Economy: Why The Supposed China Collapse Is Nonsense

(Drivebycuriosity) - It seems that China bashing is en vogue. For years China pessimists like New York Times columnist Paul Krugman, the hedge fund manager Jim Chanos and others have been banging the China crash drum (driveby). Now the magazine "Fortune" has another anti-China rant. The political science professor Minxin Pei predicts that China´s economy will collapse (fortune). The politics expert complains about  "unhealthy combination of excessive debt, overcapacity, and a lack of new sources of growth".

I think the allegation that there is "a lack of new sources of growth" is unfounded:

1. The most important source of growth is the secular catching-up process which is fueled by the still extreme income & wealth differences to the US and other Western nation values. This adaption process has been driving Chinese growth in the recent decades and there is no reason why it shouldn´t continue in the coming year.

The huge country is rapidly transforming into a consumer economy like the U.S. and other modern countries. Many peasants are moving to the huge metropolitan centers which are spread all over the huge country to lift their standard of living. This creates a fast rising affluent middle class, giving consumer spending a boost as the strong retail sales (growth rates around 11%) demonstrate.

China´s growth is also boosted by the technological progress and advances of Internet, automatization of industrial production and 3D-printing. These developments raise efficiency and  productivity of China´s economy as success stories like Alibaba and Baidu demonstrate.

2. Another source of growth are the ongoing reforms that started in 2013 (china). Last year Beijing announced the liberation of stock trading between Hong Kong and mainland China, softened the one-child policy, encouraged migration to bigger cities (with a higher productivity, announced more investments into airports, railways and other infrastructure and more.

3. China`s central bank is responding to the moderately slowing economy (from double digit growth rates to plus 7.4% in the last year) and sinking inflation rates (thanks to cheaper commodities) and is lowering interest rates & restrictions for the banks.

4. China´s economy gets a lot of tailwinds from the drop of oil and other commodity prices (around 50%). Inflation rates are falling, consumers have more  money to spend and industries (especially the transport sector) have less costs.








                                      Lack Of Economic Understanding

I think that Minxin Pei overemphasizes the debts, as many China bashers do. Imagine you have a debt of $50,000 which is backed by a stock portfolio value $100,000 (collateral). Nothing to worry. If your stocks fall 60% ( the value of the collateral drops below the debt line) you are in trouble. If your portfolio then recovers and claims above $100,000 your finances are sound again. Looking on the debt alone doesn´t make sense. Important is the relation between debt and assets (collateral) - and China has a lot of assets.

I think a dynamic developing country has to be financed by loans and has to expand her capacities to facilitate further growth. I reckon that China will continue her dynamic growth in the coming years  and  therefore will find uses for the so-called overcapacity and justify her debts.

Minxin Pei`s rant seems to me ignorant and shows his lack of economic understanding. Maybe he confused China with Greece or Argentina.