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German Economists Sound Warning on China

  • Why it matters

    Why it matters

    China is the fifth-biggest export market for German companies and its strong growth in recent years has fueled key German industries such as automaking.

  • Facts


    • The German Council of Economic Experts, a panel of economic advisors to the government, has warned that China’s new economic strategy isn’t producing sustainable growth.
    • In a report presented to Chancellor Angela Merkel on Wednesday, the economists warned that much of the current surge in investment in infrastructure and real estate was debt-financed, and could therefore lead to a financial crisis.
    • German direct investment in China has stagnated at 4.4 percent of total German foreign direct investment, in a sign that confidence in future growth is waning.
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Less hopeful about me old China. Source: Reuters

Leading German economists have warned that Beijing’s plan to refocus the Chinese economy from export growth to domestic consumption isn’t working well, and that German firms should brace for tougher times ahead in what has long been a booming market for them.

“For German companies, the best times in China are over,” Peter Bofinger, a member of the German Council of Economic Experts, a panel of advisors to the German government, told Handelsblatt.

The council on Wednesday handed over its latest economic analysis to Chancellor Angela Merkel. In it, the economists called for structural reform in Germany and in the European Union, criticized the ultra-easy monetary policy of the European Central Bank and for the first time devoted themselves in depth to China, the world’s second-largest national economy and Germany’s fifth-biggest export market.

They said China no longer had a sustainable growth model. While export growth was flagging, much was being invested in infrastructure and real estate, in some cases far more than necessary. They noted that a large proportion of the investments were financed by borrowing, and that this posed a problem because both the government and companies were amassing high levels of debt that could cause a financial crisis.

But unlike the global financial meltdown that spread from the U.S. in 2008, there wouldn’t be much international contagion from possible bank insolvencies in China, the economists said. The country has little foreign debt and banks hold little debt in foreign currencies. So the government would have little trouble bailing out banks. But if a real estate bubble were to burst, China’s economy would suffer and the newly emerging middle class would face poverty.

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