China bubble puts our recovery in doubt Rowan Callick, Asia-Pacific editor From: The Australian November 26, 2009 12:00AM Text CHINA'S economy is facing a breakdown, one of the Asian giant's most influential economists warned last night.
This would derail Australia's dependence on China's rapid growth to drive it clear of the global downturn.
Yu Yongding, economics professor at the Chinese Academy of Social Sciences, said China was suffering resurgent asset bubbles, overcapacity and inflation, likely to be followed swiftly by overheating, a breakdown of its rapid growth, and deflation.
Professor Yu, formerly a member of the central bank's monetary policy committee and of the committee that drafted the current national five-year plan, said: "China's investment-driven and export-led growth pattern is not sustainable."
Delivering this year's annual Richard Snape Lecture for the Productivity Commission in Melbourne, he said that "now, even the safety of China's ($2.5 trillion) foreign exchange reserves is under threat", as a result of the US collapse.
He called on the US government to compensate China for its losses on its US investments.
He said the impacts of the government's post-downturn expansionary policies and of the current "investment fever" were worrying.
"China's monetary policy is too loose," he said in his written speech.
"There is no need for China to drop the benchmark interest rate to such a low level. A large chunk of excess liquidity has entered stockmarkets and real estate markets. Asset bubbles are returning with a vengeance.
"The huge gap between the massive growth rate of monetary supply and gross domestic product growth implies very large inflation pressure in the future.
"With near zero interest rates, small and middle-sized private, innovative enterprises will be discriminated against vis-a-vis state-owned monopolistic enterprises. Progress made in enterprise reform may suffer retreat."
As the economy moves into "investment overdrive", said Professor Yu, "China's overcapacity will become more serious."
The strong demand for China's exports had delayed the surfacing of over-capacity for many years, he said.
"The trouble is that export demand is highly unstable," he said.
When the economy was smaller, "absorbing excess capacity was not a big deal". Now, he said, that was much harder.
He said China's vulnerability was considerable.
"The rapidity of the shift from overheating to a sudden loss of speed, and from inflation to deflation in September to October 2008, was truly stunning."
He warned that the growth rate of China's exports could not remain persistently higher than that of the global economy.
"With or without the global financial crisis, overcapacity will surface and correction is inevitable. The crisis exposed the vulnerability of China's growth pattern in a dramatic fashion."
But China can spend its way out of the slowdown as long as the government wishes, because of its strong fiscal position. But the medium and long-term impacts of the expansionary policies "are worrying".
Professor Yu said: "China's investment efficiency has been falling as a result of the stimulus package."
Bank credit soared by $1.15 trillion in the first half of this year, above the official target for the full year and double the credit increases in 2006 and 2007.
The efficiency of the resulting mostly state-directed, infrastructure-centred investment had fallen by 50 per cent, and was now below half that of Japan, he said.
This infrastructure investment, he said, would not bring returns: "Where will tolls come from, if there is no traffic in an eight-lane highway? Due to the hasty and under-supervised implementation, waste in such construction is ubiquitous."
He said this could also lead to "a significant increase in non-performing loans".
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