The Chinese economy is heading for one of the biggest meltdowns ever
To stimulate the economy, regulators in China are forcing Chinese banks to meet high loan quotas.
(Editor’s note: Watch this expert analysis author, 19FortyFive contributing editor Gordon Chang, on Fox News discuss tensions with China.)
To achieve hard-to-achieve goals, adept bankers lend and at the same time allow borrowers to deposit similar amounts with their institutions at identical interest rates.
Companies no longer want the money to launch new projects. Pessimism about the economy dominates thinking in Chinese boardrooms and throughout society.
The big story is not that the Chinese economy is collapsing. It is, at least regardless of the export sector. The big story is that China’s stimulus efforts, which in the past have spurred growth, are no longer working. The country’s economy, in short, is exhausted.
In the past, when the economy looked overwhelmed, China’s business community could count on the central government for growth through massive stimulus programs. This is, after all, how former Premier Wen Jiabao avoided deflation in China as the rest of the world suffered during the economic downturn in 2008.
Wen went big. In the half-decade beginning in 2009, Beijing added an amount of credit equivalent to that in the entire US banking system. The prime minister flooded an economy that at the end of 2008 was not even a third of the size of the American economy.
Wen went too big. Anne Stevenson-Yang of J Capital Research tells me that the Chinese have long compared their country to a train that caught fire in its last car. The train must move quickly to ensure that the flames are exploding backwards. As soon as the train slows down, passenger cars are engulfed in flames.
Stephenson Yang, author of This Is China and Debt China Alone: Emerging from Isolation and a Possible Return to it, Says. “If you add enough money to the system, you can continue to refinance the old debt, but you have to add money significantly.”
The country was heavily indebted, possibly creating debt about seven times faster than it was producing nominal GDP.
No one knows how much debt China has accumulated, but the country’s total indebtedness could be as high as 350% of GDP. Because of the notorious “hidden debt” and Beijing’s misreporting – exaggeration – of economic output, the ratio could be even higher.
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Regardless of the size of the debt, senior Chinese leaders face problems that they cannot solve, which is evident, among other things, defaults by large property developers, the so-called “mortgage boycott” of homeowners who refuse to repay loans, operations banking.
The Communist Party knows – and has known for a long time – that the game cannot go on forever. Wen Jiabao himself spoke in 2007 of what became known as the “Four Uns” of the economy. He then said that growth was “unstable, unbalanced, uncoordinated and unsustainable”.
what is happening now?
Wen’s successor, Premier Li Keqiang, announced in March a 2022 target for “about 5.5%” growth, but senior leaders are now telling ministerial and provincial-level officials that the figure is just a “guideline” rather than a “hard target”.
Official figures in Beijing suggest lowering expectations is an admission of reality. The National Bureau of Statistics announced growth of 4.8% in the first quarter of this year and 0.4% in the second quarter.
Most analysts only assume that growth will decline moderately in the coming years. But this assessment appears to be wrong. “Not only will we return to a sustainable growth rate, but we will also reverse a lot of the previously recorded unsustainable growth,” said Michael Pettis of Peking University Guanghua School of Management. In a tweet on September 3.
Pettis, who is also a senior fellow at the Carnegie Endowment for International Peace, politely suggested in his tweet that the Chinese economy would start a long period of deflation. Given the country’s huge debt burden, a slowdown actually means a crisis.
The failure of Evergrande Group last fall, which effectively led to other defaults in the important real estate sector, is a warning of what is to come across the country.
Beijing is now trying to avoid an economic downturn, and analysts are very concerned that Beijing is taking various measures to create GDP. Prime Minister Lee said at the end of last month at a meeting of the State Council that the central government’s stimulus programs are “more robust” than those of 2020. He also described the programs as “reasonable” and “appropriate.”
Li made the remarks after announcing a 19-point plan that includes financing more than 1 trillion yuan ($145 billion).
As reported by Bloomberg, the prime minister’s announcement was met with skepticism from economists. However, one does not need to be an economist to be concerned. It is clear that spending more money on unproductive investments cannot avoid a prolonged crisis.
After all, the fire, as Stevenson Yang might say, engulfs the passenger cars of the train called China. There is no hope now that the country will be able to avoid one of the greatest economic crises in history.
Expert biography: 19FortyFive Contributing Editor, Gordon J. Chang, author of The Coming Collapse of China and the Great Technological War between the United States and China. Follow him on Twitter Tweet embed.