Meanwhile, in the United States, Obama's high-speed rail plan, originally set at $53 billion over six years, has gotten a thorough democratic vetting. Three freshly elected Republican governors spurned federal dollars for high-speed rail, fearing a long-term burden on their budgets; homeowners in liberal Northern California are fighting construction through their neighborhoods; and the president agreed with Congress to trim current-year spending as part of a budget deal.

On the whole, I'd say China should envy us. [1]

China has grown for the last few decades on the back of export-led industrialization and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate, and industrial capacity for import-competing and export sectors). When net exports collapsed in 2008-2009 from 11% of GDP [gross domestic product] to 5%, China's leader reacted by further increasing the fixed-investment share of GDP from 42% to 47%.

Thus, China did not suffer a severe recession - as occurred in Japan, Germany, and elsewhere in emerging Asia in 2009 - only because fixed investment exploded. And the fixed-investment share of GDP has increased further in 2010-2011, to almost 50%.

The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging further. In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors.

Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment - including East Asia in the 1990s - have ended with a financial crisis and/or a long period of slow growth. [3]

Most controversially perhaps, the analysts predict what they call "a golden age of consumption". China's consumption as percentage of GDP is currently among the lowest in the world, which many analysts attribute to cautious Chinese families saving money for their retirements or to pay for healthcare bills. But Mr Wang says Chinese consumers aren't waiting for the government to build a new social safety net before they spend more. They're waiting to make more money, which they'll do as labor demand boosts wages over the coming decade. Consumer spending zoomed in [South] Korea and Japan after those countries reached the $7,000 mark. [4]

My firm interviewed 5,000 Chinese in 15 cities last year. It is true consumers over the age of 60 reported savings rates near 60% because they feared soaring medical and housing costs. After living through decades of upheaval and missing out on the recent economic boom, they remain thrifty. Little can be done to change decades of ingrained habits.

Our research suggests the key metric Roubini misses is shifts in how younger Chinese spend. Respondents under 32 years old had effective savings rates of zero. They remain confident about their money-making potential. Secretaries earning $600 a month commonly save two month's salary to buy the latest Apple iPhone or Estee Lauder cosmetics.

Consumer finance reforms are also spurring more consumption for younger Chinese. Total credit cards in circulation rose from 13.5 million in 2005 to 240 million in 2010 and will rise 22% annually for five years. More than 80% of the 18 million auto sales there last year were paid 100% up front. Brands like Toyota and General Motors are starting to push financing options, which will further unlock consumption. The data dispels the myth that Chinese are culturally high savers. [5]

However, Roubini is perhaps quite correct in one respect. He believes that China's infatuation with excessive investment will lead to enormous waste and a significant decrease in the growth rate in the future. This view of his is very persuasive. [6]

In the past, increases in individual incomes have lagged behind GDP growth. However, the 12th Five Year Plan intends to change this. It should be said it can be changed, because in the coming years there will be a major change in China's entire economic structure. If the economic structure can change, urbanization will accelerate, excess labor capacity in the villages will be mopped. It is possible that within three to five years, if the labor market experiences conditions of demand exceeding supply, worker's wage growth will accelerate. This would change the problem of excessively low personal incomes.

Also, China has been continually upgrading the social safety net ... which will, to a certain extent, contribute to an increase in individual consumption..

Maintaining 7% growth and maintaining relatively full employment while at the same time the government structurally adjusts its outlays and use a greater proportion to meet the demands for improved people's well-being, all can increase personal consumption.

To ease the constraints on household income, China needs more rapid exchange-rate appreciation, liberalization of interest rates, and a much sharper increase in wage growth. More importantly, China needs either to privatize its SOEs [state-owned enterprises], so that their profits become income for households, or to tax their profits at a far higher rate and transfer the fiscal gains to households. Instead, on top of household savings, the savings - or retained earnings - of the corporate sector, mostly SOEs, tie up another 25% of GDP.

But boosting the share of income that goes to the household sector could be hugely disruptive, as it could bankrupt a large number of SOEs, export-oriented firms, and provincial governments, all of which are politically powerful. As a result, China will invest even more under the current Five-Year Plan.

Continuing down the investment-led growth path will exacerbate the visible glut of capacity in manufacturing, real estate, and infrastructure, and thus will intensify the coming economic slowdown once further fixed-investment growth becomes impossible. Until the change of political leadership in 2012-2013, China's policymakers may be able to maintain high growth rates, but at a very high foreseeable cost.

"Net interest margins for the quarter were higher, and that's the most important factor for Chinese banks," said James Antos, a banking analyst with Mizuho Securities. [8]

"Foreign-exchange reserves have exceeded the reasonable levels that we actually need," Zhou said. "The rapid increase in reserves may have led to excessive liquidity and has exerted significant sterilization pressure. If the government doesn't strike the right balance with its policies, the build-up could cause big risks," he said, without elaborating. [9]

... whether Chinese economic management can avoid the kind of catastrophe that Roubini and I consider to be likely depends on your view of the efficacy of centralized economic management of the type that China practices. The Thomas Friedmans of the world, and arguably Obama, believe that such dirigisme is superior to the messy, decentralized, unplanned and non-centrally coordinated actions of greedy individuals in markets. People like me, conversely, believe that the visible hands of greedy, largely ignorant, and short-sighted politicians and bureaucrats is likely to lead to inferior outcomes.

16. Recognizing that the international financial crisis has exposed the inadequacies and deficiencies of the existing international monetary and financial system, we support the reform and improvement of the international monetary system, with a broad-based international reserve currency system providing stability and certainty. We welcome the current discussion about the role of the SDR [the special drawing rights of the International Monetary Fund] in the existing international monetary system including the composition of SDR's basket of currencies. We call for more attention to the risks of massive cross-border capital flows now faced by the emerging economies. We call for further international financial regulatory oversight and reform, strengthening policy coordination and financial regulation and supervision cooperation, and promoting the sound development of global financial markets and banking systems.

17. Excessive volatility in commodity prices, particularly those for food and energy, poses new risks for the ongoing recovery of the world economy. We support the international community in strengthening cooperation to ensure stability and strong development of physical market by reducing distortion and further regulate financial market. The international community should work together to increase production capacity, strengthen producer-consumer dialogue to balance supply and demand, and increase support to the developing countries in terms of funding and technologies. The regulation of the derivatives market for commodities should be accordingly strengthened to prevent activities capable of destabilizing markets. We also should address the problem of shortage of reliable and timely information on demand and supply at international, regional and national levels. The BRICS will carry out closer cooperation on food security. [10]