Analyzing views on the sustainability of China's growth

Updated On: Jan 20, 2010

In the past week, many have begun to question the sustainability of China’s quick economic recovery. Others in response have risen to defend it. The issue is an important one, especially for the economies of Southeast Asia. China accounts for 11.3 per cent of Southeast Asia’s external trade, and with developed nations still struggling to recover, China represents a significant growth opportunity.

In the New York Times, Thomas Friedman penned an article titled “Is China the Next Enron?”. The article was partly in response to an earlier NYT report on a prominent Wall Street hedge fund investor betting big against China’s rise. The investor, James S. Chanos, had made a fortune through correctly predicting the collapse of Enron and other large corporations- which lent some credibility to his prediction. Says Chanos, China’s surging real estate sector, coupled with the large amount of market speculation, make it “Dubai times 1,000 – or worse.”

Friedman disagreed, quipping “never bet against a country with $2 trillion in foreign reserves.” He also correctly pointed out that the Chinese government has started to take measures against economic overheating – such as raising interest rates and increasing the proportion of deposits that banks must set aside as reserves.

Friedman was also optimistic about China’s promise in technology and innovation, arguing that China’s technological infrastructure (200 million broadband users) combined with its brainpower (27 million students in technical colleges and universities) brighten its development outlook.

Since then, The Economist has sided more with Friedman, saying that the Chinese economy is “not yet a Japan-style bubble,” referring to the Japanese economy’s bust two decades ago, after it seemed poised to rival if not surpass America’s. The many differences with Japan’s economy in the 1980s include a homebuying boom fueled by cash, not credit, and the fact that China is still a poor country in early stages of development. China, The Economist points out, doesn’t have “bridges to nowhere,” because it is in desperate need of infrastructure development.

However, The Economist argued that China is not a “Goldilocks economy” on top of raising rates, the yuan must be allowed to rise. But this is a policy that Chinese officials so far seem reluctant to reform. The Economist also points out there are political trials- at home and abroad- such as demands that China play a more responsible role in global affairs, or doubts that economic advance can continue to assuage rumblings for greater political freedom.

So, taking various reports on balance, it looks like China is poised to continue its rise for the foreseeable future. But, barring significant reform, there will be hiccups.

Sources and Further Reading

The Economist, "China's battered image: Bears in a China Shop," January 14, 2010, http://www.economist.com/displayStory.cfm?story_id=15271181

David Barboza, "Contrarian Investor Sees Economic Crash in China," New York Times, January 7, 2010,http://www.nytimes.com/2010/01/08/business/global/08chanos.html

Thomas Friedman, "Is China the Next Enron?", New York Times, January 12, 2010, http://www.economist.com/displayStory.cfm?story_id=15271181

Chris Devonshire-Ellis, "China's Exports More to do with Manipulation than Recovery," China Briefing, http://www.china-briefing.com/news/2010/01/13/china%E2%80%99s-exports-mo...

China Economics Blog, "China's empty city of Ordos," January 10, 2010, http://china-economics-blog.blogspot.com/2010/01/chinas-empty-city-of-or...

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