China at a Glance

by Chris Pearson

China is becoming much more important in the world economy, meaning recent reports of a slowdown cast doubts into the minds of pundits abroad. China's GDP is fast approaching that of the US and this means that news about the Chinese economy holds much sway with global markets. 

Many assume that China is growing through its export revenue - but they are wrong - rather, 92% of  its growth comes from investment spending. Expected then, are those who believe that this surging investment level is fueling a fixed-asset price bubble -  like what happened in Japan and to the Asian tigers in the 90s. The difference between investment in China and the investment in the Asian tigers, prior to 1997, is the different sources of money used to invest. China's funds cannot be pulled out from under itself as easily as what happened to the Asian tigers because it does not rely on foreigners' money to fund its investment. 


China boasts a 51% savings rate, a highly liquid banking system and a government willing to provide a safety net -  with sovereign debt amounting to 25% of GDP, a sustainable level. This means that unlike the Asian tigers, China is not subject to the whims of capricious foreign investors. Also, with huge reserves of foreign currency to stabilize large currency fluctuations, China is rather unlikely to experience a significant currency crisis.

However, there is a hurdle facing the banking system in China. Currently, it is unfair on depositors, offering measly, capped returns on deposits and charging a high interest rate to borrowers. Additionally, competition within banking is limited, offering little alternative to savers. In the meantime though, rather than a crippling vice, as it would be in a richer country, this system - at least for the meantime - does offer some genuine stability and strength to the economy. Mainly because it makes a run on the banks an unlikely scenario.

An issue with the investments being made though, is that, rather than being largely taken out by innovative private enterprise - as it should be - it's being made by China's inefficient and protected state owned enterprises (SOEs). These SOEs often overcharging in monopolistic markets and 'misinvesting' in an environment of subtle cronyism.

These vexations are not here to stay; as the demographic changes, as the middle class expands and as savers demand better returns on deposits, the government will be forced make structural changes to its banking system and its state owned enterprises and create a larger welfare system to handle its aging population. The question is, how long will the government delay these reforms?