by Gordon G. Chang
The Chinese economy is in distress, and the country’s currency and markets, reflecting unease, are tumbling. Xi Jinping, the Chinese ruler, has no solutions. The only thing he is doing is incurring more debt. That’s extremely unfortunate because an overly indebted Beijing is again set to push the world into recession. China, through predatory policies, precipitated the global downturn last decade, and it looks like it will cause the next one as well. Last time, the Chinese benefitted handsomely from worldwide misery. This time, they will not be so fortunate and will almost certainly end up being the greatest victims.
On the surface, China’s economy looks fine. On Monday, the National Bureau of Statistics reported that gross domestic product increased 6.7 percent in the second quarter of the year, down from Q1’s 6.8 percent but in line with expectations.
Yet China’s growth rate, whatever is reported, is not the issue. The country has a fundamental problem: it is taking on debt fast. The country is incurring maybe one-and-a-half times as much indebtedness as it is creating nominal GDP—if the official GDP figures are accurate.
They are not accurate, however. The National Bureau of Statistics has been reporting steady GDP numbers, which would be extremely unusual in a fully mature economy, not to mention a developing one like China.
So Beijing’s numbers are, on their face, suspect. Take 2016, for which Beijing claimed 6.7 percent growth. The World Bank, in the middle of last year, released a chartshowing that in 2016 China’s gross domestic product grew 1.1 percent.
The 1.1 percent figure, shocking to many, is in line with the single best overall indicator of Chinese economic activity, total primary energy consumption. In 2016, total primary energy consumption, according to official numbers, increased 1.4 percent.
In 2017, the economy picked up—energy consumption rose 2.9 percent—but GDP could not have grown by the claimed 6.9 percent.
Low growth highlights Beijing’s enduring problem: no economy can indefinitely continue to create debt faster than producing GDP, especially at China’s pace. At some point, there must be an “adjustment,” as economists would put it, and a “crisis” as the rest of us would describe it. Moreover, that adjustment, or crisis, has to be large because it has been delayed for so long.
Beijing has delayed adjustments since the 2008 downturn with perhaps the largest lendathon-spendathon in history. In the five years starting in 2009, Chinese banks extended an amount of credit that was roughly equal to that in the entire U.S. banking system, even though at the end of 2008 the Chinese economy was less than a third the size of America’s. The spree has continued since the end of that half decade.
The result is that the Chinese economy has become unbalanced, those imbalances have become threatening, and the country has accumulated an awesome amount of debt. In 2008, China’s debt-to-gross domestic product ratio, a standard metric for debt sustainability, was 141 percent according to Bloomberg. That figure was already worrisome, but the situation has rapidly deteriorated since then. The ratio, Bloomberg reported , had ballooned to 256 percent in the middle of last year.
The figure is undoubtedly higher, especially when the so-called “hidden debt” in the “shadow banking” system is counted. Andrew Collier of Hong Kong-based Orient Capital Research says shadow banks handle “almost half of all the money in China.” Taking into account all indebtedness, Collier believes the country’s debt-to-GDP ratio is about 400 percent. A percentage of that sort shows the country’s debt load is exceedingly burdensome.
China’s heavy debt is a drag on growth, especially because many of the investments made with the borrowings are unproductive. Some are unproductive because they were completely misconceived and will remain so or because they will become productive only far into the future. In either case, those investments cause a current-day problem. Chinese technocrats can do many things, but as Fraser Howie, co-author of Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise, told me last month, “What they can’t do is make crap investments good ones.”
China’s leaders have tried to outgrow problems by piling on more indebtedness. That stratagem worked at the end of the 1990s, but the accumulation of debt has now become so burdensome that it is slowing growth and shaking confidence.
Concerns about the economy, among other things, triggered massive capital flight in 2015 and 2016, when net capital outflow was, according to best estimates, slightly in excess of two trillion dollars. Beijing stopped the outflow, but only with draconian capital controls, only some of which were officially announced.
Despite the success in stemming outflow, concerns remain. Last October, Zhou Xiaochuan, when still head of China’s central bank, publicly raised the possibility that China would suffer a “Minsky Moment,” the point when asset values collapse. It is also the worry of the Chinese people, who obviously think something bad is coming. Survey after survey show that a third to a half of China’s wealthy plan to leave their country in the medium term.
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