European Regional Development Fund

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Publish date:
28/07/2013

Author:
ChrisGrech

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China following Japan's footsteps?

Published 6 years ago by Chris Grech

According to CBNC (http://www.cnbc.com/id/100919914), the China State Council ordered an audit of the books of government agencies/ local governments.

To prop itself out of recession in 2008, China rolled out a stimulus programme 3 times larger than US. Through this programme many local governments borrowed to build infrastructure projects. Centralised planning however has one big disadvantage - projects which do not make financial/ economic sense are nonetheless undertaken.

CNBC reports that "many local governments have embarked on a borrowing spree to fund construction projects. However, there are growing concerns about their ability to repay the debt as many of the investments are not generating returns". Most of the tax revenue in China does not go to local governments so it is likely that China will start bailing out its local governments.

"This is reflected in the country's vast areas of unoccupied housing, also known as "ghost cities," and the many "roads to nowhere," or bridges built under the premise of boosting infrastructure but which are barely used."

To some extent, I see China following Japan's footsteps:

1. The world was in awe with Japan's roaring 1980s and Western economies thought Japan will take over - which didn't happen

2. Japan suffered from a huge market crash on the first day of 1990 - something which is likely to happen in China because property prices have increased immensely

3. In their drive to lift Japan from its recession(s), the authorities during the last 2 decades rolled out huge infrastructure projects - sometimes also described as bridges to nowhere – which is happening already in China

4. Japan has a huge ageing population problem. This will surely happen in China too because China has a one-child policy

Only 8% of the Chinese population belongs to the middle class. The huge potential China holds will come to fruition when the middle class in China grows (middle class people have discretionary spending – which means they will buy lots of goods and services from Western economies). The middle class will take time (some expect a decade) to form and I'm afraid that China will follow Japan's footsteps sooner than the formation of the middle class.

China has grown too quickly and probably risks bursting its own bubble.

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