China’s
rise to the upper echelons of world economic power has been truly remarkable.
With annual gross domestic product growth rates of between 8% and 9%, China
became the world’s largest merchandise exporter last year. It also has just
passed the United States for being the largest manufacturer of automobiles.
Yet,
China has a fragile economy.
There
is growing skepticism that this spectacular expansion, which has been in effect
for more than a decade, can continue at the same pace.
China
critics maintain that economic growth may soon witness a substantial correction
because domestic consumer demand is not keeping up with capital investment. This
should not be too surprising since many of its over 1 billion people live on
less than 5 dollars a day.
The
country has invested heavily in infrastructure for which, at this point, there
is little demand. Many Chinese office buildings stand empty. Retail malls in
major cities like Beijing are eerily silent.
Another
troubling factor is that there is a suspicion, because of inconsistent
statistics, that the Chinese government is inflating its official GDP numbers.
The
concern for the North American and other world economies is that, if the
Chinese economy either deflates or, shudder, collapses, it may have much the
same impact on the global economy as the subprime mortgage fiasco had in the
United States.
While
the inordinately high Chinese holdings of U.S.Treasuries is a concern, a China
melt-down could have a debilitating effect on China’s ability to continue to
finance the U.S. debt, which could have an equally devastating impact on world
economic markets.
------------------------
Bob Weir, B. Comm, B.Sc., CFA. - eResearch
Mr. Weir has 43 years of investment research and analytical
experience in both the equity and fixed-income sectors, and in the
commercial real estate industry. He was at Dominion Bond Rating Service
(DBRS) from 1994 to 2001, latterly as Executive Vice-President
responsible for supervising the firm’s 34 analysts and conducting the
day-to-day management affairs of the company. He joined eResearch in 2004 and has been its President, CEO, and Managing Director, Research Services since May 2005.
