Chinese economy has nothing to do with the global recovery

Talking in an interview with Reuters late on Thursday at the World Economic Forum in the northern port city of Dalian a financial company leader noted that it is unlikely that China will lead the global recovery out of recession because its own recovery is unsustainable.

In the first 8 months of 2009 China's urban fixed asset investment rose 33.0% which made some people think the Celestial Empire is recovering. The figure beat experts expectations and came after Beijing launched a massive two-year, 4 trillion yuan government stimulus spending plan and as banks embarked on a record lending boom in the first half of the year. Investment backed by the central government increased 22.3 percent from January to August.

Investment backed by the central government increased 22.3 percent from January to August.

"China's investment recovery funded by bank lending is a pretty self-contained recovery, with minimum spillover to the rest of the world," said Morgan Stanley Asia Chairman Stephen Roach.

This view is shared by many Chinese economists who previously noted that China's recovery will be unsustainable once the initial effect of pump-priming government stimulus measures starts to wear off and private consumption fails to take the baton.

It has been for a long time to date that China has been basing its economic growth on domestic consumption instead of exports.

"China is still hoping that its exports machine would start humming again, that is unlikely to be the case given the protracted sluggishness of external demand," said Roach.

He added that China faces the risk of asset bubbles, following lending splurges like those seen in the first half. "There is certainly a risk of a new round of asset bubbles," he said.

In the first half of the year banks in China extended an unprecedented 7.37 trillion yuan ($1,079 billion) in loans following the government's call to support economic growth. As a result some experts got concerned about the potential bubbles in the property and stock market.

Separately, Roach said China will not see an internationalization of its currency, the yuan, until it deepens its capital markets and financial institutions and makes its currency convertible. "I think that is a 25-30 years story," he said.