20/08/2008 - 22:00

Doubts over China’s economic strategy

20/08/2008 - 22:00

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A China expert with the Centre for Independent Studies is warning of serious flaws in the Chinese economic growth strategy as its economy booms.

A China expert with the Centre for Independent Studies is warning of serious flaws in the Chinese economic growth strategy as its economy booms.

John Lee is reassessing China's future beyond the Beijing Olympics and suggests the Chinese strategy of growing itself out of trouble is unsustainable.

Dr Lee is even suggesting that China could stagnate and descend into turmoil.

Australia is benefitting enormously from China's economic growth, with its rise seen as perhaps the most significant illustration of economic transformation in history.

In March last year, at the Chinese National Peoples' Congress, China's Premier Wen told delegates: "The biggest problem with China's economy is that growth is unstable, unbalanced, uncoordinated and unsustainable".

Dr Lee believes China's high level of growth is symptomatic of fundamental problems within its fixed investment sector, which accounts for 70-75 per cent of GDP growth over the past decade.

"The Chinese people are the best savers in the world. They save about 40 per cent of their disposable income and deposit these in mainly state-owned-banks, simply because there is little alternative," Dr Lee said.

Bank loans account for between 80 and 90 per cent of all financial activity in China, and 70 per cent of the funds are lent to state owned enterprises (SOE), which Dr Lee believes are inefficient because of cheap capital, a lack of competition, and corruption.

"Because the SOEs perform so poorly, and because they keep on borrowing more and more money, there is a huge non-performing loans problem in the Chinese banking system," Dr Lee said.

A 2004 study by McKinsey suggested that all of China's major banks were technically insolvent, but remain operational only given the continued deposits coming in from the high savings of the population.

"It is a perverse cycle; monopolise the financial sector, use these deposits to lend to SOEs who use the money inefficiently, these SOEs are bailed out when they can't repay their loans, and the cycle starts again. It all counts as growth but all this investment activity is not producing profits," Dr Lee said.

Dr Lee believes China could reorient its economy in order to avoid disaster but this would mean releasing its grip on the economy, and therefore political power.

''This isn't just about abstract finance and economics; the massive misallocation of the country's wealth combined with the entrenched corruption of officials is having real economic and social effects,'' Dr Lee said.

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