This summer Foreign Policy posted an article called saying “The whole Chinese economy’s getting ready to burst“, comparing the growth of China’s export model with Lucent technologies in the 90’s. The article is long on adjectives and short on numbers. The premise isn’t necessarily wrong though.
China’s fortunes over the past decade are reminiscent of Lucent Technologies in the 1990s. Lucent sold computer equipment to dot-coms. At first, its growth was natural, the result of selling goods to traditional, cash-generating companies. After opportunities with cash-generating customers dried out, it moved to start-ups — and its growth became slightly artificial. These dot-coms were able to buy Lucent’s equipment only by raising money through private equity and equity markets, since their business models didn’t factor in the necessity of cash-flow generation.
Funds to buy Lucent’s equipment quickly dried up, and its growth should have decelerated or declined. Instead, Lucent offered its own financing to dot-coms by borrowing and lending money on the cheap to finance the purchase of its own equipment. This worked well enough, until it came time to pay back the loans.
Personally I would make more of a comparison to Enron once the internal debt to GDP number gets shown to be 3x higher than the commonly accepted numbers. However, unlike Enron China doesn’t actually report these numbers – all finance numbers are considered State Secrets (国家机密), fortunately they don’t show up on Danwei’s list of state secrets.