When the world-wide economic crisis unfolded, Beijing reacted by pumping 4 trillion yuan (US$ 550 billion) into the economy in the form of infrastructural investments. It also had the banks to provide easy credit to business. Through such an approach the economy is set to be on track to meet the target of 8 per cent growth this year, a rate China says it needs to ward off social unrest.
However, for many experts this development model rests upon excess investments, over-production and under-consumption.
Public investment in fact accounts for nearly 45 per cent of mainland gross domestic product, with consumption making up just 35 per cent.
This means that China’s economy is highly dependent on exports, which are not likely to pick up any time soon.
“China's investment is already too strong. The US consumes too much, but China consumes too little . . . millions are poured into infrastructure . . . and distortion will continue to worsen,” said Xu Xiaonian, professor at the China Europe International Business School in Shanghai. “"China will lose steam and slow down,” he added. Its “recovery is not sustainable; the government is extending credit like crazy”.
In the first six months of 2009 banks went on a credit spree to the tune of 7,37 trillion yuan, something "not sustainable’ according to many economists because so many loans are granted without much supervision as to their purpose: investments in the real economy or speculation in the stock market. Many fear that many loans will not be repaid and that the banks may suffer a liquidity crunch like that experienced by US banks in 2008 as a result of the subprime crisis. A year ago, on 15 September, Lehman Brothers, the fourth largest US bank, collapsed, triggering the worst economic crisis since the 1920s.
“We need to increase structural reform and reduce dependence on external demand,” said Yu Yongding of the Chinese Academy of Social Sciences.
Stephen Roach, Asia chairman of Morgan Stanley, agrees. "China needs more private consumption. Chinese households have a very high savings rate," he said. "The missing link is the social safety network,” he noted.
What is more, up to 41 million workers have lost their jobs since the financial crisis began, and 23 million of them remain out of work, experts said, who now wonder how there can be real recovery when so many people are still out of work.
Prime Minister Wen Jiabao, who was in Dalian, dismissed criticism arguing that his government is spending substantially in housing, health care reform and the medical industry.
“We are not only thinking of how to meet the [8 per cent growth] target this year, but also how to achieve long term economic growth,” he said.