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An alternative perspective.
Feast nearly over for China Nation's woes will hurt global growth
The reality is that since 2007/2008, a significant part of China's growth has been an illusion. Since 2008, China's headline growth of eight to 10 per cent has been driven by new lending, averaging around 30 to 40 per cent of GDP. Up to 20 to 25 per cent of these loans may prove to be non-performing, amounting to losses of six to 10 per cent of GDP. If these losses are deducted, Chinese growth is much lower.

China now faces significant problems in maintaining its high-growth strategy.

The case for the soft landing assumes the investment and property bubbles are less serious than thought. Beijing has sufficient financial capacity to boost growth by loosening monetary policy and bank lending, while adjusting specific policies, such as lifting restrictions on housing sales to prop up prices. China is able to boost domestic consumption, replacing investment as the key driver of its economy. Excess capacity is gradually absorbed as the world economy recovers. Growth comes down gradually, without causing social and political disruptions.

The case for the hard landing assumes the rapid and destructive unwinding of asset price bubbles and problems within the Chinese banking system. A poor external environment and losses on foreign investment exacerbate the problem. Growth collapses, triggering massive social unrest and political tensions.

The end of a cycle of debt and investment-driven growth is typically disruptive. Japan's experience, which China has drawn on in shaping its economic model, is salutary. Japan grew by 10 per cent in the 1960s, five per cent in the 1970s, four per cent in the 1980s and has remained stagnant since, adjusting to the deflation of its debt-fuelled bubble.

Growth may decelerate sharply as the identified problems emerge, falling below five per cent by the middle to end of the decade. While growth at this level is high by the standards of developed nations, it is below that required in China to meet the needs of its population and their aspirations. A lower growth rate is also problematic for external investors and trading partners, assuming higher rates of growth.

The global economy increasingly looks to China to drive the world's growth. These febrile expectations are ill-founded. China's GDP is only around 20 per cent of the combined GDP of the United States, Europe and Japan, which make up around 60 per cent of global output. The view China, because of its large population, can compensate for a decrease in consumption in the developed countries is fanciful. China's consumption is only a little more than France's, a little less than Germany's and around one-eighth of the United States'.

In the aftermath of the crisis, industrial and direct investors have looked at China for earnings growth and returns. High growth rates, fables of urbanization, rising domestic consumption and the need for investment in upgrading infrastructure have attracted investments. Fairy tales about how a billion Chinese would urbanize and consumerize, driving 10 per cent growth forever and replacing America as the global consumer of last resort, captivated audiences at business conferences.

Investors generally chose to ignore the truth underlying the fairy tales, ignoring how the growth was going to be achieved. China's debt-driven and investment-fuelled growth is now vulnerable.

China's problems are likely to affect global growth. There will be significant effects on commodity prices and volumes, affecting resource producers and commodity-exporting nations, such as Canada. It will also affect demand for industrial goods, especially advanced machinery. China consumes more than $500 billion of these products, mainly imported from Europe, the United States and Japan.

A hard landing will be especially traumatic for the global economy, which has not dealt with its core problems -- excessive debt levels, weak non-debt-fuelled demand and global imbalances. The crisis and its effects have been masked in developed economies by artificial demand from government spending, which is proving increasingly difficult to sustain. In China, it was masked by debt-fuelled investment. Now, that feast, too, is coming to an end.

http://www.winnipegfreepress.com/business/feast-nearly-over-for-china-149459805.html