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Two sides in China’s recovery debate

Scott Tong Jul 16, 2009

Two sides in China’s recovery debate

Scott Tong Jul 16, 2009

CORRECTION: This story incorrectly reported Professor Michael Pettis’ place of employment. He teaches at Peking University.


Stacey Vanek-Smith: This morning, China reported its economy grew nearly 8 percent in the last three months. That’s thanks in large part to mega-stimulus from China’s state-controlled banking system. But there’s a lot of debate over how real that growth is. From Shanghai, Marketplace’s Scott Tong reports.

Scott Tong: In this corner, Beijing hedge fund advisor Bill McCahill:

Bill McCahill: China has a very resilient economy and is doing really quite well.

McCahill is with the research firm JLM Pacific Epoch. He sees a genuine recovery sparked by China’s $600 billion stimulus. The package focuses on infrastructure work, like laying 13,000 miles of new rail track — triple the length of the U.S. transcontinental railroad.

McCahill: These big construction projects, particularly railways and railway equipment, have now begun to kick in — and as one travels around China, this is very, very apparent.

These mega-projects need raw materials, like iron ore. So China’s bingeing on commodities and stoking up prices.

In the other corner stands Michael Pettis, finance professor. He’s more skeptical:

Michael Pettis: That movie has never turned out with a happy ending.

Pettis teaches at the prestigious Tsinghua University [Editor’s note: See correction above]. He warns that most of the stimulus takes the form of bank lending, and too-loose credit can lead to sub-standard loans that go bad. Heard that before?

Pettis: And I don’t think I can find a single instance in history in which you’ve had a massive expansion in the banking system which didn’t increase in bad lending.

The bulls and bears also spar over Chinese consumption. Bill McCahill notes retail spending keeps growing by double digits, and that more cars these days sell in China than the U.S.

McCahill: China’s a vast continental economy with pent-up demand that can go on for decades, really.

But how much demand is there? Michael Pettis has his doubts.

Pettis: Total consumption in China is not much greater than total consumption in France. It’s just not big enough. U.S. consumers account for six Chinas.

Watching this fight are global investors. Pettis fears they’re hyping the “China is back” story. Maybe so, but this morning’s impressive growth figures score at least one point for the bulls.

In Shanghai, I’m Scott Tong for Marketplace.

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