China’s growth model is much more about supply than demand

China Economy May Slow Next Year, Stephen Roach Says (Update1) - Bloomberg.com

China Economy May Slow Next Year, Stephen Roach Says (Update1)


By Bloomberg News

Oct. 24 (Bloomberg) -- China may face an economic slowdown in the middle of next year because the nation’s growth model is unsustainable, said Stephen Roach, chairman of Morgan Stanley Asia.

Economic growth in China accelerated to 8.9 percent last quarter, fueled by government stimulus spending and more than $1 trillion of new bank lending. That rebound is causing complacency in China, which still faces “tough challenges in years ahead,” Roach said today at a financial forum in Shanghai.

“China’s growth model is much more about supply than demand,” Roach said. “It’s not a sustainable model for China. It’s not a sustainable model for any nation.”

The “imbalance” created by China’s overdependence on exports for growth was compounded by the government’s efforts to bolster the world’s third-biggest economy as the global recession sapped demand for Chinese-made toys, clothes and electronics, Roach said. China’s stimulus measures have also raised concerns about overcapacity and asset bubbles.

“Macro imbalances are particularly acute right now,” Roach said. “China’s economy risks slowdown again around mid- 2010.”

China’s exports in September fell 15.2 percent from a year earlier, the smallest decline in nine months. The nation has posted export declines for 11 consecutive months.

Stimulus Plan

The government’s $586 billion stimulus plan unveiled in November last year spans earthquake reconstruction work, roads, railways and low-cost housing. Chinese banks doled out a record 8.67 trillion yuan ($1.27 trillion) of new loans in the first nine months, more than double the same period a year earlier.

That helped economic growth accelerate even as exports worsened. China grew 6.1 percent in the first quarter of 2009, the slowest pace of expansion in almost a decade, as shipments abroad fell 17.1 percent during the period. Growth picked up to 7.9 percent in the second quarter as exports slid 21.4 percent.

“While the government is ensuring economic growth, we are also concerned about overcapacity in some industries,” Xiong Bilin, deputy director of the National Development and Reform Commission’s industry department, said Oct. 19. The commission is China’s top economic planning agency.

China is curbing financing for projects in industries including steel, cement and aluminum to prevent the government’s stimulus package and record bank lending from spurring excess investment.

Balancing Needs

In the next few months, the government will focus on balancing the need to maintain stable and relatively fast growth with the need to adjust the structure of China’s economy and better manager inflationary expectations, the State Council, China’s cabinet, said Oct. 21. The nation also faces increasing difficulty in managing liquidity and the structure of loans is “not rational,” the State Council said.

“The global economic recover is still uncertain and unstable,” Wang Huaqing, the disciplinary secretary of the China Banking Regulatory Commission, said at the financial forum in Shanghai today. The regulator “will continue prudent oversight and regulation of banks,” he said.

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