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China's growth to take 'middle road'
By Geoff Hiscock
SYDNEY, Australia (CNN) -- China's $1.2 trillion economy is likely to grow about 7 percent a year for the rest of this decade as it confronts major reform challenges, a new study by the Australian government says. That would see its gross domestic product reach about $2.3 trillion by 2011. But the study warns that continued high growth is "not inevitable," citing potential social, economic and political problems for the Asian giant. Of particular concern is the mountain of bad debt held by China's big banks and asset-management corporations. That could be as high as $720 billion, according to some estimates, and could require a $320 billion rescue package by Beijing. China has averaged 8 percent growth since 1997 and is the world's fastest-growing large economy. Exports, investment boost
At the 16th Communist Party Congress in Beijing earlier this month, Chinese economic planners said a boost in exports and about $50 billion of overseas direct investment would keep its economy on track for 8 percent growth this year. (Full story) But its government is well aware that neighboring Japan, the world's No. 2 economy, has suffered a decade of stagnation, largely because of what analysts say is its failure to clean up problem loans as part of wide-ranging structural reform. Japan's big banks are only now starting to address their own non-performing loans, estimated at about $420 billion. (Full story) The Australian study, released Tuesday by Trade Minister Mark Vaile, identifies three reform-related growth scenarios for China: one delivering 8 percent growth from 2005 onwards, a middle course of 7 percent, and one that could see growth slow to just 5 or 6 percent by the end of the decade. It predicts the "Middle Kingdom" will take the middle path on reform, opting for "solid progress" rather than either an aggressive restructuring of banks and state-owned enterprises, or slow, stop-start reforms. The report, "China Embraces the World Market," by the government's Economic Analytical Unit, analyzes the implications of China's entry into the World Trade Organization and investigates the reliability of China's statistics. It also assesses how well Beijing is handling major social, economic and political challenges related to the banking system, state enterprises, unemployment and pensions. Inter-related challengesThe report highlights key sectoral reforms flowing from China's WTO commitments. It notes China's many, related challenges include the financial condition of its banks and asset-management corporations. It says these hold nonperforming loans of between 25 and 60 percent of total outstanding loans. That's as much as $720 billion by some estimates, far surpassing Japan's well-publicized problem debts. "Most analysts expect the (Chinese) government eventually will have to cover a large portion of asset management companies' bad debts; even with a recovery rate of 30 percent, this could cost almost 1 trillion yuan ($120 billion) or 10 percent of gross domestic product," the report notes. If the government also takes responsibility for half the bad loans held by state commercial banks, it would need to inject a further 1.7 trillion yuan ($200 billion) into the banking system to maintain solvency, it warns. It says resolving these problems will substantially increase the Chinese government's debt levels. Three scenariosThe China report, one of a series on Asia produced by the Australian government's analytic unit over the past decade, says China is most likely to adopt its "middle growth" scenario of solid reform progress, as this best reflects China's policy approach of the past 20 years. While not maximizing growth, it says this approach would minimize potential social instability, which either rapid restructuring or slow output and job growth could exacerbate. The high-growth scenario would involve aggressive reforms of banks and state-owned enterprises. That would slow growth in the short-term, as restructuring impacts on the Chinese economy. But from about 2005 onwards, stronger productivity gains would boost annual growth to 8 percent. In the low-growth scenario, a slow stop-start reform process could keep the economy growing at about 7 percent for two to three years, according to the report. But after that, the rising fiscal burden would gradually undermine economic performance, slowing growth to no more than 5 to 6 percent by the end of the decade.
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