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Ever since the evident on-set of the crisis in the US finance sector in 2008 — and its rippling out globally, due to the central fact of a US-centered world political economy –

people, especially here in Asia, have been wondering about whether — somehow — China could “replace” the US as an engine of global demand …

As we have pointed out in several places — notably in the Straits Times of Singapore, as well as speeches to audiences in Singapore and elsewhere in the region –

this is unlikely to happen any time soon precisely BECAUSE the global economy is US-centered,

and, in order for China even to begin becoming an engine of global growth, it will have to begin a years- , if not decades-, long RE-structuring of its entire economic system … …

In that context, this article from the New York Times pulls together a number of different strands of the large-scale economic situation in China, and is hence definitely worth looking at …

Below, a few of the more important quotes …

“They opted for a very quick fix,” said Stephen Roach, an economist and chairman of Morgan Stanley Asia.

“Surging investment, fueled by the most rapid bank lending in history, accounted for nearly 90 percent of China’s G.D.P. growth in the first half of this year. And that is worrisome.”

Mr. Roach said China’s growth remained too heavily weighted toward investment, rather than consumption, creating unhealthy, imbalanced growth. …

The question is whether economic planners can strike a balance in encouraging growth.

Restricting lending could stall the recovery and make it difficult for Beijing to meet its growth target.

Allowing the lending boom to continue could sow the seeds of financial disaster.

“They’ve got to ensure there’s enough loans for the real economy,” said Wang Tao, an economist at UBS Securities in Beijing. “But they also have to slow down the loan growth to prevent an asset bubble or future increase in nonperforming loans.”

In the first half of this year, China’s bank loans were up more than 200 percent from a year ago, to more than 7 trillion yuan, about equivalent to 25 percent of China’s gross domestic product in 2008.

Chinese banks were able to do this because they have strong balance sheets relative to Western banks.

Bad loans were cleared off the books years ago and initial public stock offerings in recent years pumped billions into many of China’s big banks.

The banks had also avoided many of the toxic assets American and European banks held. …

[A]n even bigger worry is that China is not doing more to rebalance its economy, away from investment and exports and toward consumption.

The country, they say, needs a new growth model.

With exports down more than 20 percent from a year ago, China appears to be stimulating growth with loans to state-owned companies and government works. But how long can that last?

Mr. Roach, the Morgan Stanley economist, said not for long.

China needs to stimulate its consumers.

“Here’s the wrinkle,” he said. “External demand is not coming back anytime soon because the American consumer is dead in the water.”

Definitely worth pondering … …

Dr David Caploe
The Minerva School
PhD/MA Program in Critical Thinking

The New York Times has an interesting story on the role of state-directed lending in China …

Many economists now worry that too much of China’s growth was fueled by aggressive, state-directed lending that could eventually result in a soaring number of bad loans and mounting government debt.

Again, while inflation remains a theoretical possibility, people are MUCH too concerned about it, given the generally DEFLATIONARY dynamics currently at play …

Here’s an excellent analysis of how much it would actually cost to provide comprehensive health care for ALL Americans — yes, I realize there’s a redundancy … just making a point … …

It’s done by Uwe Reinhardt, probably the leading academic economic analyst of health care, who teaches at Princeton’s Woodrow Wilson School …

He focuses on the ridiculous scare campaign about how much MORE it would cost to have health care for all, at least formally,

and points out how the supposedly huge — and “politically unpalatable” — figure of 1.6 trillion over the next decade is, in fact, LESS than the ANNUAL increase in health care costs that has ALREADY taken place …

A price tag of $1.6 trillion seems immense if one contemplates the figure in the abstract.

It is, however, only about 4 percent of the total cumulative health spending of $40 trillion, the amount government actuaries now project for the decade from 2010 to 2020. That is also less than the 6 to 7 percent that total national health spending has increased each year in the past decade.

And $1.6 trillion is only about 1 percent of the amount of G.D.P. that America can reasonably be expected to produce in the next decade (about $150 trillion to $170 trillion).

That 1 percent would not be lost to G.D.P., of course, because health spending is part of G.D.P. Rather, it would be a diversion of G.D.P. — away from other uses, and toward providing the otherwise uninsured with the peace of mind that comes with health insurance and access to timely health care. It would represent merely a change in the composition of G.D.P.

A change in the composition of G.D.P. should be distinguished from an actual loss of G.D.P.

Indeed, to give a sense of perspective: Whatever waste there might be in any new spending on health care, the loss of welfare it implies is dwarfed many times over by the actual loss of G.D.P. and human welfare over the coming decade caused by the reckless mismanagement of our financial sector. Not to mention the diversion of additional G.D.P. to Wall Street bailouts and away from uses that taxpayers probably would have preferred.

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