Things are gradually and very slowly returning to normal – at least the US economy seems to be heading that way. And already markets are fretting about the implications of this. All of a sudden we are getting what we have been wishing for throughout the last half a decade and now the markets are panicking because their wish may be granted. But it seems to me that one country is particularly exposed and in danger of losing out if things return to normal and that country is China. Today I look at the evidence for and against China being on the verge of some kind of major crash.
The evidence for. According to data released by the World Bank last week, China’s private domestic debt is around 160 per cent of GDP. No other emerging market country listed in the World Bank report comes even close to matching China’s private debt levels.
Credit ratings agency Fitch is concerned about the recent explosion in China’s credit. In fact it goes a bit further than that, calling China’s credit bubble unprecedented. The real issue here seems to relate to China’s shadow banking system. Writing in the ‘Telegraph’, Ambrose Evans-Pritchard quoted Charlene Chu, Fitch’s senior director in Beijing, as saying: “There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling.” She said: “The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation.” See: Fitch says China credit bubble unprecedented in modern world history http://www.telegraph.co.uk/finance/china-business/10123507/Fitch-says-China-credit-bubble-unprecedented-in-modern-world-history.html
The final words of that above comment tally with a piece in today’s ‘FT’ warning that China is suffering from huge levels of over-capacity. “From chemicals and cement to earthmovers and flat screen televisions,” wrote Jamil Anderlini, “Chinese industry is awash with excess capacity that is driving down profits inside and outside the country and threatens to further destabilise China’s already shaky growth.” See: Chinese industry: Ambitions in excess http://www.ft.com/cms/s/0/4d5528ec-d412-11e2-8639-00144feab7de.html#axzz2WRtKeV3v
China is one of the world’s biggest subsidisers. Its government (local and national) throws money at whole industries turning them into world beaters within a very short time frame, but this inevitably brings with it the problem of over capacity. The recent row between the EU and China about solar panels exported into Europe is indicative of this. Although some of the more vocal critics of China are being a tad hypocritical; after all, France is not exactly shy when it comes to subsidising its own industries and it promotes the biggest subsidy scam of the lot – the Common Agriculture Policy.
Local government debt in China is also a major crisis in the making in China.
No wonder many economists are seeing parallels with China today and Japan just before it entered its lost two decades or so ago.
Evidence against. But before you conclude that the good news story on China is over, bear the following two points in mind. Firstly, China’s foreign debt remains modest – less than 10 per cent of GDP. Of the major economies across the emerging world, only Brazil and Malaysia have lower foreign debt to GDP than that. For most countries the ratio is double or even treble the levels we are currently seeing in China.
But for me one of the key measures of an economy’s long term potential is productivity growth. Over the last ten years China’s productivity growth has risen by an average of 10 per cent per year.
It was quite different in Japan 20 to 25 years ago years when the country had pretty much caught up with potential, and productivity growth slowed dramatically. As long as the average Chinese worker is producing more goods and services each year, there is something inherently sustainable about growth. Even apparently high debts levels may actually be manageable during times of high productivity growth.
I am not saying that China does not have serious problems to contend with – it clearly does. And it is no good being able to produce more unless demand rises to match growth capacity. And I am sure that growth over the next ten years will be much slower than over the past ten years. Nonetheless, I suspect that in 2023 the Chinese economy will be much bigger than it is today, and indeed –looking back over the period 2013 to 2023 – we will say that its growth rate was amongst the highest in the world.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees