China Running Out of Room to Restructure Economy

Sept. 26 (Bloomberg) -- If we accept the argument thatChina must, and will, rebalance its economy by reducing itsreliance on investment, what happens if it proves politicallyimpossible to cut investment rates sharply? Gross domesticproduct growth rates would remain very high, but debt levelswould also grow unsustainably. At some point, China will reachits debt capacity limits and no longer be able to fundinvestment.

At this point, the country would fall into the self-reinforcing process of chaotic adjustment that characterized theU.S. in the early 1930s or Brazil in the mid-1980s. Asinvestment falls and GDP growth grinds to a halt, risingfinancial distress causes businesses to fire workers.Unemployment causes consumption growth to drop, and GDP growthfalls even further, resulting in more distress.