China Part III: The Financial Crisis
China’s economy is officially in a state of advanced financial crisis which may exacerbate if the government does not attend the states’ debts problem. Debates on whether China will grow by 7% or 7.5% are pointless, said Xie Bin, an economist at the development center of China’s State Council and the Economic Advisor to the government. China’s yearly debt interest is almost 6 trillion yuan per year. “We need to find a way to let the bubble explode, delete the losses we have as soon as possible, to avoid bigger crisis,” said Xie MNI to financial news website. Xie calls for the government to use some of the 3.5 trillion dollars in foreign reserves – – to close bankrupt companies and encourage private investment as a way to encourage growth.
Today, economists and policy makers in China are looking for alternative models. The growth model that served well for 30 years, no longer works. Last month Stephen King, HSBC chief economist said “the old Chinese model reached the end” the Chinese economy has relied on exports, as Japan, South Korea and other countries in South – East Asia, that had a competitive wage advantage. Their poverty and underdeveloped economies was used to become economic powers. The huge manufacturing power pushes exports to annualize rate of more than 20% a year and brought the economy to unprecedented growth rate.
But gradually, Chinese labor force has risen. Chinese economy produced more than it consumed and more then it export. Starting at 2008 the global economic crisis reduced the demand for Chinese goods drastically forcing China to find another way to grow. China starts to suffer from what we identify as surplus inventory.