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China on verge of worst economic crisis in decades

Srinivas

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China on verge of worst economic crisis in decades

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Back in 2001, Goldman Sachs’ Jim O’Neill coined the term BRICs to describe the key fast growing developing economies of Brazil, Russia, India and China. But a dozen years later, is the focus on the BRICs misplaced? Indeed, is the group “broken,” as Morgan Stanley’s Ruchir Sharma has suggested?
“Although the world can expect more breakout nations to emerge from the bottom income tier, at the top and the middle, the new global economic order will probably look more like the old one than most observers predict,” Sharma wrote earlier this year. “The rest may continue to rise, but they will rise more slowly and unevenly than many experts are anticipating. And precious few will ever reach the income levels of the developed world.”
Each day this week, a leading analyst will assess the prospects of a BRIC nation and weigh in on whether it still deserves its place in a group of economic high flyers. Today, Minxin Pei looks at China, the only country that Sharma was relatively upbeat about.
By Minxin Pei, Special to CNN
Editor’s note: Minxin Pei is the Tom and Margot Pritzker ’72 Professor of Government at Claremont McKenna College and a non-resident senior fellow of the German Marshall Fund of the United States. The views expressed are his own.
Recent economic turmoil in major emerging market economies such as India, Indonesia, Turkey, Brazil, and South Africa has apparently made China, for all its economic woes, an oasis of stability. Its currency, the renminbi, remains stable; its economic growth, though slowing down, is expected to reach 7 percent this year, the fastest among major economies.
But appearances are deceiving. Behind these statistics lies a far more fragile Chinese economic reality. The relative calm of the Chinese economy actually conceals far greater risks.
The biggest short-term risk is financial overleveraging. Thanks to its decade-long credit boom, the Chinese economy as a whole is far more leveraged (indebted) than any of the major emerging market economies. Net domestic credit as a share of GDP is close to 140 percent in China, compared with roughly 90 for Brazil, 75 for India, 60 for Turkey, and 35 for Indonesia. To make matters worse, most of the debt is owed by state-owned companies, real estate developers, and local governments that are known for wasting capital on financially unprofitable investments.


For now, the bad debts incurred by these borrowers are not recognized on the balance sheet of Chinese banks, which are ordered by the Chinese government to roll over these loans. Estimates of bad loans hidden in Chinese banks vary, due to the opacity of the Chinese financial system. The most conservative estimates suggest they are around 10 percent to 15 percent of GDP. If that is true, the Chinese banking system is technically insolvent.
Thanks to its capital control and state ownership of banks, China does not face an imminent financial meltdown (since the government can maintain liquidity), but Chinese banks will have to be recapitalized at some point – an expensive, time-consuming and technically complex process that will have a substantial negative impact on future growth.
Even if Beijing manages, through a combination of inflation and clever accounting gimmicks (such as shifting bad loans to off-balance sheet financial entities), to make its banks healthy again, it has to confront a tough medium-term challenge: cutting China’s massive excess capacity in most industries. Much of China’s investment, the most critical factor of its sustained rapid growth, has gone into manufacturing and infrastructure. As a result, excess capacity is plaguing major manufacturing industries (such as steel, cement, automobile, solar panel, wind turbines, and many others) and destroying profitability in sector after sector. To restore profitability and kill zombie firms that are now kept alive only by bank loans, China will have to shut down many companies – a politically difficult task. More importantly, Beijing will have to follow up this painful restructuring with far-reaching financial sector reform so that investments in the future will not flow into sectors with excess capacity.
Whether China can deal with these two challenges is anybody’s guess. However, one thing is clear – mountainous bad loans hiding in the balance sheet of Chinese banks and massive overcapacity in its manufacturing industries are not going away. Even a successful resolution of these problems will unavoidably entail years of slower growth. Compared with other emerging economies, China’s problems are far bigger and more complex. They may appear manageable at the moment, but in the next one to two years, when the full magnitude of China’s macroeconomic risks and structural deficiencies are fully exposed, Beijing will likely face its most lethal economic crisis since the end of the Mao era.

China on verge of worst economic crisis in decades – Global Public Square - CNN.com Blogs
 
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If China's "appearances are deceiving", and her 7.5% is not good enough; Well, why don't you tell us which top countries now in the world have better China on performance???
 
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No gonna happen unless some one steals all there forex reserves, which even theoretically is impossible. Man they have at least two zero's extra than any other nation below them when it comes to the assets. I envy the chinese a lot. But they deserve to bear the fruit of their decade long hardwork. India and the world can still learn a lot from them and save their economy.
 
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No gonna happen unless some one steals all there forex reserves, which even theoretically is impossible. Man they have at least two zero's extra than any other nation below them when it comes to the assets. I envy the chinese a lot. But they deserve to bear the fruit of their decade long hardwork. India and the world can still learn a lot from them and save their economy.

America has already stolen it and given them papers.
 
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Now that jayatl has banned, I see you've picked up the slack. And when you get banned again and he comes back, this virtuous circle can begin anew :rolleyes:.

True, I agree!! This is a anti China news in CNN and the Indian posters are using it to defame China and show it in bad light. Chinese people don't agree to this news!!
 
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The "China will collapse" or "Chinese estate bubble will explode" or " China will disintegrate" have been around since 10 years and same will continue for the next ten years. These are the usual rhetoric and China bashing theories by the White Western racists in view of discrediting China. Each time China is on the verge of collapsing, but one year later, nothing happens despite all the demoniac prayer by the white western racists. In the contrary, it is the West which is collapsing. Just before the London riot, the West had predicted that China would witness its worst social unrest leading to the fall down of the ruling communist party, same prediction just before the Arab spring, and just before the Greece or Eurozone crisis, the West had predicted the Chinese Estate bubble bursting. China is so use with all these dooms predicted by the White Western racists. Even the work and research undertaken by economists had shown that China would no more exist as a country. But China is still going strong. China's economic situation is the best among all BRIC countries. It is India/Scatland which is collapsing with a falling currency, abyssimal deficit and colossal infrastructural depletion. Stange that no such prediction had been made by the West on Scatland while it is the latter which is already in economic crisis.
 
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Can Indian members please at least change their flags when bashing china
Currently we are more likely to collapse than the Chinese & we are showing total Hypocrisy in this matter
We should sort out our own problems before Posting this kind of Nonsense

& credibility of Mr chang on china related news is very questionable
Seriously guys stop bashing for now reason
 
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