Andrew Sheng is one of the most astute and plugged-in analysts on the Chinese economy. I read his work on a regular basis and it is always worth the time and effort.
Sheng has been highly critical of many Chinese economic initiatives and has pointed out their flaws. In this article, he takes a more positive approach.
China’s main problem is that it over relies on investment and net exports to generate growth and does not pay enough attention to consumption. The investment is driven by borrowed money and much of the investment is wasted on white elephant projects and ghost cities. Net exports are propped up with a cheap currency. Neither the debt load nor the currency manipulation is sustainable.
Sheng points out that China needs to stimulate domestic consumption to pick up the slack from reduced debt, investment and exports. Sheng points to five mega-cities in China (centered around Beijing, Shanghai, Hong Kong, Macau, and Shenzhen). Sheng’s suggestion is that consumption from these and other urban centers can help the Chinese economy grow without resort to wasted investment and excess debt.
Sheng’s idea makes sense, but it’s unlikely to emerge as official policy. China is highly corrupt and the bribes, kickbacks and cronyism that drive the current system make it extremely difficult to dislodge that system in favor of something that makes more sense.
In the end, the current system will only be ended by a financial collapse and panic that causes officials to respond harshly and to redirect their economic efforts. Until then, get used to more ghost cities and empty transportation hubs.
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