China crash scenario

Much has been said that China’s economy will crash in the future. It is certainly possible, just as a famous economist said that in the long run all of us will be dead.

China economic collapse scenario is very well played out in the West. Every detail or issue that could purportedly link to China’s economic malaise is being given prominence and analysed by the media. There’s a lot of wishful thinking there, given that the Western media have been predisposed in making such predictions for years. The reasoning for the crash theory varies, depending on the flavour of the time. Years ago, in 1990’s it was reckoned that the ailing SOE (state owned enterprises) could not transform themselves into market economy, and their demise would bring about widespread unrest and economic collapse. When China joined the WTO, the theory was that all the’ inefficient’ local enterprises would not be able to compete on the world stage, and thus would face bankruptcy. Later, it was claimed that the China banks have very high non-performing loan portfolios, and thus financial collapse was imminent. Nowadays, it’s the high property prices that caused asset bubble the built up to burst, and this endangering the financial system and the economy.

My opinion is that China’s economy will remain strong for years to come. There are number reasons for my optimism.

  • Quality of the top leadership. While many observers would predict severe economic hardship in China due to the Wall Street financial crisis in 2008/2009, the economy performed better than expected due to the economic stimulus measures being undertaken. The top leadership has the foresight and ability to manage the economy.
  • China strong financial standing. The accumulated reserves of about $US 2.5 trillion, is very handy tool to fight against financial manipulation by outsiders. The government income from tax rises very fast, and thus it does not experience chronic budget deficits. Therefore, it does not really need to borrow money to balance government expenditures as it has ample financial backings.
  • Transformation within the society. Two aspects need to be mentioned here. First is the movement of people from rural to urban areas. Second, is the people are getting increasingly educated. The resultant transformation is that there will be high income (better educated workers) and strong demand for consumer goods etc (large number of people settling in urban areas). Thus the fuel for China’s economic growth can be sustained for many years to come.

I do believe stock market correction (even dip to 30- to 40 % range) is very much possible, but a crash that brings about severe economic hardship is unlikely. The People’s Daily carries an article debunking the prediction on China crash theory, calling it as ‘illogical’.


Chinese expert: China crash prediction ‘illogical’

China’s economy will slow and possibly "crash" within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst, predicted Marc Faber, a Hong Kong based investment adviser. Dr Faber’s forecast is illogical and is an obvious misjudgment, one Chinese expert said.

Marc Faber, a.k.a. "Dr. Doom," joins hedge fund manager Jim Chanos and Harvard University’s Kenneth Rogoff in warning of a crash in China.

Chanos said in an interview last month that China is "on a treadmill to hell" because it relies on property development to drive growth. As much as 60 percent of the country’s gross domestic product relies on construction, he said. Rogoff said in February that a debt-fueled bubble in China may trigger a regional recession within a decade.

Xu Bin, a professor of Economics and Finance with China Europe International Business School, noted that although China’s regulation of the housing market may slow down China’s economic growth, he stands firmly against Faber’s theory.

"Before China adopted tightening policies, the foreigners said that a booming asset bubble would lead to China’s crash," Xu said. "While China is striving to control bubbles, they say that the regulation policies will lead to the crash of China’s economy. There has been no logic in their theory, and it is an obvious misjudgment"

The theory that a crash in China is imminent is not a new one. In 2003 and 2004, when China’s banking institutions faced relatively high non-performing loans, many Western economists predicted that China’s banks would crash, and then China’s economy continued to gain momentum.

"Seven years have passed, and we can hardly find those prophets." Xu said.

Xu admitted that the regulation policies will have some impact on the property and the stock markets and slow down China’s economic growth. But "the Chinese government won’t let the policies get out of hand", he said.

China achieved nearly 12 percent GDP growth in the first quarter of 2010, but the target set for the whole year was only 8 percent.

"This indicates that the government has already taken the policies’ impact into consideration," Xu said.

As to the theory that regulation will lead to crash, Xu noted that China’s population structure contributes to the relatively high rigid demand in China’s housing market. Meanwhile, because China does not allow "zero first payment," risk from individual housing mortgage loans is very low.


About kchew

an occasional culturalist
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