No Meltdown But the End of 10% Economic Growth for China
Martin Wolf has a very good column at The Financial Times about China’s troubling financial situation:
Imagine you were told of an unnamed economy that had soaring investment and credit, but falling growth. A rising proportion of investment activity was being funded by debt, while at the same time returns were falling. You would surely expect an unhappy ending.
Credit cannot grow faster than GDP forever, even in China. The question is not whether it will stop, but how – and when. The longer this goes on, the greater the risk of a nasty surprise down the road. Furthermore, some part of the recent growth has almost certainly been an illusion: investment that does not generate much of a return is in part waste, rather than valuable output – however beneficial its immediate impact on demand may seem to be.
That’s a key point. Some government spending is investment; other government spending is consumption. At this point it seems pretty unlikely that all of China’s government-funded construction has been investment. No one on either side of the ocean really knows how much is which.
The exchange controls on the renminbi place China in a stronger position (and foreign companies in a weaker one) than might otherwise be the case. That’s something I warned my bosses about decades ago when investing in China looked much riskier than it does now.
How is China’s sitution likely to resolve itself?
The accumulation of debt is likely to end not with a financial bang but with a whimper, as growth peters out. According to the IMF staff, low interest rates for household savers have helped subsidise investment to the tune of about 4 per cent of GDP a year. Small and medium enterprises face a higher cost of capital because of the priority given to larger corporations. These implicit taxes on households and SMEs will probably have to rise, harming the economy, if investment is to be sustained at these exalted levels.
The Chinese authorities have long believed that growth rates below 7% would result in substantial unemployment which in turn would result in civil unrest in the country. If they’re right there could be some very trying times ahead.