China's Latent Economic Crisis and Potential Risks

Essay by morgan1234aUniversity, Master'sA+, May 2004

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Since the beginning of broad ranging economic reform [in 1978], China's economy has been growing at a pace that commands the world's admiration. Entering the 1990s, however, the high-speed growth of the virtual economy has produced a large number of bubbles. Arguably, the major factor contributing to the dramatic growth of our country's economy in the past twenty years has been rapid investment. However, the quality of economic growth produced by this "investment, investment and more investment" model has been relatively mediocre. In recent years, the bubbles accumulated through sustained, ineffective supply have become a cause for concern that further development might be accompanied by potential risks.

Before the breakout of the Asian financial crisis, Western scholars La Roche and EIR issued an alert. La Roche's analysis is based on a material economy. He notes that there are two aspects of an economic process: (1) operation of financial currency and (2) production, distribution, and consumption of material products.

He thinks that today's world economic system and vast wealth assume the form of an upside-down pyramid, at the bottom of which are material products. Above these products are services as well as commerce and trade; further above are bonds, stocks, currencies, commodity futures, etc. Sitting atop the pyramid are derivatives and other forms of virtual capital. La Roche argues that in any economic system, if the balance between physical assets and financial assets is tipped, an economic crisis will occur. It seems that among the variety of methods employed in analyzing the Asian financial crisis, the one used by La Roche and EIR has been relatively effective. Therefore, in this article the author will borrow their method to analyze the physical and financial dimensions of China's economy so as to reveal its real conditions.

1. Potential Risks associated with...