China’s Economy: Growing or Worse?

Inevitable that Chinese economy at this time sped by so fast. Is

China's economy has been running in accordance with the appropriate
destination or vice versa? The following will present the cons and pros of
the sources of reliable information.

First, although the credit business has grown rapidly in China, in

contrast to a credit squeeze in Europe and the United States, it's still hard
to tell which one is good and which bad. The global financial crisis, which
started with the collapse of Lehman Brothers, has severely curdled the
fluidity of America's financial system. Though European countries and the
US have managed to restore the fluidity of their financial systems since,
it's hard to rebuild the credit relations between banks and enterprises, as
well as banks and consumers quickly. Unusual fluctuations in asset prices,
because of the lack of fluidity, have become common. Even if there are
not many new non-performing loans, the risk of potential ones remains
high.

As noted in the Times Magazine by the year 2008, researchers for

the Conference Board in New York City calculated average annual
productivity growth in China's manufacturing sector at an astonishing
20.4% from 1995 through 2003. That's almost six times faster than
productivity growth in Europe or the U.S. China was facing the risk of
deflation. And since its domestic consumption capacity is limited and
orders from Europe and the US had shrunk drastically owing to the lack of
fluidity there, the Chinese government announced a $586-billion stimulus
package to, among other things, activate banks' credit funds. Government
investment restored confidence in the market and became the pillar of the
Chinese economy in its fight against the global economic crisis. Above all,
it helped China's real economy to avoid a hard landing, which was
becoming a possibility because of the rapid shrinking of orders from
Western markets.

Put simply, China has been investing too much, too fast, particularly
in its export-oriented manufacturing sector. The most striking evidence of
this is the relatively small role Chinese consumers play in the economy.
Household consumption as a percentage of GDP fell to 36% in 2006,
perhaps the lowest such ratio in the world. At the other end of the scale is
the U.S., with a household consumption–GDP ratio of 72%. For years the
U.S. has been consuming too much and saving too little. China has the
opposite problem.

Ironically, the Chinese are far more open and honest about the
growth challenges they face than outsiders are as quoted from
Chinadaily.com, "The domestic and international economic situation is still
extremely complex," Chinese Premier Wen Jiabao said during two days of
meetings this week with economists and business executives in Hangzhou,
Zhejiang province June 25, 2010.

As written in Newsweek magazine, now China appears to be

reaching a critical turning point, at which it has become too big to
continue growing so rapidly. When Japan’s per capita income in the mid-
70s reached levels similar to those of China today ($4,000 in current dollar
terms), investment spending slowed down markedly and so did the
economy’s overall growth rate from a trend rate of 9 percent to 5 percent.

It is very clear that the Chinese economy could also affect the
economy in Indonesia. As written by Bahana Securities in The Jakarta Post
Newspaper that China's economic policies affected the countries of Asia
and Indonesia with one of them is pointed out on the table about the
Consensus Forecast of Regional Currencies. When China increases its
interest rates once or twice to prevent asset bubbles from forming will be
the trigger leading to re-rating of Asian markets, particularly in North Asia
like China, Korea and Taiwan.

Since Indonesia’s re-rating occurred earlier, there is a risk that the

flow of funds could move from South to North Asia towards the end of this
year. However, this prospect could be tamed by continued positive
sentiment on Indonesia, particularly if the country can achieve the much-
talked about rating increase to investment grade.

The current debate on China’s future has just two camps, the
extremely bullish majority and a very shrill, bearish minority, but the truth
may lie in the middle. China could well be like Japan in the mid-1970s, a
period when Japan began to downshift, but remained a compelling growth
story for 15 years. China’s share of global economic output has more than
doubled in the last decade, but is still just 8.5 percent. If China moves
smoothly to 6 or 7 percent growth in the coming years, it will hardly be a
cataclysmic event, except possibly for those who have bet it all on the
story of the last decade.

In summary, what China needs most now is economic growth,

especially because the world economy is yet to recover fully. But at the
same time, the authorities should reflect on their economic policies. If they
move ahead ignoring or repeating their mistakes, they could end up
undermining China's economic growth.