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CHINA: More Growth Lies Ahead, But Hurdles Too

Mitch Moxley

BEIJING, Dec 7 2010 (IPS) - As China’s economy continues to soar, many experts here remain only cautiously optimistic about the country’s future growth, confident that its fundamentals remain strong but concerned that a real estate bubble and rising inflation could slow economic growth.

After a surprisingly strong recovery from the 2008 financial crisis, China overtook Japan in August to become the world’s second largest economy. Its 2010 annual economic growth is easily expected to surpass the government’s own estimate of 8 percent, with forecasts of more growth ahead.

China’s economy grew 11.9 percent in the first quarter of 2010 and 10.3 percent in the second quarter. In December, the World Bank raised its 2010 growth forecast for China to 10 percent, up from 9.5 percent, based on “still surprisingly strong” 9.6 percent Gross Domestic Product growth in the third quarter. The bank predicts 8.7 percent growth in 2011.

Earlier in October, the International Monetary Fund had upwardly revised its 2010 forecast to 10.5 percent.

Justin Yifu Lin, the first Chinese citizen to serve as chief economist of the World Bank, is among the bulls about China’s economic path. He has said he expects the country’s next 10 or 15 years of economic growth to be even more spectacular than the last decade, and he believes that by 2025 China’s economy will be the largest in the world.

Other economists are more cautious.

Xie Guozhong, an independent economist and financial investment advisor who is a former Morgan Stanley managing director, tells IPS that China’s excessive production capacity and, more importantly, its real estate bubble, pose real challenges to the country’s future economic growth.

“The bubble will keep growing in the next two years and will break someday without exception,” he says.

Su Jian, deputy director of Peking University’s School of Economics, says that while inflation is on the rise, due largely to rapidly increasing food prices, China’s economic performance remains strong. He said that China’s real estate market “is plagued with bubbles… but China’s economy is not heading toward a crash.”

Indeed, the long-term strength of China’s economy is the subject of debate among economists and financial experts. While the majority opinion seems to fall on the side of sustained growth, at least in the medium-term, a minority of critics, mainly from Western countries, are warning that China’s economy is not what it seems and predict the country could be heading toward a financial crisis within the next few decades.

James S Chanos, a prominent U.S. hedge fund manager who made a fortune by predicting the fall of Enron and other companies, has warned that China’s economy is heading toward a crash, rather than sustained boom. He has said that the government is exaggerating the county’s economic strength and faking its growth rates. China’s real estate bubble is “Dubai times 1,000 – or worse,” Chanos has warned.

Since late 2008, critics like Chanos have warned that asset bubbles could emerge in China. They argue that the 596 million dollar stimulus package, record bank lending and massive inflows of foreign “speculative capital” have been pumped into the stock and real estate markets.

In November, Martin Wolf, among the most influential writers on economics, said at the 2010 World Economy Annual China lecture in Ningbo that China is “almost certain” to experience a financial crisis in the next 25 years. He warned that China has “significant vulnerabilities”, adding that large losses in its banking sector are possible in the coming years.

Wolf said China’s growth model of the last 10 years is “fundamentally unsustainable.” Among the key challenges ahead for China’s policymakers include raising productivity levels, managing declining investment rates and securing natural resources at workable prices, he added.

“My view is that however remarkable the success China has had in the last three decades, the next two decades will be ineluctably more difficult than what has already been achieved,” he said.

There are other potential problems ahead. The World Bank itself has warned that global tensions over trade imbalances and currency manipulation could cast a pall over the otherwise positive economic outlook.

It suggests that a more flexible exchange rate mechanism would allow for more policy options, including interest rate hikes, which would help Beijing control mounting inflation. Inflation exceeded the government’s target of 3 percent in May and reached 4.4 percent in October 2010.

The government has acknowledged that it needs to slow down the economy in order to cool inflation. In early December, top Communist Party leaders said they would switch to a “prudent” monetary policy, although they did not indicate what that might mean. The government has already taken steps to curb lending, raising banks’ required reserves twice in the last month.

Beijing has also begun taking steps to rein in the real estate market, including implementing stricter mortgage policies to curb soaring housing prices, Su says.

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