China's Economic Reckoning Is Coming

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By William Pesek

What's most surprising about China's slowdown? That anyone could actually be surprised about it.

The sense of shock coursing through the economic intelligentsia reflects misplaced faith. Despite some observers' hopes, Beijing hasn't repealed the laws of economic gravity. Popular wisdom long held that China can grow at 10 percent indefinitely and that its potential is boundless. Yet no one beats the system, so to speak. No industrializing nation has ever avoided a financial crisis.

Whether China is crisis-bound is anyone's guess. And investors haven't made much money betting against Beijing. Anyone who shorted China after the 2008 collapse of Lehman Brothers can't be happy. It nimbly avoided the worst of the global meltdown.

Yet China's reckoning is coming in slow motion, and the world is only now noticing. The hundreds of billions of dollars of stimulus China tossed at its economy sowed the seeds of trouble. The money was spent haphazardly and inefficiently, creating fresh asset bubbles, inflation and a legacy of bad debt at China's biggest banks. Fresh efforts to boost demand will do more harm than good as Europe's woes close in on Asia.

On Sunday, China's central bank announced its third cut in six months in the amount of cash banks must set aside as reserves. The 50-basis-point move followed news China’s import gains stalled in April, industrial output rose at the slowest pace since 2009 and new yuan loans were the lowest this year. Export-driven China may be able to live for a few years without U.S. and European consumers. But it cannot survive indefinitely.

What's more, politics is standing in the way of reforms needed to stabilize the economy. The scandal involving Chongqing bigwig Bo Xilai shows how adept China's leaders can be at enriching themselves, as well as the lengths to which they might go to protect the status quo. Corruption isn't just an issue of inefficiency and waste. It's halting vitally needed change and reducing the odds China can beat the system.

(William Pesek is a Bloomberg View columnist. Follow him on Twitter.)

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-0- May/14/2012 14:21 GMT