOE-led economy.
Third, China’s vulnerability arises from its under-developed financial sector. Saving rate is still high. Besides the traditional cultural reason, there are limited options for household savings: low interest-bearing bank accounts; equities, where governance concerns persist; or real estate, where prices are already sky-high in many cities. The lack of an adequate social safety net and the need to pay for education and healthcare also stress the problem.
China is developing its financial sector, but not fast enough to keep pace with its economy. Although its bond market has grown over the last decade, from $202bn to $2,700bn, corporate bond issuance remains low. China needs deeper and broader domestic capital markets to efficiently use its high domestic savings and to absorb increasing inflows.
The other sources of China’s instability are its low interest rates and weaker than needed currency. China needs to avoid the lethal combination of cheap money, leverage and one-way expectations, particularly in property, that hit the west. These factors make the economy prone to bubbles and raise the risk of a near-term setback – either as the bubble bursts or, more likely, as policymakers act.
If there were a setback, the market impact would be significant. There would be much comment about China’s growth being a bubble. That would be wrong. China’s growth is for real. Any slowdown would be temporary and present a buying opportunity. It would highlight that the business cycle exists in China, and that while the trend is up, one should expect setbacks along the way.
Labels: china
posted by Jiu Zhuang at
10:06 AM
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