China’s Challenge

A decent article in the LA Times about the challenges facing the Chinese:

China tries to put brakes on overheated economy – How well China succeeds in slowing its economy without triggering a slump holds enormous consequences for the rest of the world economy.


The essence is that the Chinese economy, which has been growing at 8-9% per year for nearly two decades has based it’s growth on heavy investment spending and strong exports. In particular, to help China overcome the global recession in 2008-09, the Chinese government launched a huge Keynesian-style stimulus program of government spending and support for bank lending.  It worked.  In fact, it worked better than the weaker attempts made in most other nations.  But now, China faces a challenge.  It’s been growing so fast for so long, that the really attractive investment opportunities are gone.  Now the bank lending craze and investment craze is going after very dubious and low-return projects.    The nation is starting to push up against it’s limits.  When that happens, when the economy’s resources are already fully occupied (particularly labor), then you get inflation.  Indeed China is now experiencing some moderate and rising inflation.   They already have what appears to be a real-estate price bubble.  What they have to do is to  gradually switch over to more consumption than investment, but that’s a hard transition to make smoothly.  If they fail and their economy goes into a crash or even a moderately bad recession, it’s bad news for everybody because right now, China’s one of the strongest economies on the global scene. The U.S. needs China to keep growing if the U.S. hopes to expand it’s exports.