[ccebook.cn]The World in 2010

Asia
The dragon still roars
Nov 13th 2009
How sustainable is China’s economic boom?
China will reach two economic milestones in 2010. It will overtake Japan to become the world’s second-largest
economy (at market exchange rates). And its exports will reach 10% of world trade—matching Japan’s share
at its peak in 1986. But China’s economy also resembles Japan in the 1980s in more worrying ways. Will its
boom turn to bust as it did in Japan?
China has rebounded faster from the global downturn than any other big economy, thanks to massive
monetary and fiscal easing. China’s slowdown in late 2008 was only partly caused by the slump in American
demand. It was also self-inflicted by tight credit controls, so the economy responded quickly when the
government turned the credit tap back on full and launched huge infrastructure spending. This stimulus will
stretch into 2010; private consumption will remain strong, and a rebound in home sales will boost
construction. As a result, China’s GDP should grow by around 9%.
But for how long can China sustain such growth? Its GDP has increased by an average of almost 10% a year
for the past 30 years. Even assuming a slowdown in the pace of expansion, many economists expect China’s
economy to overtake America’s within 20 years. But the same was predicted of Japan in the 1980s before its
bubble burst, resulting in a lost decade of sluggish growth. The gap between Japan and America has instead
widened.
Some analysts claim that China today looks ominously like Japan in the late 1980s: chronic overinvestment,
they say, has resulted in excess capacity and falling returns; a tidal wave of bank lending threatens a future
surge in bad loans; and stock and property markets look dangerously bubbly. Banks’ non-performing loans will
surely rise in 2010, and unless the government tightens monetary policy it will store up future problems which
could harm economic growth.
-51-