Can China maintain pace of economic growth?

People talk about China’s continued economic growth almost as if it is a foregone conclusion.

But Bruce Jaffee, emeritus professor of business economics and public policy at Indiana University’s Kelley School of Business, isn’t so sure.

He said much of the recent economic growth has been driven by an infrastructure spending spree and strong exports.

“That just can’t be sustained at this level, and with all the leverage, the focus on construction, and elements of speculation in housing, the bubble is likely to burst,” he said.

Anemic economic growth in China’s key export markets—Europe, North America and Japan—will force the country to rely more on domestic consumption, he said. But he thinks buying power in the country will suffer from a correction in housing.

“I think to meet their goals for the next five years, the next 10 years, is going to be a real struggle,” Jaffee said.

Housing prices have skyrocketed in China. China Economic Quarterly said the average price of a home rose from $59,899 in 2008 to $77,732 in 2010—a nearly 30-percent increase.

Many observers play down the potential for trouble, in part because the economy has performed so well for so long. China’s gross domestic product has grown more than 90-fold since Deng Xiaoping ditched hard-line communist policies in favor of free-market reforms in 1978.

But even bullish observers see problems—most notably a huge disparity between rich and poor, many of them living in rural areas. Government figures show the top 10 percent of urban Chinese earn nine times that of the poorest 10 percent—a ratio that drastically understates the reality.

“China’s rich are more numerous and also far richer than official data let on, and their share of national wealth is rapidly rising,” China Economic Quarterly said in December.

“The sociological consequence is that China runs some risk of becoming a two-tier, Latin American-style society of haves and have-nots, run for the benefit of crony capitalists.”•