Hugh Hendry writing at the Telegraph admits that China's economic growth is impressive; but he wonders if GDP growth based on goverment-mandated bank loans, as a substitute for contracting exports, is sustainable growth.
However, the composition of China's growth has undergone a potentially treacherous change: in the absence of expanding foreign demand for its exports, it has instead come to rely on a massive surge in domestic bank lending to fuel its growth rate.
Indeed, when measured relative to the size of its economy, the 27pc point jump in bank loans to GDP is unprecedented; at no point in history has a nation ever attempted such an incredible increase in state-directed bank lending.
What a turnaround: from an export juggernaut to a credit addict. Who would have thought it necessary back in 2001, the year everything all started to work out for China?
There is quite a struggle of ideas being waged in the intellectual community about China's wisdom, current intelligence, and inevitable beheamoth status as SUPER SUPER-POWER. Some believe in China; some don't. Some believe China and India are on the verge of dominating world markets for centuries. Some wonder if China and India are merely economic bubbles -- the latest in quite a line -- being manufactured for the sake of international capital.
Some believe China is America in the 1800's...a new giant learning how to walk, destined to dominate the world's economy (and, some argue, the world's political and military picture) for many centuries to come. Others argue that China lacks a flexible administration that will allow cultural, political and economic growth to occur, qualities that a true Super Power must develop. We remember, of course, that economic empires are not the exclusive province of political democracies. Where wealth and large militaries are present, empires tend to follow.
But is China's growth today, astounding as it seems, real? In fact, is any country's growth -- as measure by GDP -- a picture of actual economic growth or just a picture of activity as opposed to wealth-generating activity? Job-creation seems to be a much better gauge of an economy's relative health.
Hendry suggests that China's GDP growth reflects a credit bubble instead of an expanding economy. He continues:
The ancient ethical system of Confucius is silent on the subject of modernisation. There is no proverb counselling that "wise men not invest in over-capacity". Perhaps there should be: in China, investment spending has tripled since 2001 and the consequences are staggering. A country that represents just 7pc of global GDP is now responsible for 30pc of global aluminum consumption, 47pc of global steel consumption and 40pc of global copper consumption. The overriding problem is that the Chinese model leads to a deflationary spiral that is perpetual in nature. Domestic consumption never grows fast enough to absorb the supply, prompting the planners to commit to ever-higher levels of investment. Over-capacity inevitably plagues many sectors of the economy and Chinese profitability is already low.
Remember, it is one thing to create economic growth, but it is another thing to truly create wealth. If I commit to building a new commercial property in Shanghai I will undoubtedly contribute to GDP growth. However, if I have no tenants and the city already has a vacancy rate of 20pc, then I am probably destroying wealth.