The Chinese Economic Miracle....

As reported in [story found via Barcepundit]this The Australian article, China's economic miracle may be somewhat less than meets the eye.

ESTIMATES of the growing pile of non-performing loans (NPLs) in China appear to have caught many by surprise, especially because Beijing's efforts to clean up its rickety state-owned banks were thought to have greatly reduced NPLs and the risk of a full-blown financial crisis.

According to Ernst & Young, the accounting firm, bad loans in the Chinese financial system have reached a staggering $US911 billion ($1.18 trillion), including $US225 billion in potential future NPLs in the four largest state-owned banks.

Even with all the lip service being paid to getting the banking system in order and the governance systems being put into place, NPLs continue to grow at an astonishing pace. The high level of NPLs are a sign of bad lending practices and an allocation of resources to inefficient or ineffective projects. Wasteful spending is a short-term prop for an economy and the World Bank estimates wasteful spending accounted for about a third of all fixed asset investment in the 1990's.

The growing NPL problem is confounding efforts to stem the tide of losses. As mentioned in the article, continued political patronage seems to be at the heart of the problem...

Government figures show that, in 2003, 5.3 million party officials held executive positions in SOEs [state owned enterprises]. The party appoints about 80 per cent of the chief executives in SOEs and 56 per cent of all senior corporate executives. Recent corporate governance reforms, Western-style on paper but not in substance, have made no difference. At 70 per cent of the large and medium-sized SOEs ostensibly restructured into Western-style companies, members of party committees were appointed to the boards. Painful restructuring appears to have spared this elite. China has shed more than 30 million industrial jobs since the late 1990s but few party officials have become jobless.

China has some other big problems to contend with too. In addition to being unable to allocate resources efficiently through financial intermediaries, China's troubles will be aggravated by an aging population, a very high tax rate and the continued need to create jobs to move people out of agrarian jobs into other sustainable employment. On the plus side, China has a large, educated and a population that is willing to work and economies of scale and support for manufacturing operations that would be difficult to replicate elsewhere in a short period of time.