China Can Resist a Crash But Can’t Prevent One (Source Bloomberg)

After many years of 7- to 10-percent growth, economies tend to overheat, creating bubbles that burst. That’s what happened to South Korea and Japan in the 1980s and 1990s. But China’s economy keeps plugging along (though probably not at its published growth rate of 6.7 percent), defying the predictions of doom saying pundits. Some indicators show a recovery this year. That doesn’t mean that the danger of a crash has passed, however. There is growing evidence of a real-estate bubble, and the economy seems increasingly dependent on government stimulus and private-sector credit growth.

I see a few reasons why the Chinese economy really is different from most Western models, and these imply that forecasting the Chinese economy is more like predicting the winner of a race than analyzing a bubble.

Unlike the U.S., China is full of large, state-owned enterprises. That gives the Chinese government the ability to manipulate a large stock of asset wealth. The U.S. government is more dependent on flows of revenue from taxation and the private sector.

When bad economic news arrives, the Chinese government can instruct the companies it owns to spend wealth to keep workers employed. Think of this as using the companies to conduct fiscal policy rather than laying off workers, building another bridge or erecting another steel plant. Whereas Western economies take an immediate hit to income in bad times, the Chinese have been converting this into a hit to wealth, insulating themselves from major downturns.