Nouriel Roubini, the New York economics professor who predicted the financial crisis –  and who is also known as Dr Doom – is forecasting a sharp slowdown in China in a few years’ time, because it is currently over-investing in infrastructure and  property (Beijing’s empty bullet trains):

China’s economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible—most likely after 2013—China is poised for a sharp slowdown. Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium.

According to Prof. Roubini:

The problem, of course, is that no country can be productive enough to reinvest 50 percent of GDP in new capital stock without eventually facing immense overcapacity and a staggering nonperforming 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.

The possibility of a China crash makes the task of repairing Australian Government budgets even more urgent, and hence it’s encouraging that the Gillard Government is considering the means testing of childcare assistance:

Parents face childcare rebate cuts under tougher work test

The Government could also cut back the generous $8bn of subsidies and tax concessions it grants to industry each year (see Gillard says no more corporate welfare). There is a lot of fat in the Commonwealth budget.