Business, Economics and Jobs

China's economic model: Just how weak is it?


A model on the catwalk at China Fashion Week, November 1, 2011 in Beijing, China.


Feng Li

Here's one of the more colorful sayings attributed to China's new material girls, most notoriously on a Chinese television dating show:

"I'd rather cry in the back of your BMW than laugh on the back of your bicycle."

Funny, yes.

But the remark also reveals the aspirational urge across China to leave behind symbols of the past and to race headlong — wallets open and arms outstretched — into a more prosperous future.

As the Economist points out today in a must-read special report on the Chinese economy, the bicycle has long been a useful analogy for thinking about China's remarkable and complex economy: everything's fine as long as you keep peddling.

Here's how writer Simon Cox puts it:

"Bikes—especially when heavily laden—are stable only as long as they keep moving. The same is sometimes said about China’s economy. If it loses momentum, it will crash. And since growth is the only source of legitimacy for the ruling party, the economy would not be the only thing to wobble."

But as the Economist report also makes clear, that metaphor may be outdated.

China's government no longer sees gross domestic product growth of 8 percent as mandatory — it lowered that target to 7.5 percent last March.

And it is investment — on plants and machinery, infrastructure and other modernizing inputs — that's really driving the country's economy these days. It's not exports, as the conventional wisdom goes.

So big change is afoot in the world's second-largest economy.

And that begs the following questions: what's changing, and what does that change mean for the rest of us?

In the short term, China is having problems pretty much everywhere you look: industrial production is lower, house building is down, demand is slowing for iron ore, semiconductors and other goods, while exports and imports are falling sharply.

Moreover, the Chinese economy is famously inefficient. It is bogged down by the heavy hand of state-owned industries. The country's legal institutions remain weak. The banking industry has big problems.

And hovering above all of this uncertainty is an ongoing and uneasy political transition in Beijing, the biggest in a decade.

But as the Economist argues, China still has a lot going for it as the rest of the world frets over the economic wreckage in Europe, rising economic troubles in India and other problems across the global economy:

"China relies very little on foreign borrowing. Its growth is financed from resources extracted from its own population, not from fickle foreigners free to flee, as happened in South-East Asia (and is happening again in parts of the euro zone). China’s saving rate, at 51% of GDP, is even higher than its investment rate. And the repressive state-dominated financial system those savings are kept in is actually well placed to deal with repayment delays and defaults."

Plus, China's government doesn't hold all that much debt — just about 25 percent of its GDP, versus the US where the number is closer to 100 percent. Those low debt levels give Beijing more breathing room to stimulate growth as needed.

Taken together, these postive factors should make the Chinese economy more resilient to outside shocks, such as the worsening euro crisis.

We hope.