Will China Crash?

Investment analyst Gordon Chang has written an opinion piece in the Christian Science Monitor, which expands on an article written earlier in the New York Times that describes the underlying themes which have driven acclaimed investor James Chanos into betting against the Chinese economy.

Until now, China's extensive annualized growth and its emerging role as a global economic and political power have muted much of the criticisms and naysayers.  However, with more investors questioning the soundness of the "Chinese miracle", Mr. Chang, who has been making dire economic predictions for the People's Republic of China for more than a decade, is finding his assessments more closely followed.  In his CSM commentary, he uses the analogy of Dubai, where their bubble was fully evident to all and yet when it imploded, there were many investors who were dismayed that it could have occurred.

Key points outlined are:

• Beijing’s stimulus spending last year represented approximately a quarter of the total economy, resulting in as much as 95% of China’s growth being attributable to state investment
• China's exports declined 16% in 2009 and there is little evidence that global demand will increase in 2010.
• Power consumption statistics contradict government economic growth statistics and infer that the 'real' economy was expanding at only two-thirds of the announced rate.
• The nation's stimulus plan favored "large state enterprises over small and medium-sized private firms, and state financial institutions are diverting credit to state-sponsored infrastructure."
• Whereas annual growth was driven by private growth in previous years, in the current situation China is "re-nationalizing the economy with state cash."
• 20% of state bank loans have been diverted into the country’s rising stock markets, and "another large portion is fueling property market bubbles."

If the criticisms made by Mr. Chang prove correct, then China's state-sponsored stimulus package will, like America's dalliance with low and non-existent interest rates after the dot-com implosion, prove to have made the country more susceptible to economic decline.

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I too have written about the Chinese economy crashing (here) and the inconsistencies of economic data emerging from China in the past decade (here and here).