Can China Sustain Growth Spurt?

Via
Time

Finding the Right Balance

By Pieter Bottelier and Gail Fosler

Until a few years ago, the big question was, is China's growth for real? Now the question is, How long can it last? Even with the U.S. economy slowing, the concern is not so much that China will run out of resources or markets to sustain high growth, but that economic imbalances are becoming too severe.

Put simply, China has been investing too much, too fast, particularly in its export-oriented manufacturing sector. The most striking evidence of this is the relatively small role Chinese consumers play in the economy. Household consumption as a percentage of GDP fell to 36% in 2006, perhaps the lowest such ratio in the world. At the other end of the scale is the U.S., with a household consumption–GDP ratio of 72%. For years the U.S. has been consuming too much and saving too little. China has the opposite problem.

China's imbalances are likely to get worse. This is largely because the country's spectacular economic boom is driven by a self-sustaining flywheel of rapid productivity gains and increasing profits, which generates excess capital that is in turn invested in more manufacturing capacity. This is why the country's trade surplus with the rest of the world has been rising at an alarming pace, growing nearly 50% to a record $262 billion last year (although the trade gap narrowed in the final three months of 2007). Because many Chinese companies are awash with cash, traditional policies aimed at slowing investment growth, such as raising interest rates, seem to have lost much of their effectiveness.

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