04/19/2011, 00.00
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China’s economy could implode by 2013

The great discrepancy between short- and medium-term investments, the real estate bubble, government monetary policy and high inflation could lead the Asian giant to edge of economic collapse. Privatisation and an end to government-backed fixed investments could be the solution.
Beijing (AsiaNews) – China’s economy could collapse within two years because of potentially destabilising contradiction between its short- and medium-term performances. An overheated real estate market, high inflation and a frozen yuan could in fact pull the rug from under the Asian giant by 2013, this according to Nouriel Roubini, professor of economics at New York University's Stern School of Business.

“China's economy is overheating now,” he wrote in an editorial published today, “but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible—most likely after 2013—China is poised for a sharp slowdown.”

Instead of focusing on a soft landing, “Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the five-year plan. Despite the rhetoric of the new plan [. . .] the path of least resistance is the status quo.”

China’s growth has been extremely high, but “When net exports collapsed in 2008-09 from 11 per cent of GDP to 5 per cent, China's leaders reacted by further increasing the fixed-investment share of GDP from 42 per cent to 47 per cent. Thus, China did not suffer a recession [. . .]. The problem, of course, is that no country can be productive enough to reinvest half of GDP in new capital stock without eventually facing immense overcapacity”, especially in “physical capital, infrastructure and property”.

China could thus face high levels of inflation because of its monetary policies. Even though the government claims that it wants to revalue the yuan soon, as China's central bank governor Zhou Xiaochuan said recently, this move will only raise prices.

To tame 32-month-high inflation, China has raised interest rates four times in six months. However, this is not enough and could do more harm than good. The contradictions of China’s economy are huge and financial or monetary tinkering will not stop the disaster.

For Roubini, Beijing instead “needs either to privatise its state-owned enterprises, [. . .], or to tax their profits at a far higher rate” if it does not want its own collapse.

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