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Concerns over China's overheating economy have been mounting for quite some time now. With imports growing at a sizzling yearly rate of 40%, it has indeed been difficult to ignore the nation's economic expansion. GDP growth, by official numbers, is slightly above 9%, but electricity usage suggests that the real figure might be closer to 12%. China has accounted for nearly 25% of global growth (in PPP terms) over the last five years, and many strategists worry that the ripples of an abrupt Chinese landing would be felt worldwide.
Investment has been growing at a scorching rate of 50% per year, developing an eerie similarity with the 1997 East Asian crisis. Bank loans have surged by 25% annually, in a Chinese economy that is extremely dependent on its banks: loans already account for 130% of GDP. As a result, bad debt has accumulated to between 40 and 50% of all loans (by some estimates). The nation desperately needs to reform its banking system if it wants to avoid a recession similar to Japan's in the '90s. Despite the government's claims, overheating is not limited to a select few industries. Housing has attracted a lot of attention as Shanghai property prices have swollen by almost 30% over the last year, but the truth is that investment is up in just about every sector. As international investors blindly purchase yuan-denominated assets, upwards pressure has built on the currency, which is currently pegged at 8.3 yuan to the dollar. This has forced the PboC to increase its dollar-reserves: US treasury holdings are now $191 billion (as of 11/04), second only to Japan, and China's overall foreign-currency reserves amount to $514 billion (as of 9/04). Purchasing foreign-currency assets, however, only increases the money supply. The PBoC has attempted to sterilize its currency interventions by selling its bonds, but an interest |
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rate slightly above 5% has not attracted much attention in an economy where GDP growth is almost double that. As a result, sterilization has been largely unsuccessful, and inflation has quickly surged from 0% in early 2003 to over 5% today. Still, rising inflation should not detract attention away from the
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 main cause of concern in China today: overinvestment. Overinvestment leads to inefficient investment, and it now takes over $4.50 to produce $1 in additional output, compared to $3 a couple years ago. The nation's current growth is unsustainable, and many analysts worry that the inevitable slowdown will result in a bursting of the investment bubble, as it did in late 1994. |
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