• Forum
• SITREP

• Military

• Introduction
• Systems
• Facilities
• Agencies
• Industry
• Operations
• Countries
• Hot Documents
• News
• Reports
• Policy
• Budget
• Congress
• Links

• WMD
• Intelligence
• Homeland Security
• Space
• Public Eye

Further Reading

China's Problem Economy

Although the exploding Chinese economy may be the envy of the world, there are potential economic, political and demographic problems. Major areas of concern are that the economy might be overheating, that countries on which China relies to buy its exports may become protectionist, that growing economic inequality could produce internal strife, and that the rapid aging of the population may create economic difficulties. Other significant problems exist as well. The regulatory environment is uncertain, and a large unwieldy government bureaucracy continues to play a crucial role in many areas of business operation.

Local party officials and local government officials are powerful and often corrupt and obstructionist. Within the banks themselves, corruption is widespread. There is also significant corruption and cronyism in the four asset management companies created by the government to dispose of the banks' bad loans. The management companies are staffed with many of the same bankers who made the bad loans in the first place; and not surprisingly, the corruption and self-dealing have continued.

China is the world's second-largest bad-loan market (after Japan). S&P estimates that there are approximately $700 billion in bad loans in China; other analysts suggest a higher figure. The government has pressured the state-owned banks to dispose of bad loans in preparation for their IPOs, and it has created four asset management companies to dispose of the loans. Through the end of 2004, the companies had sold only one-third of the $230 billion in bad loans acquired from the banks since 1999.

Some foreign banks have shown interest in this area. Citigroup purchased over 16 percent of Silver Grant International, a real estate affiliate of China Cinda Asset Management, one of the four asset management companies. Credit Suisse First Boston has also been active in this market, recently purchasing a 2.4 billion yuan ($290 million) package of distressed loans from China Orient Asset Management Corporation, another of the four asset management companies.

China's growth since the early 1980s has been phenomenal. Much of this growth is investment-based: gross fixed investment constituted 45 percent of China's GDP in 2004. This high level of investment has resulted in overbuilding and excess capacity in some sectors. The government has responded by trying to stop this overbuilding so that business profitability remains strong and the banks are not engulfed with new nonperforming loans. Rising inflation is also a concern: if increasing investment-led demand for workers and materials results in inflation, it is feared that the value of savings will be eaten away, interest rates will increase, and the gains in the standard of living that many Chinese have attained in recent years will be pushed back. This could very well create political as well as economic reverberations.

Some analysts believe that growth has not been as great as officially reported because of suspect data. Official Chinese economic statistics, although improving, are generally considered unreliable. The World Bank estimates that China overstated its growth between 1978 and 1995 by 1.2 percent a year; the OECD believes the overstatement was 3.8 percent between 1986 through 1995 (Lardy 2002). Unlike most developed countries, China does not seasonally adjust its statistics, and the lack of seasonal adjustment can distort recent activity. Other analysts question the accuracy of the raw data themselves. Business Report (2004) suggests that economic figures should be viewed as "highly manipulated political statements" rather than hard numbers. Even trade statistics are not considered reliable. The New York Times (2004) reports that some companies exaggerate exports to claim tax credits, and others underreport imports to avoid customs duties. Despite all these qualifications, however, there is general agreement that China's economy has grown tremendously over the past two decades, although less than officially reported.