Thursday, January 27, 2005

China's Reheated Economy

on Economist

the Chinese authorities sheepishly confessed that the economy beat expectations last year, growing by 9.5%. It finished the year particularly strongly, growing at an annual pace of almost 13% in the last three months ... Anywhere else, this would be cause for celebration. But in China, the firecrackers remain unlit. Instead, analysts and investors are trying to reassure themselves that this is not bad news.

Since China embraced market economics in 1978, its average rate of growth has been 9.4%. By its own standards, then, last year’s pace of expansion was nothing out of the ordinary.

In the year to the first quarter of 2004, spending on fixed assets—plant, property and infrastructure—grew by 43%. Investment accounted for 42% of GDP in 2003, and perhaps a still greater share last year. No economy can sustain such a colossal rate of capital accumulation.

Chinese households still save about 45% of their income. They deposit about two-thirds of these savings in China’s four big state-owned banks, which lend about two-thirds of these deposits to state-run firms. The banks pay little attention to risk and do not expect much of a return: perhaps 40-50% of loans are non-performing.

Economists, who freely mix their metaphors, have spent the past year worrying that China is “overheating” and hoping that it will make a “soft landing”.

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