February 24, 2012

China's Statistics indicate that the China Economic Bubble Arguments are Overblown

1. WSJ China Real Time has the optimistic view of China's economic situation

Argument No. 1: China is an over-invested bubble waiting to burst!

It’s true, China’s investment as a share of gross domestic product is at worrying levels –close to 50% according to the 2010 data. But that doesn’t mean China is maxed out on infrastructure. China’s entire railway network is still just 40% the length of the rail tracks in the U.S.

Argument No. 2: China’s real estate sector is about to collapse, dragging the rest of the economy down with it!

Total lending to China’s real estate sector at the end of 2011 was just 22% of gross domestic product. In the U.S., mortgage lending at the end of 2007 was 103% of GDP. That means even if China’s house prices do fall, households won’t be bankrupt and the banking sector won’t fall over

Argument No. 3: The shadow banking system is a disaster waiting to happen!

At its peak in early 2008 the shadow banking system in the U.S. was almost twice the size of the traditional banking sector. In China, off balance-sheet lending remains a fraction of total outstanding credit. Bernstein analysts put it at 28% of the total at end 2010.

Argument No. 4: China’s labor force is shrinking! Rising wages will cripple competitiveness!

Increases in the minimum wage (which are already taking place) and a move by factories inland (like Foxconn’s move to Chongqing) will help lure workers back off the farms. Even if wages do rise, they are starting from a very low base. The U.S. Bureau of Labor Statistics estimates that in 2008, wages in China’s manufacturing sector were just 4% of their level in the U.S., and 20% of their level in Mexico.

Plus, if you’re worried about increasing consumption isn’t rising wages a good thing?

Argument No. 5: China’s debt levels are ballooning!

China’s central government debt to GDP ratio is about 20%. Even if you add in a generous estimate of debt taken on by local government you only get to about 50%.

With the U.S. debt-to-GDP ratio at about 100%, and Japan’s at 230%, in international perspective China’s problem doesn’t look that worrying.

2. Carnegie Endowment - China's Surprising Rebalancing Act

The risk of a “hard landing” has diminished and now appears small. China’s external surplus (measured by its current account surplus-to-GDP ratio) declined in 2011 and is expected to fall further in 2012, even as its rate of growth remains very high—a projected 8.5 percent in 2012.

This relatively optimistic outlook for China’s near-term future is based, in part, on slightly improved global indicators and an unexpected uptick in China’s Manufacturing Purchasing Managers Index (PMI) for January (to 50.5, see figure). Together with a sharper uptick in the Small Business Manufacturing PMI (to 52), this suggests that the expected gradual slowdown in manufacturing output and employment growth in 2012 may be more modest than previously thought.

Is China’s economy rebalancing?

There is strong evidence that the economy is rebalancing externally—domestic demand is rising relative to exports—but not (yet) internally, in the sense that China’s exceptionally low household consumption-to-GDP ratio (about 34 percent in 2011) failed to increase.3 However, the current account surplus, which peaked at over 10 percent of GDP in 2007, has since declined as a percentage of GDP, to well under 4 percent in 2011—the benchmark figure for an economy’s external imbalance proposed by U.S. Treasury Secretary Timothy Geithner. Based on provisional estimates, China’s current account surplus-to-GDP ratio in 2011 was 3.7 percent (about half of what the IMF projected in April). A UBS research bulletin dated February 17, 2012, puts it even lower (2.7 percent).

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