2010-06-29 08:15

China's rapid credit growth and excessive asset price inflation, represented by high housing prices, have attracted wide attention both at home and aboard. But contrary to some experts' view, I don't agree that the Chinese economy is headed for a hard landing and that it would be dragged down by local governments' debt crisis.

First, although the credit business has grown rapidly in China, in contrast to a credit squeeze in Europe and the United States, it's still hard to tell which one is good and which bad. The global financial crisis, which started with the collapse of Lehman Brothers, has severely curdled the fluidity of America's financial system. Though European countries and the US have managed to restore the fluidity of their financial systems since, it's hard to rebuild the credit relations between banks and enterprises, as well as banks and consumers quickly. Unusual fluctuations in asset prices, because of the lack of fluidity, have become common. Even if there are not many new non-performing loans, the risk of potential ones remains high.

Toward the end of 2008, China was facing the risk of deflation. And since its domestic consumption capacity is limited and orders from Europe and the US had shrunk drastically owing to the lack of fluidity there, the Chinese government announced a $586-billion stimulus package to, among other things, activate banks' credit funds. Government investment restored confidence in the market and became the pillar of the Chinese economy in its fight against the global economic crisis. Above all, it helped China's real economy to avoid a hard landing, which was becoming a possibility because of the rapid shrinking of orders from Western markets.

As long as a complete "domestic-demand-oriented" growth pattern does not emerge in China, the government's leading role in promoting economic growth is irreplaceable.

Second, it's hard to say that government measures such as improving infrastructure and boosting the housing and automobile sectors are against the laws of economics. They were the government's strategic choice during the global financial crisis, prompting local authorities to play a positive role in developing industries under the decentralization system.

Seizing the opportunity created by the central government, inland areas seem to be performing better than the coastal cities. This is an important development considering that China's coastal belt has accounted for the majority of wealth during three decades of reform and opening up.

To increase infrastructure construction in order to expedite urbanization and industrialization during the global financial crisis and help develop local enterprises (especially private enterprises) is somewhat a healthy and sustainable development pattern. For instance, during the East Asian financial crisis, local governments in China's coastal belt concentrated on infrastructure construction, which created favorable conditions for attracting foreign investment later.