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.

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Dave Schuler
About Dave Schuler
Over the years Dave Schuler has worked as a martial arts instructor, a handyman, a musician, a cook, and a translator. He's owned his own company for the last thirty years and has a post-graduate degree in his field. He comes from a family of politicians, teachers, and vaudeville entertainers. All-in-all a pretty good preparation for blogging. He has contributed to OTB since November 2006 but mostly writes at his own blog, The Glittering Eye, which he started in March 2004.


  1. Brett says:

    China’s got a slow-growing workforce, so a reduction in GDP and job growth might not hit as hard – and the fact that the Chinese authorities have been talking about this and saying that growth is going to slow down makes me suspect they’re not worried it will cripple internal stability anymore. Instead, it should be a good incentive for a lot of companies to start using more labor-saving technology.

    I’m mostly rather bullish on the Chinese climbing into rich country status. They’ve got the underperforming SOEs and state banks, but there’s a thriving shadow banking sector, and there are plenty of rich countries that did alright with SOEs for at least a while. They’ve got the rapid adoption of technology, the entrepreneurialism, the reasonably effective business law and debt collection at least for in-country firms, the strong international business connections and developing business networks in places like Africa, and so forth.

  2. There is some speculation that much of what we’re seeing lately from Vladimir Putin can be traced to a desire by those in power to distract the Russian public from an economy that was in bad shape even before the Crimea annexation, and which is only likely to get worse with sanctions..

    Would the Chinese seek to distract their citizens in a similar manner?

  3. Dave Schuler says:


    China’s workforce is actually shrinking and will continue to do so for the foreseeable future. Its total population continues to grow albeit slowly.

  4. Brett says:

    RE: Dave Schuler

    Correction noted, although that still fits with the point I made. China’s economy may be generating less growth and jobs, but the overall workforce is shrinking so it’s not as big of a deal.

  5. Ron Beasley says:

    China has a couple of problems: 1)Their growth depends on exports which require strong economies elsewhere in the world – I wouldn’t be surprised if they were lobbying for an increase in the minimum wage in the US. 2) A lot of really bad real estate investments – entire new cities that no one lives in. In addition in the not too distant future they are going to have to address the pollution issue or their workforce is all going to die off.

  6. Ben Wolf says:

    Western observers are eternally obsessed with growth rates but the Chinese don’t see it in the same light. Their policy goals are 1) full employment 2) price stability 3) growth, in that order. Since the God they have begun the process of shifting from an investment/export driven economic model to a domestic consumption model, so far with success.

    I expect within the next five years (maybe sooner than later) China will abandon its currency peg and allow the renminbi to float; in fact it will have no choice if it wishes to retain full control of its domestic policy, because it will begin running current account deficits rather than surpluses.

  7. Ben Wolf says:

    God = GFC which my spellchecker rejected for some reason.

  8. rudderpedals says:

    China’s future will be closely tied to eastern Siberia. Leverage could be there for use in the dispute with Russia, IMO.

    @Ben Wolf: Your spellchecker has a suitably subtle subversive agenda

  9. Hal_10000 says:

    This was always going to happen. China’s massive growth rates were a result of being so dirt poor when Maoism was finished (10% of nothing is still close to nothing). Their GDP per capita, even after all this growth, is still half that of Greece and a quarter of Japan. What’s happening is that they’ve picked the low-hanging fruit — industrialized the cities (along with massive pollution) and gotten rid of the worst parts of communism. But large parts of China are still third world poor and lifting those areas up is going to be difficult, if it’s possible at all.

    You add, as Dave noted, a shrinking workforce and a one-child policy that is going to cause China to get older faster than any nation in history and I just don’t see how they are not in for a long stagnation.

  10. Ben Wolf says:

    The Chinese leadership understands that great powers run trade deficits; economic might makes their currencies highly desired by other countries and those countries will force a change in the balance of trade. What we’ve been seeing are China’s preparations to become a real rival to the U. S. in the current economic order. Big changes are directly ahead, for everyone.

  11. MarkedMan says:

    There are policy differences between China and the Western countries that drive the economy in ways I don’t really understand, but I’m sure must be important. One example: little to no property tax. Given 30 years of rising property values and a deep distrust of stocks and other financial instruments, a very good individual investment plan is to buy, say, an apartment and just keep it empty. With no property tax, there’s just a few small fees to pay every year while, at least in Shanghai, your investment grows 10-15% or more in inflation adjusted numbers, every year. Couple this trend with the tradition, at least in Shanghai, of a groom contributing a home before a couple can get married and we end up with families buying an apartment when a son is born and leaving it empty until he gets married. And by empty, I mean no walls, wiring, interior plumbing, nothing on the floors or ceilings. No sinks, no toilets, nothing. I’ve been in Chinese apartment buildings where every front door was different because even they weren’t included in the purchase price.

    Same applies commercially. My company has been in the office building I’m sitting in for the past two years, since it was built. The whole development, four big buildings is maybe 10% occupied, but 100% sold. They are building two more phases of equal size and the same things will happen. Companies that have renminbi cash feel that the safest place to put it is in a building.