The Chinese economy - is it stable?

China’s emergence as a dynamic, private-sector led economic powerhouse has been stunning, considering how closed and inward looking the country was less than two decades ago. China’s economy is already the sixth largest in the world and has been growing faster than most other nations in the industrialized West. It has been the first to recover from the current global recession and appears poised to emerge as the world’s biggest economy within the next decade.

The speed at which the country has transformed itself and the rate of its economic growth has evoked comparisons with Japan’s economic surge in the 1980s. Many economists wonder how long China can sustain this blistering place. Others question whether its momentum will begin to sputter and fade away in much the same way that Japan’s economic miracle ended in the late 1980’s and early 1990s.

On the surface at least, questions about the stability of China’s economic growth appear to be justified. One big concern has to do with overinvestment resulting from its export-driven economic policies. Over the past few years the Chinese government and Chinese industry have invested billions of dollars in capital and energy-intensive industries. This has resulted in severe over-capacity in areas such as wind power, steel making and oil refineries. The government’s efforts to raise housing standards have also resulting in billions being poured into real-estate. China’s investment rate of 45% of its GDP is significantly higher than the investment rates of other countries during their periods of maximum growth. Many economists predict that without a focus on increasing consumption domestically, the returns on these investments will start falling dramatically.

There are also fears that rising real-estate prices and overvalued assets are creating a dangerous housing bubble in China. In some of the fastest growing urban areas in China, the average home price is roughly ten times the average annual per capita income, making new homes largely unaffordable to a majority of the population. Some economists believe that the situation could trigger a real-estate crash such as the one witnessed in the U.S. over the last three years.

The fact that property prices in many urban areas are beyond the reach of most ordinary people also highlights the social rifts that are being created by China’s superfast economic growth. Income differences between rural and urban areas have increased dramatically over the past two decades. So too have differences in employment opportunities. A lot of the development that has taken place has also been unbalanced, leading to wide-disparities in living standards in different parts of China. Some China watchers believe that such disparities could create social stability issues that could eventually slow economic growth. Economists are also concerned about a rapid accumulation of bad loans made by China's largely state-owned banking system over the past two decades.

Despite such issues there are others who believe that China’s economic growth is no short-term miracle. Though almost everyone concedes that the country appears to have overinvested in certain areas, not all are agreed on how that will impact economic growth. Some economists for instance, believe that excess capacity will be utilized over the next few years from surging domestic consumption. The Chinese stock market too has been relatively stable and its major industries have rebounded faster from the global economic downturn than many had predicted. Some say China’s real-estate market is also a lot less vulnerable to the kind of implosion that happened in the U.S. because Chinese homes carry much lower debt that U.S. homes.