Wednesday, 4 April 2012
is China going capitialist?
Of course, now there are some serious economic headwinds. Firstly, any Country in history that has over-spent so much on infrastructure has had a massive bust at the end of its bubble, as demand fails to rise fast enough to keep up with supply. If China is to avoid this, it needs to do something that no Country anywhere has ever achieved and that is to keep its domestic demand growing with real demand.
Thanks to its enormous population there is a small chance that China can do this, after all the Chinese will pass the US in pure economic size with its typical earner on less than $6,000 a year.
The demographic issue is another key area though, with China's population starting to shrink in the next decade. As China grows old growth will drop off and the propensity to save will go up - hindering the chances of boosting the domestic demand needed to wean China off its export bias. I find it hard to see how China avoids Japan's experience of sclerotic growth as this sets in.
Today though a very interesting short-term step. An opening up of the Financial System in China by a reasonable amount. The Government has realised the monopoly which has allowed China to develop all the World's top banks by balance sheet size, has also proved very inefficient at transferring money internally as it is so open to corruption. Boosting domestic lending is a good way to help increase demand and even better to use foreign assets to do it rather than your own reserves - both from a risk perspective and a balance sheet perspective. Freeing up the currency to float more is a sensible way to force a re-balancing of the economy too.
So in conclusion, China has a very small chance of continuing it current growth for the next few years without a major economic catastrophe, on the other hand, steps like today are exactly the right ones to be taking - so it must be on a knife edge as to whether a goldilocks scenario can play out.