For more more than two decades, prophets of China’s impending doom have warned that the greatest economic success story in recent history is about to come screeching to a halt. For more than two decades, they’ve been wrong.
Of course, China has problems: an unbalanced growth model, ballooning credit levels and aging work force among them. But does that mean the world’s second biggest economy is about to fall over?
As a public service for Panda-lovers, China Real Time has compiled a list of the naysayers’ main arguments, and counter arguments you can use to stop them in their tracks.
Argument No. 1: China is an over-invested bubble waiting to burst!
It’s true, China’s investment as a share of gross domestic product is at worrying levels –close to 50% according to the 2010 data. But that doesn’t mean China is maxed out on infrastructure. China’s entire railway network is still just 40% the length of the rail tracks in the U.S.
More important, calling for higher consumption misses the point about what drives China’s growth. Buying more iPads might add to demand, keeping growth buoyant in the short term. But it’s additions to China’s capital stock which have added to China’s productive capacity.
In fact, it’s only because China has invested so much that it has grown so quickly. And it’s only that rapid growth which has enabled a sharp increase in household incomes and consumer spending.
Argument No. 2: China’s real estate sector is about to collapse, dragging the rest of the economy down with it!
Yes, real estate is a big chunk of China’s economy, and yes, a correction in house prices is underway, nudging down investment in the sector.
But that slowdown is the result of deliberate government policy. In a China that is becoming richer and more urban, strong underlying demand for new and better homes means a collapse is unlikely.
Total lending to China’s real estate sector at the end of 2011 was just 22% of gross domestic product. In the U.S., mortgage lending at the end of 2007 was 103% of GDP. That means even if China’s house prices do fall, households won’t be bankrupt and the banking sector won’t fall over.
Argument No. 3: The shadow banking system is a disaster waiting to happen!
China’s credit levels have swollen to worrying levels, but that was necessary to underpin growth through the crisis years of 2009 and 2010. Meanwhile, off balance-sheet lending grew at a worrying rate, but as a share of total credit it never got that high.
At its peak in early 2008 the shadow banking system in the U.S. was almost twice the size of the traditional banking sector. In China, off balance-sheet lending remains a fraction of total outstanding credit. Bernstein analysts put it at 28% of the total at end 2010.
More important, Beijing is getting ahead of the curve on solving the problem. In the second half of 2011 growth in off balance sheet lending fell away sharply.
Argument No. 4: China’s labor force is shrinking! Rising wages will cripple competitiveness!
China’s labor force is not getting any bigger, and the inexhaustible supply of workers moving from farm to factory has started to dry up. But critics exaggerate the extent of the problem. There are still workers in China’s countryside, they are just unwilling to trek to faraway factories for work at today’s low wages.
Increases in the minimum wage (which are already taking place) and a move by factories inland (like Foxconn’s move to Chongqing) will help lure workers back off the farms. Even if wages do rise, they are starting from a very low base. The U.S. Bureau of Labor Statistics estimates that in 2008, wages in China’s manufacturing sector were just 4% of their level in the U.S., and 20% of their level in Mexico.
Plus, if you’re worried about increasing consumption isn’t rising wages a good thing?
Argument No. 5: China’s debt levels are ballooning!
Yes, but again, from very low levels. China’s central government debt to GDP ratio is about 20%. Even if you add in a generous estimate of debt taken on by local government you only get to about 50%.
With the U.S. debt-to-GDP ratio at about 100%, and Japan’s at 230%, in international perspective China’s problem doesn’t look that worrying. That’s especially true when you consider that almost all of China’s debt is held domestically, so there’s no chance of a Greek-style crisis with foreign creditors demanding repayment.
With higher debt levels and lower growth rates, the U.S., Europe and Japan wish they had China’s problems.
Tom Orlik is The Wall Street Journal’s Heard on the Street columnist in China.
