Will China’s economy crash?

7/29/13
 
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from CNN,
7/29/13:

Should we be concerned about China?

After many years of euphoria over China’s rapid growth and the country’s apparently inevitable rise to global economic dominance, the China story has taken a serious turn for the worse. China, it now seems, is about to collapse, and along the way it may well bring the world economy down with it.

Fortunately, the new story may be as muddled as the old one.

China’s economic model has relied heavily on investment and debt. It shouldn’t be a surprise that after many years of tremendous growth driven at first by badly needed investments, Chinese spending on infrastructure and manufacturing capacity is slowing down.

During the same period, debt levels surged as borrowed money poured into more highways, airports, steel mills, shipyards, high-speed railways, and apartment and office buildings than the country could productively use.

A few economists predicted as far back as 2006 that China would face a serious debt problem. By 2010, it became obvious even to the most excited of China bulls that this was indeed happening.

To protect itself from the risk of a debt crisis, China must bring spending to a halt. Beijing now wants to rebalance the economy away from its excessive reliance on investment and debt, and to increase the role of consumption as a driver of growth.

But this cannot happen except at lower growth rates.

So what happens next — will China collapse? Probably not. What is far more likely is that in the coming years, China’s gross domestic product growth rate will continue to decline as the country focuses on stimulating consumption.

Will the slower growth rate be a disaster for China? Certainly, Would much lower growth rates create high unemployment and huge dislocations for the economy? Some are worried about such scenarios. But the Chinese economy has so far shown a lot of resilience despite passing storms such as the global financial crisis.

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