The Economist: ““JUST the other day we were afraid of the Chinese,” Paul Krugman recently wrote in the New York Times. “Now we’re afraid for them.” He is among a number of prominent commentators contemplating calamity in the world’s second-biggest economy. Three measures seem to encapsulate their fears. Economic growth has slowed to 7.5%, from its earlier double-digit pace. The investment rate remains unsustainably high, at over 48% of GDP. Meanwhile, the debt ratio—ie, what China’s firms, households and government owe—has risen alarmingly, to 200% of GDP, by some estimates.
Concerns about the first number were assuaged a little this month, when China reported strong figures for trade and industrial production (which rose by 9.7% in the year to July; see chart). Yet beneath the cyclical ups and downs, China has undoubtedly seen its momentum slowing.
It is the combined productive capacity of China’s workers, capital and know-how that sets a maximum speed for the economy, determining how fast it can grow without inflation. It also decides how fast it must grow to avoid spare capacity and a rise in the numbers without work. The latest figures suggest that the sustainable rate of growth is closer to China’s current pace of 7.5% than to the 10% rate the economy was sizzling along at.
For many economists, this structural slowdown is inevitable and welcome. It marks an evolution in China’s growth model, as it narrows the technological gap with leading economies and shifts more of its resources into services. For Mr Krugman, by contrast, the slowdown threatens China’s growth model with extinction.
China, he argues, has run out of “surplus peasants”. Chinese flooding from the countryside into the factories and cities have in the past kept wages low and returns on investment high. The flood has slowed and, in some cases, reversed. So China can no longer grow simply by allocating capital to the new labour arriving from the fields. “Capital widening” must now give way to “capital deepening” (adding more capital to each individual worker). As it does so, investment will suffer “sharply diminishing returns” and “drop drastically”. And since investment is such a big source of demand—accounting for almost half of it—such a drop will be impossible to offset. China will, in effect, hit a “Great Wall”. (The metaphor is so obvious you can see it from space.)”
CHINDIA ALERT: You'll be living in their world, very soon 