by Don Alexander, MBA
Associate, RSD Solutions Inc.
The IMF, in their latest assessment of the Chinese economy, views it as one of the global bright spots for economic growth. Economic growth is projected to exceed 9% in 2011 driven by strong domestic and external demand. The actions taken by policymakers are expected to dissipate many of the recent drivers of inflation and progressively slow the surge in property prices. The key challenge for China is to continue the transformation of its economic model to one more closely linked to domestic consumption and less reliant on exports and investment.
A question should be asked, what are the risks to the global economy if China is not able to make that transformation (not the view of most analysts)? If China cannot make the transition and growth prospects were revised downward there could be dire consequences for major trading partners such as Australia, Africa, Brazil, Japan and the US. It would deflate any reflation trade and push the global economy into a period of stagnation.
The lack of transparency among Chinese banks and companies could potentially amplify the problems. The financial numbers from Chinese banks lack full disclosure as most institutions act on behalf of the government rather than their investors. The numbers of Chinese corporations listed on American stock exchanges do not have clear transparency. The large surplus position of China with its major trading partners represents a large transfer of wealth (capital). The lack of an efficient pricing mechanism can lead to a misallocation of scarce capital on a global basis.
The view of most analysts and policymakers is that China remains the one bright spot in the global economy. However, have corporations or investors considered the potential risks if the China bears are right?
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