http://www.taipeitimes.com/News/edit/archives/2004/05/18/2003156010Despite China's enviable economic performance, a reality check indicates that such high growth rates are unsustainable. The worse news is that there is also likely to be a sharp reversal which could harm many neighboring countries whose economies have become more closely integrated with China's.
This is because China's high economic-growth rates are based upon flows of cheap credit and growing public-sector borrowing that have prompted an investment bubble and instability in prices. Economic euphoria seems to induce people to forget that busts follow booms in the way that night follows day.
Or at least they do when macroeconomic policies push interest rates artificially low and promote increased deficit spending to create temporary growth spurts. A similar logic dictates that the greater the deviance of booms from the long-term growth trend, the sharper the corrective effect of the bust. And China's exchange-rate peg is worsening macroeconomic imbalances and hastening the day of reckoning.
It seems hard to argue against such storied economic performance. With industrial production growth of 19.4 percent, GDP rose by 9.7 percent from January through March this year. When comparing the economic data for the first quarter of this year with the same period last year, fixed investment rose 43 percent. And bank lending has risen by 40 percent over the past 24 months so that outstanding bank loans are equivalent to 140 percent of GDP, an exceptionally high proportion for a developing economy.
But bad news followed similar good news in China's previous boom and bust cycles. An initial double-digit growth spurt in response to economic reforms that began in 1978 ended with a sharp fall in 1981 to 5 percent. Rising investment allowed growth to rally back to over 15 percent in 1984 before plunging to nearly zero after the Tiananmen massacre. In 1992, another round of double-digit GDP growth rates began slumping badly in 1994 before hitting bottom in 1998, when growth was about 3 percent.
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