China's Economy 'Overrated'

      February 02, 2010 13:15

      The Chinese economy, which has expanded at a blistering 9.8 percent rate on average a year over the past three decades, is overrated, according to a conservative U.S. think tank. Derek Scissors, a researcher at the Heritage Foundation, is the author of the report issued last week which sets out to debunk 10 "leading myths" about the Chinese economy.

      First of all, it says China will not overtake the U.S. in terms of economic size within the next 10 years? This "myth," the report says, stems from the premise that the U.S. economy will stagnate while the Chinese economy continues to grow as it has over the past 30 years. The reason why China overtook Japan a few years ago to become the world's second-largest economy was because the Japanese economy stopped expanding for 15 years. Moreover, the number of people in China under 30 years of age accounted for 47 percent of the total population in 1985 but will fall to 26 percent by 2030, while by 2035, 280 million people in China will be 65 or older, making it inevitable for China's economic growth to cool, the report claims.

      It also casts doubt on the belief that China is in effect America's "banker,” saying the People's Republic's holdings of U.S. Treasury bonds are worth less than 7 percent of America's fiscal deficit and do not offer significant political leverage for Beijing. Rather, U.S. consumers account for 7.4 percent of China's GDP, demonstrating how dependent China is on America, it claims. It adds that China's foreign exchange and balance of international payments cannot function normally without dollar stability.

      Nor does the report's author accept that China is now the leading engine for global growth. China detracts from the rest of the world's growth in GDP rather than offering new momentum, he says. Until last year, fixed investments accounted for 67 percent of China's GDP, and such investments, which far outpaced private consumption, have been the main driver of Chinese growth. Another piece of evidence supporting the claim is the fact that changes in the value of the yuan does not have a major effect on the global economy.

      Scissors, who also claims that China should get poor marks for its efforts to move to a capitalist system and to lower greenhouse gas emissions, said, "The U.S. has stronger long-term economic fundamentals than China. Exaggerating Chinese prowess and emphasizing the wrong issues leads to general mistakes in U.S. economic and foreign policy, and to an incoherent China strategy."

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