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Is China Operating A Modern Day Ponzi Scheme? (Essay Sample)


Opinion based Essay on the article written by Michael Schuman, The Real Reason to Worry About China, Time, on April 28, 2013. http://business(dot)time(dot)com/2013/04/28/the-real-reason-to-worry-about-china/ Essay has to be based on applied economic principals. Cite any works quoted.

Is China Operating a Modern Day Ponzi Scheme?
For all practical purposes, the economy of China is in contraction notwithstanding the GDP figures recently released. This year, there has been a major shift in sentiments about China, with analysts particularly those on the sell side trying to remain relevant at the backdrop of their earlier projections about growth and risk in China (Knight, 2013). The increased skepticism about China’s growth prospects has come about due to a deeper understanding of the root cause of the imbalances between investment and consumption and also the relationship between debt and growth. For many years, even as recent as 2011/13, analysts were quite confident that the growth model of China was in a reasonably good shape, one which only required minor changes to foster the growth rates for many more years (Schuman, 2013). However, the situation now calls for urgency in fundamental reforms because of the extent that it has on the slowdown in economic growth.
While many would be quick to laud Premier Li for his resolve to tackle the underlying problems, it is nevertheless important that one understands what the underlying problems in the country has always been. To begin with, the recent slowdown can be attributed to consequences of unexpected adverse developments as opposed to being an expression of the systemic problem with the growth model (OEDC, 2013).The economic worries in China is not as a consequence of a bunch of irresponsible borrowers whose ends is to ruin the party; further, the solution is not that these irresponsible borrowers need to be brought to book. The problem is much deeper. China’s economic growth is by design dependent on a thoroughly unsustainable credit expansion. The country cannot rebalance the economy neither can it minimize its growing credit risk until such a time that it makes radical overhauls of the growth model as well as the capital allocation process, both of which are not tenable at economic growth rates that are above 3-4 percent.
China’s economic growth numbers of 7.8 percent is better that was expected, which reversed a mid-year slowdown that had gotten the leadership in extreme panic mode. Months after China tried to engineer a slowdown unsuccessfully, it has had to rely on investment for growth on an even bigger scale. The amount of malinvestment that is taking place in the country is just mind-boggling. As it is, there are many proponents of the economic model of ‘build it and they will come.’ There are many millions of ‘poor’ Chinese who are moving from the countryside in the search for housing and basic infrastructure. However, this is not how economic structures are supposed to evolve. China is by and large repressing household expenditure or domestic demands, and in effect it ...
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