A leading American “star” economist predicts bad times ahead for China because of a flawed economic strategy. Nouriel Roubini, famous for somewhat predicting the US real estate collapse and subsequent recession in 2008, criticizes China’s heavy overinvestment which he says, based on two recent trips, is apparent in “sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed.” While I’m tempted to agree superficially, as well as remembering my observations on my short trip to China last year of almost empty restaurants and a fancy and most-likely new but almost empty outdoor supermall in Suzhou. On the other hand, as the FT blog says (first link), many have said similar things about China in the past and China has just kept powering on. This CNBC article rebukes Roubini, noting that while capital investment in infrastructure is harmful if protracted and unproductive, like in Japan, but not if it’s temporary or benefits tens of millions. For me, I think it comes down to the part where Roubini says that China’s economic strategy is geared towards state-owned enterprises (SOEs) which comes at the expense of households aka regular citizens. Roubini calls for measures like raising interest rates,boosting wage rises, and privatizing more SOEs or taxing them more heavily. Yet it is unlikely, as Roubini says: ” But boosting the share of income that goes to the household sector could be hugely disruptive, as it could bankrupt a large number of SOEs, export-oriented firms, and provincial governments, all of which are politically powerful.” The question is whether he overstates the impact and prevalence of SOEs, many of which the state closed down starting in the nineties. On the other hand, it doesn’t seem surprising that the state would try to favor state-owned firms and the small-business sector in China doesn’t seem particularly vibrant (based on no substantial evidence at the moment, I confess). It’ll indeed be interesting to see how China fares in the next few years as it tries to maintain its high growth amid growing unrest and cries for more socially progressive measures.


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