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January 25, 2012

Advantage of China's Fast GDP Growth - They can Outgrow Debt Problems

Wall Street Journal - In 2011, China's gross domestic product came in at 47.1 trillion yuan ($7.11 trillion). That represented nominal growth of 17.5 per cent from 2010, a blistering pace that makes many of the problems of debt and credit that trouble investors, and which hang over valuations for Chinese stocks, appear a little more manageable.

Take local-government debt. The government's auditor put the number at 10.7 trillion yuan at the end of 2010. That was equal to 26% of China's GDP. In 2011, it shrank to 22%. Even if weaker demand and lower inflation mean a slightly lower nominal growth rate in 2012, by the end of the year local-government debt could shrink to 19% of GDP. Debt may be creeping up, but not enough to push the ratio in the wrong direction.

Investors also worry about China's credit binge, which saw the ratio of loans to GDP soar from 96% at the end of 2008 to 119% at the end of 2010, as the pace of new loans ran far ahead of GDP growth. An expanding economy means that ratio was down to 116% in 2011. That reduction reflects the fact that banks' loan books are expanding, though not as fast as GDP.

Slow growth in the US, Europe and Japan mean there is almost no room for error managing issues like real estate and debt.

China can overbuild real estate and then absorb the capacity with 30 million people moving to cities every year.

China can run up debt but easily have GDP/Debt ratio shrink by pulling back so that debts grows less than the nominal GDP growth rate. China's nominal 17% in 2011 and which should still be 12% or more in 2012 through 2020.




This is an issue that runs into those who are against pro-growth economic policies. Those against pro-growth want a society that has very little growth or even no growth. This is often for some ideology related to resource usage and the environment and some aspect of a philosophy of what they consider to be right and wrong.

This ignores the fact that the world can easily support an economy that is one hundred times larger, if cities and transportation are structured correctly and technologies like deep burn nuclear fission power were developed or nuclear fusion were available. The economy could be one hundred times larger still with advanced molecular nanotechnology. The economy could be over a billion times larger than that with development of resources in the solar system.

Zero growth plans leave a society on the razors edge of economic disaster. In the far future, after civilizations has expanded to somewhere between Kardashev 2 and 3, there could be some consideration of transitioning and managing with almost no growth. This is something the future society should take the time to determine how to do correctly. That is not something that should happen now.

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