In an article titled Pedalling Prosperity, The Economist correspondents use an elaborate metaphor of penny-farthing to disagree with China bears. They point out a common misconception among observers that China is an export-led economy:
The contribution of foreign demand to China’s growth has always been exaggerated, and it is now shrinking. It is investment, not exports, that leads China’s economy. Spending on plant, machinery, buildings and infrastructure accounted for about 48% of China’s GDP in 2011. Household consumption, supposedly the sole end and purpose of economic activity, accounts for only about a third of GDP.
The state’s influence over the allocation of capital is the source of much waste, but it helps keep investment up when private confidence is down. And although China’s repressed banking system is inefficient, it is also resilient because most of its vast pool of depositors have nowhere else to go.
Yet this Economist article is not exactly bullish on China’s future economic progress either. It indicated that China’s growth could slow down due to its aging demography. China’s working-age percentage of the population fell. The article voiced concerns over China’s investment-led economy:
A disproportionate share of China’s investment is made by state-owned enterprises and, in recent years, by infrastructure ventures under the control of provincial or municipal authorities but not on their balance sheets. This investment has often been clumsy.
Hong Kong bureau chief of The New York Times Keith Bradsher reports on the same debate with the case study of Xi’an, a city in northwestern China. Bradsher writes that productive state investments are increasingly scarce:
…with the country having finished building much of its infrastructure, it is having a harder time finding further projects that can pass cost-benefit analyses.
Still, one of his sources argued that investment-led economy has its advantages for growth:
“When you’ve got state banks lending to state enterprises to implement the state’s five-year plan, you don’t have a lot of downside to investment,” said Paul Gruenwald, a former International Monetary Fund official in Hong Kong who is now the chief Asia economist at ANZ, one of Australia’s biggest banks.