Thursday, July 31, 2014

China’s bad dream

By Gene Frieda 

Arab News — Thursday 31 July 2014

Since his first address as China’s president last year, Xi Jinping has been espousing the so-called “Chinese Dream” of national rejuvenation and individual self-improvement. But the imperative of addressing the unprecedented amount of debt that China has accumulated in recent years is testing Xi’s resolve, and his government is blinking.
The Chinese government’s uncertain ability — or willingness — to rein in debt is apparent in its contradictory commitment to implement major structural reforms while maintaining 7.5 percent annual GDP growth. Given that China owes much of its recent growth to debt-financed investment, often in projects like infrastructure and housing, meant to support the Chinese Dream, any effort to get credit growth under control is likely to cause a hard landing. This prospect is already prompting the authorities to delay critical reforms.
To be sure, China’s debt/GDP ratio, reaching 250 percent this month, remains significantly lower than that of most developed economies. The problem is that China’s stock of private credit would normally be associated with a per capita GDP of around $25,000, almost four times the country’s current level.