July 13, 2004

Running out of gas...

Here's a pessimistic view of China's economy, to balance the admiring one I blogged here:

...In other words, China's leaders had better create a self-sufficient economy because Beijing will have to find about a half trillion dollars to fix the banks. And he will have to do that while repairing the financial condition of the central government. Official figures say that the annual deficit to GDP ratio is now 2.7 percent, just below the 3.0 percent international alarm level. Others put the number at 3.5 percent, and it is probably higher than that, perhaps 10 percent or more. According to official numbers, the ratio was just 0.75 percent in 1997. China has been running large budget deficits even though the economy is growing at a fast pace according to official statistics. That's unusual, to say the least. And disturbing.

What's more disturbing is that deficits eventually turn into debt. Beijing claims that its debt-to-GDP ratio is in the teens, well below the 60 percent alarm level. Yet once you add debt that is not officially counted and the "hidden obligations" like bad bank debt and unfunded social welfare liabilities, the ratio goes up to perhaps 170 percent.

Experts, ignoring China's debt problems, keep on saying that the country will have another banner year for gross domestic product. True, the People's Republic can continue to create growth for a few more years, but increasing levels of deficits, debt and non-performing loans indicate that the productive capacity of the economy is, in reality, weak. On its own, the Chinese economy is running out of gas...

Posted by John Weidner at July 13, 2004 7:12 PM
Weblog by John Weidner