NYT: As its Economy Sprints Ahead, China's People Are Left Behind

Barboza, David (October 9, 2011), As Its Economy Sprints Ahead, China’s People Are Left Behind, New York Times:New York

The New York Times, as part of its series on the Chinese Economy, recently published a very interesting article on the nature of Chinese economic growth, its reliance on being driven by large (mostly state owned) enterprises that are in turn reliant on cheap loans from Chinese government owned banks.  No news there; however the interesting point the article makes is that this system runs at the experience of the average Chinese saver (and there are a lot of them in a country that has one of the highest savings rates in the world) in a system that essentially reallocates the country's wealth from China's still relatively poor saving middle class to the wealthy.  This is largely achieved due to the relatively high level of inflation in the country (currently at around 6%) and the low interest rates (currently at around 3%) that banks give to depositors who save with them.  This essentially means ( in a crude calculation) that Chinese depositors are suffering from an unseen tax on their savings (through inflation) of 3% a year.  Money that is essentially used to subsidise these cheap loans that state banks are giving to state owned companies that in turn is playing a role in driving the country's booming housing market and is, in turn, making housing too expensive for most people to afford. 

The full article can be read here: http://www.nytimes.com/2011/10/10/business/global/households-pay-a-price-for-chinas-growth.html?_r=1&ref=business&src=me&pagewanted=all

China's soft (not hard) landing

Roach, Stephen S. (September 30, 2011). China’s Landing – Soft not Hard, Project Syndicate, retrieved October 4, 2011.

Business as usual in Beijing*

A while ago I posted a piece by the famously pessimistic Nouriel Roubini (the man that successfully predicted the Crash of 2008) about his similarly pessimistic outlook for the future of the Chinese economy.  Recently Stephen Roach (of Yale University) published an article that is more upbeat and argues that although it looks likely that China's economy will slow down it will enjoy a relatively welcome 'soft landing' as opposed to Roubini's tragic 'hard landing'.

Although Roach notes a number of the serious economic problems that the Chinese economy is currently facing - such as the serious property bubble, reducing property inflation and the US$1.7 trillion of local-government debt - he also notes a number of factors that the economy has going for it, such as the unprecedented large urbanisation of China and the ample liquidity of Chinese banks to absorb potential losses. He also correctly points out that the government is taking the risks of the property bubble seriously and is taking measures to crack down on property speculation as well as seeking to reduce inflation and food inflation in particular (the biggest driver of inflation in the country).

This leads him to conclude that although the Chinese economy is slowing down in the mid-term future it is likely that it will be soft gradual show down that will allow the economy to adequately adapt to the new pace of change.

You can read the article here: http://www.project-syndicate.org/commentary/roach9/English