by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Jonathan Laing offers Barron’s readers a disturbing picture of China’s latest economic developments.
U.S. INVESTORS SHOULDN’T put too much stock in the China turnaround story. The government is notorious for inflating its GDP and other growth numbers. It’s a nation that appears to be drowning in too much debt.
Perhaps of greatest moment, Beijing in the first quarter seemed to panic, shoving nearly $1 trillion in new credit into the Chinese economy. That’s an epic amount for any economy, especially in a nation with a GDP of $10 trillion. The liquidity boost is the largest quarterly credit surge on record.
So for all the talk of Beijing restructuring away from an industrial and into a consumer-based economy, China seems to be resorting to an old model of debt-fueled growth that has seen its debt-to-GDP ratio surge from around 150% to well over 300% since 2008. This calculation of the ratio—higher than some other estimates—was made by Victor Shih, an associate professor at the University of California, San Diego, and an expert on the Chinese financial system. This ratio exceeds by a wide margin the debt burden of most developing economies.
China is paying the price for the past six years of malinvestment that resulted in mountain ranges of empty apartment buildings, vanity infrastructure projects comprised of unused highways, bridges, and exposition centers, and redundant industrial capacity. These projects yielded temporary GDP boosts during construction, but then lapsed into the netherworld of nonperformance, unable to generate the cash flow necessary to service underlying debt.
As a result, bad credit abounds, largely hidden from sight by loans that are “evergreened” and capital infusions from government-related entities to hide defaults. Perhaps hedge fund legend George Soros posed the issue most baldly in a statement he made a few weeks ago at New York’s Asia Society. He raised the possibility of the Chinese economy enduring a hard landing in the near future. He said the debt problem in the Chinese economy “eerily resembles what happened during the financial crisis in the U.S. in 2007 and 2008, which was similarly fuelled by credit growth…Most of the money that banks are supplying is needed to keep bad debts and loss-making enterprises alive.”