Washington, Oct 08: Demystifying the Chinese economy, a noted economist has said the Asian giant is living on "borrowed growth" and this "surreal economy cannot continue indefinitely." "China is a paradox. It is the fastest growing economy in the world - average annual rate of growth 8.6 percent - but, by some measures, it is also among the most inefficient," says Weijian Shan, a partner at Newbridge Capital, a private equity firm, in an article in the Wall Street Journal. The banking system is the main symptom of China's weakness. The bad loan ratio is put at 50 percent, which is the official estimate. This is particularly worrying because bank loans currently make up almost 98% of the total financing for Chinese companies, says Shan. This squandering of resources can coexist with growth because the country has two "advantages." One is the abundance of capital. China's 40% savings rate is one of the highest in the world. The second is capital controls. Chinese citizens cannot convert their money into foreign currency for the purpose of investing abroad. In such a system, growth can only continue as long as households continue to save at a high rate and the government maintains capital controls so those savings are not allowed to flow out of the country in search of better returns.
Standard & Poor's estimates it will cost some USD 518 billion, or more than 40% of China's GDP, to clean up the country's banking system. These costs, plus the equity write-off of those companies that will go bankrupt without continued funding from banks, translate into years of negative growth.
Bureau Report