China has accumulated massive debt through government spending on a "massive stimulus program" and "giant public projects," but the future of such investments is uncertain.
The New York Times' Room for Debate launched a discussion on this topic yesterday, presenting experts with a question: "Is China's spending on giant public projects a worthwhile investment, or does the rising debt threaten the country's economy?" A few experts from Asia Society's own China Boom project — a multiyear research and public education initiative by our Center on U.S.-China Relations chronicling China's economic rise over 30 years — weighed in.
Michael Pettis, a finance professor at Peking University, believes the debt is not the problem, and that by focusing on it, analysts are overlooking the real problem: the debt is actually a side-effect of the Chinese economy's "underlying dependence on accelerating investment" in an "investment-driven growth model." He writes:
For the past decade, analysts have been able to describe economic conditions in China with some accuracy but have failed generally to understand the underlying growth dynamics. We've done a great job, in other words, of describing the landscape through which the train is passing, but because we don't understand where the train is headed we are constantly shocked when the landscape changes.
Yao Yang, of the China Center for Economic Research, says that private investment will save the economy and that "we can expect the Chinese economy to continue growing at a reasonable rate in the next few years."
One theory is that all of these investments are made to prepare for the coming wave of urbanization. This is a myth. The Chinese cities do not lack buildings, which they have in surplus. The cities lack people. Beijing and Shanghai have some of the lowest population densities among the world’s big metropolises. The current infrastructure is more than adequate to accommodate China's urbanization.
It is likely that a sizable portion of this investment binge is sheer waste and will surely end up as non-performing loans on the banks' balance sheets. The Chinese term for crisis comprises of two words: danger and opportunity. The corrupt local officials saw abundant opportunities to amass wealth for themselves, and the central government completely lost sight of the inherent danger. The structural distortions of the Chinese economy grew worse and the government did exactly what it should not have done: It wasted a perfectly good crisis.