IS CHINA STUCK IN A CATCH-22 LIKE SITUATION?
Rediff, April 5, 2012
A significant part of China's growth has been an illusion. China's headline growth of eight to 10 per cent has been driven by new lending averaging around 30 to 40 per cent of GDP. Given that, up to 25 per cent of these loans may prove to be non-performing, amounting to losses of six to 10 per cent of GDP. If these losses are deducted, then Chinese growth is much lower.
Unfortunately, China now faces significant problems in maintaining its high-growth strategy, especially given the weakness in its major export markets. As early as 2009, Premier Wen Jiabao admitted that the "stabilisation and recovery of the Chinese economy are not yet steady, solid and balanced".
China needs to boost domestic consumption. The world hopes that China can become a significant source of global demand, replacing the US as the world's consumer of last resort.
Consumption totals 35 to 40 per cent of China's GDP, a decrease from over 50 per cent in 1980. Even by the thrifty standards of Asia, Chinese consumption is low. Japan, India, Taiwan and Thailand are at 55 to 60 per cent, while South Korea and Malaysia are 45 to 50 per cent.
American consumption is around 65 to 70 per cent of GDP. In contrast, Chinese fixed investment is around 46 per cent of GDP, an increase of 12 per cent over the last decade.
At a comparable stage of economic development, fixed investment in Japan and South Korea was 10 to 20 per cent of GDP lower than China.
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