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It has become clear China's old playbook of "invest and grow" no longer works so well. For all its successes, China suffers from the effects of overbuilding and unbridled credit growth. The country's new leadership may engineer a true shift toward a consumption economy – which will reverberate well beyond China.
About 50 leading BlackRock portfolio managers and external experts recently exchanged views on China's economic trajectory at the BlackRock Investment Institute's China Forum. Many went in bullish and came out still bullish – but with much less complacency and certainty. This site and the publication Braking China…Without Breaking the World discusses the main factors driving the economy, signposts for change and implications for investors.
We are optimistic on China's economic trajectory in the short term. A nagging worry is markets already factor in a "soft landing" this year, and only downside risk remains. We are concerned about China's ability to keep up its economic march in the long run. Challenges are big and solutions are not easy:
- An explosion in credit growth resulting from Beijing's 2009 stimulus has made the financial sector the economy's Achilles heel and its biggest long-term threat. The country can pave over problems this year, but the bills will come due.
- The real estate slump is the biggest threat to economic growth and confidence this year. Can Beijing break a vicious circle of falling prices and sales? (When it is ready to do so.)
- Powerful interests are stacked against a true shift to a consumption economy: exporters, state enterprises and local governments.
- Beijing is not almighty: Local governments tend to go their own way and a desire for consensus has often resulted in political paralysis.
- Real wage growth, rising materials costs and environmental restrictions are changing the workshop of the world – for the better.