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FT: Troubled Waters Ahead for China’s Economy

By    |   Sunday, 14 Apr 2013 01:34 PM

China’s economy could crumble over the next decade, especially if the inevitable transition to slower growth is fumbled and consumption does not take a bigger role in the economy, the Financial Times reported. 

The London-based paper cited an official report from Chinese economists that noted a “natural  landing” often occurs when a developing nation catches up with advanced economies, as a surging Japan did in the 1970s and South Korea did in the 1990s.

The Chinese economists from China’s Development Research Center (DRC) concluded that, in fact, the transition to slower growth has already begun.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

The DRC’s ten-year plan said China’s future potential for infrastructure investment has already contracted, overcapacity has soared, labor supply growth is falling and urbanization growth is declining.

Further, the Times noted China is so much larger than Japan, for instance, that its proportionate opportunities in the world economy must be relatively smaller.

China’s former premier, Web Jiabao, stated more than once that the nation’s growth has been “unbalanced, uncoordinated and unsustainable.”

But the most significant reason for pessimism is China’s “dependence on investment, not 
just as a source of extra capacity, but as a source of demand,” the Times said. “Consistently rising investment rates are not sustainable, since the returns ultimately depend on additional consumption.”

If China’s economic growth falls from over 10 percent to 6 percent, the corresponding rate of investment could decline from 50 percent to 30 percent of GDP. “If swift, such a decline would cause a depression, all on its own,” the Times estimated.

Also, a decline in growth is bound to mean a rise in bad debts, and there is little reason to 
expect income in China’s controlled economy will be shifting away from corporations and state enterprises toward households who might consume more.

Reuters reported stronger domestic demand helped China's factory activity to rebound in
March. New orders were up sharply, demonstrating that the nation’s underlying economic
recovery was strong enough to weather export pressures, Reuters said.

Qu Hongbin, HSBC's chief China economist, said while China's resilient local demand would support its economy in coming months, domestic growth is not rising quickly. "Beijing policymakers should keep a relatively accommodative policy stance in place," Qu said.

Last month, a member of the top Chinese decision-making body called for sweeping economic changes, including a reduction in state control, due to China’s surplus production capacity and risks to the financial system, Reuters reported.

Deputy Prime Minister Zhang Gaoli, a member of the Politburo Standing Committee, warned that failure to make changes would mean years of low-quality growth.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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China's economy could crumble over the next decade, especially if the inevitable transition to slower growth is fumbled and consumption does not take a bigger role in the economy, the Financial Times reported.
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Sunday, 14 Apr 2013 01:34 PM
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