A China crash in the making?
G. Bin Zhao says China's current economic difficulties, including the scale of its government debt, are not as severe as many fear, and are to some extent a temporary result of reforms. Andrew Collier is less sanguine, warning of worse to come if cash-strapped local governments fail to find alternative sources of revenue, as land sales dry up
'Short-term problems will neither hold up nor distort China's sustainable development'
Each time China's economy faces difficulties, talk of a collapse tends to surface. Some voices are driven by concerns about their investments; some are looking for speculative opportunities; others might just be following the trend, unable to draw their own conclusions. In any case, it's always necessary to think critically and deeply when absorbing new information, regardless of how authoritative the source may be.
So, what is the true picture of China's current economic situation? Will the country's stretched bank credit lead to a financial crisis? How severe are the debts accumulated by local governments and the shadow banking sector?
As I have said before in these columns, I expect China's economy to face a rough ride in the next few years as the new leadership introduces major changes. The current policy transitions, which are the root cause of the recent pain, combined with slower growth, have exposed major problems, such as the cash crunch in banks. But these short-term problems will neither hold up nor distort China's sustainable development, because at the core of these changes are reforms which are designed to facilitate a much healthier and better economic future.
China's top leadership has decided to follow a slower path; however, local officials, and even some ministries, as well as executives of the major banks and other state-owned enterprises, have demonstrated they are not yet ready to adapt. This is the root cause of the current tensions related to bank liquidity, shadow banking and local government debt.
Despite the slight increase in non-performing assets, Chinese banks are more healthy than many would believe
More specifically, gross domestic product growth averaged 10 per cent for the past three decades; now the official target is 7 per cent. A reduction of nearly one-third can mean a lot for many industries, not to mention provinces and municipalities.
