China's Economic Recovery: Headed For Boom or Bust?

China is bouncing back with a vengeance. The rising power is emerging from economic meltdown relatively unscathed, for now. But speculation about the sustainability of China’s growth is mounting.  The debate on China’s financial health concerns its savings rate (among other indicators), which some blame for aggravating the recession. Others defend savings as the life raft of China’s economy while developed superpowers crumbled.

China’s lack of liquidity saved the nation in 2008, as it weathered the economic drought without a severe credit crunch.  China’s savings rate, which economists estimate remained between 30 and 40th percentile over the last decade, meant that consumers weren’t stuck under houses or loans without any means of paying. Those savings, in addition to cheap labor and a huge domestic market have kept the Chinese market afloat. Although the fixed yuan is the doing of the government, growing demand and consumption is the result of a booming emerging consumer market. China’s domestic consumption needs to keep growing to keep the economy humming and the Chinese government will continue reforming policy to ensure that productivity is increasing while easing up on lending. 

Critics of China’s monetary policy claim that its former savings “put downward pressure on yields and spread risk everywhere.”  But, as China’s purse strings loosen, a rising number of Chinese loans are supporting projects that are not likely to generate positive returns for a lack of sufficient demand in those investment areas. In the cement industry these loans have created enough spare manufacturing capacity to cover cement consumption in the U.S., Japan, and India combined. According to a recent article in Forbes magazine, loans have increased 136% from 2008, to the disbursement of $1.27 trillion in new loans. Total lending even reached 140% of GDP at midyear!
Around the globe, investors have been carefully moving back into speculative debt, including emerging market bonds from the BRIC countries like China. These bonds are likely to grow faster than in saturated markets, making stocks and bonds potentially very profitable. However, the future is hardly predictable and figuring out when markets like China become overvalued is the critical question. Kurt Brouwer’s Fundmastery Blog in the Wall Street Journal speculates that population trends are key to understanding fund profitability.  And with China’s 1.3 billion consumers, any decline or implosion seems a long way off.

No matter if you are bullish or bearish on China, most parties agree that international cooperation is needed to arise from this crisis stronger. Developing and developed governments, MNC’s and federal banks must all do what they can to ensure effective regulation, lift consumer confidence and drive productivity. All powers have a stake in a healthier, financial system and responsible use of valuable renewable resources.