Could China’s efforts to cool the economy be working too well?

Marketplace Staff Jun 13, 2011
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Could China’s efforts to cool the economy be working too well?

Marketplace Staff Jun 13, 2011
HTML EMBED:
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STEVE CHIOTAKIS: There’s word today out of China — big banks handed out fewer loans in May. Perhaps a sign Beijing’s efforts to cool an overheated economy could be making some headway. But how cool is too cool?

Michael Pettis is an economist at Peking University in Beijing. Hi Michael.

MICHAEL PETTIS: Hi how are you?

CHIOTAKIS: Doing well. Is there a risk that the Chinese government will over reach and hinder the country economically, or even cause a slow down?

PETTIS: A slowdown is inevitable. We’ve been going extremely rapidly over the last 30 years because of huge increases in investment. And there’s increasing evidence that five years ago, perhaps even ten years ago, a very large amount of this investment was being mis-allocated. It was being used to build excess real estate development or excess infrastructure. And one of the consequences is that we’ve been seeing a very rapid rising in debt and I don’t think we can do this many more years before we run into real trouble.

CHIOTAKIS: How has China avoided the economic down turn the rest of the world’s experienced?

PETTIS: Well, it hasn’t really avoided it. What it did was it post-poned it. They responded to the 2007-2008 crisis by taking a country which already had the highest investment growth rate in history and significantly increasing it. Now when you increase investment, you always get growth. But if the investment is not economically viable, you give back all of that growth in the future and I’m afraid that’s what may have happened here.

CHIOTAKIS: Michael Pettis, economist at Peking University in Beijing. Michael thanks.

PETTIS: Thank you.

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