Is China "desperately" trying to get away from it? They still manipulate their currency, rolling over bad debts and have excess capacity by the boat load. The factories on the coast that close move inland where wages are cheaper. The only thing that has changed is the reliance on fixed asset investment and land sales to prop up declining shares of exports. They aren't getting away from it, they have maxed out the export model. The service sector of China isn't going anywhere fast and actually decreasing as share of GDP thanks to their over reliance on construction. The private sector is taking a nose dive with no loans. They are going in the wrong direction.
Trouble brewing:
Over the past year, a growing number of analysts and investors have argued all is not as it appears in the Middle Kingdom. What they see instead is a government desperately priming the pump to maintain an illusion of prosperity"¦ As a share of the economy, household incomes have actually declined over the past decade. With the domestic economy too weak to maintain China's high growth rates, and with exports to the West hurting, the Communist Party in Beijing and its regional offshoots have come to rely heavily on cheap exports and debt–fuelled investment to sustain China's fragile fortunes. And the problems will only get worse as China's massive population starts to age rapidly over the next decade"¦
Massive stimulus:
In a country that's often been called the world's factory floor, China's Pearl River Delta is the industrial engine that keeps the assembly lines running. So, when America's economy tanked in 2008, and western consumers stopped buying TVs and sneakers, the region was hit hard. Exports to the U.S. and the rest of the world plunged, and more than 100,000 factories shut their doors, throwing millions of Chinese labourers out of work. As protests broke out, officials worried the backlash could escalate"¦
Faced with crisis, China's leaders swung into action with a mammoth stimulus plan. In November 2008, Beijing unveiled a US$600–billion rescue effort that, relative to GDP, was several times larger than what America put in place. More important, the government ordered its state–run banks to crank up lending, especially to residential and commercial developers. The banks promptly obliged, shovelling more than US$1.5 trillion of loans out the door last year, an amount equal to 30% of the country's economy. It worked better than the Chinese could have ever hoped — on paper at least"¦
To provide readers with some context on the explosion of credit in China, consider the below chart from Societe Generale:
Too little domestic consumption:
The crisis and the government's response exposed just how fragile China's economy has become. The problem is simple — for all the hype around China's emerging middle class, Chinese shoppers contribute very little to the country's fortunes. In any economy, domestic consumption typically makes up roughly 55% to 65% of GDP. The remainder is typically split between exports and investment. Not so in China. Over the past decade, domestic consumption's share of the economy has plunged from around half to a miniscule 35%, the lowest of any significant economy ever, according to Michael Pettis, a finance professor at Peking University"¦
With almost nothing in the way of health insurance, welfare or a social safety net for retirement, Chinese feel pressure to save every penny they earn. At the same time, official policies that favour Chinese banks and exporters — namely artificially low interest rates, an undervalued yuan and cheap labour — come at the expense of household savers"¦
The days of China being able to fall back on cheap exports is coming to an end, say experts. It's not just that consumers in developed countries have retrenched, though that's an immediate threat. China's policy of devaluing its currency to grab export market share from the West is now squarely in the crosshairs of politicians in the U.S. and Europe"¦
With the writing on the wall for China's export machine, officials have to scramble for an alternative way to juice the economy. So China has increasingly looked to investments in infrastructure and construction to keep Chinese workers employed. In 2009, the peak of China's stimulus campaign, fixed investments accounted for a whopping 95% of the country's GDP growth. Even last year, despite all the efforts by Beijing to rein in its stimulus efforts, investment in fixed assets was the fastest–growing segment of the economy"¦
Absolutely. The Chinese economy has become increasingly dependent on fixed asset investment
