Chinese 'miracle' resting on unsound foundations

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SYDNEY (MarketWatch) — The ability of China to support the seriously compromised global economic and financial system is overestimated. The unsound foundations of Chinese economic and financial strength have been largely ignored. But then all food tastes good to the starving man.

In the first phase of the global financial crisis, China was badly hit, with growth slowing and lay-offs of 20-25 million migrant workers in export-based Guangdong province alone. In response to a large external demand shock stemming from rare synchronous recessions in the developed world, Beijing deployed massive resources to restore growth to counter the economic and social impact of the slowdown.

In late 2008, China announced a fiscal stimulus package of renminbi 4 trillion (about $600 billion) over two years, equal to a budget deficit around 2.2% of Gross Domestic Product (“GDP”). But the major response was via the government controlled large policy banks that were directed to extend credit and finance infrastructure projects on a large scale.

New lending by Chinese banks in 2009 and 2010 was around 40% of GDP. New bank loans in 2009 and 2010 totalled around $1.1 trillion-$1.4 trillion, an increase from $740 billion in 2008. Total outstanding loans in the economy have jumped by nearly 50% over the past two years. ..................(more)

The complete piece is at: http://www.marketwatch.com/story/chinas-not-so-miraculous-recovery-2012-03-05?dist=beforebell

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