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Slowdown for China

Political scientist Victor Shih expects a soft landing, minimizing global impact

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July 19, 2011 | by Brendan Cosgrove

What is going on with the Chinese economy that has some people concerned?

Will the Chinese economy falter?

How will a slowdown in China's economy impact the rest of the world?

EVANSTON, Ill. --- The pace of growth of China’s economy -- the world’s second largest – seems to be slowing, but it should be a soft landing with minimal impact on the larger worldwide economic picture, according to Northwestern University China expert Victor Shih.

“Countries that have done well in recent years exporting commodities to China, such as Australia, Brazil and Argentina, may be impacted,” said Shih, associate professor of political science at Northwestern.

“In the United States, farmers and aircraft manufacturers may be impacted. But, because the U.S. runs a trade deficit to China, it won’t be hurt that much by an economic slowdown in China.”

The slowdown follows reports by the National Bureau of Statistics indicating that China’s economy grew 9.5 percent in the second quarter this year.

Policies adopted by Beijing in response to the worldwide economic crisis of 2008 contributed to the slowdown, Shih said.

“The Chinese government basically panicked and ordered all the banks to lend as much money as they could to local governments so they could engage in investment on an enormous scale,” he said. “In the span of one year, China invested $2 trillion in infrastructure, but all of that was financed by debt.”

But the Chinese debt is owed to domestic banks backed by mainly domestic deposits, unlike the massive debts owed by governments in Greece, Ireland and elsewhere.

Shih said the Beijing government has been very smart in pushing the debt on local governments.

“They know that by doing this they can push the national deficit level down,” he said. “When organizations like the IMF, which only care about national-level deficits, look at China’s balance sheets, they declare it a healthy economy.”

In reality, Shih said, there are a lot of unhealthy tendencies in how China runs its economy.

“This investment binge that started a few years ago happened on the backs of Chinese households,” Shih said. “They paid a very heavy tax to finance this investment binge and will continue to pay it mainly in the form of inflation tax.”

The government has also seized land from residents as a way to pay off debt, he said. “Those factors, combined with high prices due to state-owned monopolies and oligopolies, could slow down Chinese consumption.”

Topics: Opinion