Over frothy cappuccinos at Hong Kong’s Grand Hyatt Hotel, Simon Cox, The Economist’s Asia Economics Editor, discussed his recent Special Report on China’s economy. He voiced his frustrations over the so-called ‘Bulls’ vs ‘Bears’ debate that dominates much of the commentary on China. Both, he said, tend to miss the point. Bulls ignore the inefficencies and tensions in China’s economic model, while Bears expect their misgivings to be vindicated by some imminent cataclysmic event.

The truth is somewhere in the middle, because while China does have problems, they are chronic, not acute. The good news is that government investment is creating growth, and that for now this continues to maintain the social contract between the CCP and the Chinese people. However, this is at the expense of domestic consumption, which is a feeble 30% (roughly) of GDP. To put that in perspective, during World War II, America’s domestic consumption was 50% of GDP. And while government investment is getting strong returns relative to other governments, the flip side is that private investment could allocate capital much more efficiently (some estimates claim the same growth rate could be maintained by half the capital).

But enough of me and my pale imitations – listen to the man himself here.