In a recent Digital Journal article, Northwestern political science professor Victor Shih expressed concern that China’s economy could cave in as soon as this year.
China’s GDP accelerated from 7.2 percent to 8.9 percent in the third quarter of 2009. However, as the nation surpasses Japan’s economy to become the second largest in the world, Shih remains skeptical of its growth and predicts a turn for the worse.
Shih, who graduated in 2003 from Harvard University with a Ph.D. in government, cites international interest in its young market as China’s potential undoing. “Foreign direct investment, previously welcomed by China, may consequently prove detrimental to its economy by creating a property estate bubble that can burst as early as this year.”
A closer examination of China’s recent economic figures, Shih claims, reveals its declining state. In the first half of 2009, Chinese exports actually dropped by 22 percent. He predicts that this drop will incite a major hit to the country’s income.
According to the Digital Journal, some analysts believe that the Chinese government is falsifying its own economic assessment, including its growth rate of more than eight percent. If China’s situation is worse than the administration claims, it is headed for trouble.
But many Chinese analysts are optimistic about the economic boom, perhaps because of promises made by Chinese officials. Premier Wen Jiabao has promised new limits on speculative borrowing, such as raising the deposit requirement to purchase raw land to 50 percent.
According to Michael Wines of the New York Times, Chinese regulators ordered state-owned banks on January 12th to set aside a larger share of their deposits as a reserve against failed loans, the first in a series of precautions to protect against economic decline.
Shih suggested that the next step China should take is to cut back on loans. “The best thing for the government to do now is to prick the bubble immediately by slowing lending. But that is politically very costly, as [is seen] in the case of the U.S.”
He went on to explain that inflationary policy is easier on the government. “If you can get the central bank to print money without too much information, it is always easier for political leaders.”