One of the brighter spots for the global economy in recent years has been China. A heady rate of economic growth – 9.7 percent growth in GDP last year – has encouraged some to wonder whether this nation’s decision to hitch its wagon to the star of capitalism can be translated into a more lasting adoption of liberal civil society. So far, the jury is out, but some signs are encouraging. I honestly cannot see how China can long resist reforms to its political arrangements in the long run.
More recently, though, a number of fund managers, banks and economists have voiced a few worries about whether China could be vulnerable to the sort of jarring market moves that hit Southeast Asia, starting in Thailand, back in the late 90s. China has a fixed exchange rate to the dollar, which means that at present Chinese goods are very cheap in overseas markets, but also swells the Chinese money supply. Credit expansion, guided by the state-owned banks, has been rapid, and a lot of the investment has been spent on questionable enterprises. About 40 percent or more of China’s GDP growth is dependent on bank lending. There are many signs that China could be headed for a serious hangover.
One of the biggest worries could be the state-run banks. About 40 percent of all the loans held by these banks are so-called non-performing loans — in other words, they will never be repaid. These banks are in the throes of a major overhaul, as the Chinese authorities in Beijing try to restructure the system along more commercial lines. But in the meantime, the authorities are trying to cut the pace of monetary growth, which may come at a time when the financial infrastructure is in a weak state.
Attending a conference in the City today, an economist, speaking off the record, said this: “Alan Greenspan (Fed Chairman) is a smart man, has access to all kinds of research backup, but he has made mistakes on the economy. Now the Chinese authorities, who are isolated in their Beijing centre, inexperienced in such matters, could make very big mistakes indeed.”
China offers a great deal of promise in the medium term. In the short term, anyone with a few pounds to spare on an investment should tread very carefully. China could be in for a bumpy ride.