(Editor’s Note: Watch the author of this expert analysis, 19FortyFive Contributing Editor Gordon Chang, on Fox News discussing tensions with China.)
To hit the difficult-to-attain targets, ingenious bankers are lending and simultaneously allowing borrowers to deposit identical amounts with their institutions at identical interest rates.
The big story is not that the Chinese economy is falling apart. It is, at least apart from the export sector. The big story is that China’s stimulus efforts, so successful in the past in jumpstarting growth, are no longer working. The country’s economy is, in a word, exhausted.
In the past, when the economy look fatigued, China’s business community could count on the central government to create growth with massive stimulus programs. That is, after all, how former Premier Wen Jiabao avoided contraction in China as the rest of the world suffered during the 2008 downturn.
Wen went big. In the half decade beginning in 2009, Beijing added an amount of credit equal to that in the entire U.S. banking system. The premier flooded an economy that at the end of 2008 was not even a third the size of America’s.
Wen went too big. Anne Stevenson-Yang of J Capital Research tells me that the Chinese have long compared their country to a train whose last car is on fire. The train has to go fast to make sure the flames blow backwards. As soon as the train slows, flames engulf the passenger cars.
“That is China and debt,” Stevenson-Yang, also author of China Alone: The Emergence from and Potential Return to Isolation, says. “If you add enough money to the system, you can keep refinancing the old debt, but you have to add money exponentially.”
The country has been exponentially incurring indebtedness, perhaps creating debt about seven times faster than it has been producing nominal gross domestic product.
Nobody knows how much debt China has accumulated, but total country indebtedness could be an amount equal to 350% of GDP. Because of the infamous “hidden debt” and Beijing’s misreporting—exaggeration—of economic output, the percentage could even be higher.
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However much debt there is, senior Chinese leaders are facing problems they cannot solve, something evident from, among other things, defaults by large property developers, the so-called “mortgage boycotts” of homeowners refusing to pay loans, and bank runs.
The Communist Party knows—and has known for a long time—the game could not go on forever. Wen Jiabao himself in 2007 talked about what has become known as the economy’s “Four Uns.” Growth then, he said, was “unstable, unbalanced, uncoordinated, and unsustainable.”
What happens now?
Wen’s successor, Premier Li Keqiang, in March announced a 2022 goal of “around 5.5%” growth, but senior leaders are now telling ministerial and provincial-level officials that the figure is mere “guidance” and not a “hard target.”
Beijing’s official numbers suggest that the lowering of expectations is a recognition of reality. The National Bureau of Statistics reported 4.8% growth in this year’s first quarter and 0.4% in the second.
Most analysts just assume growth will moderately decline in the years ahead. That assessment looks wrong, however. “We would not just be reverting to the sustainable growth rate, but we would also be reversing much of the previously recorded unsustainable growth,” Michael Pettis of Peking University’s Guanghua School of Management predicted in a September 3 tweet.
Pettis, also a senior fellow at the Carnegie Endowment for International Peace, has politely suggested with his tweet that China’s economy will begin an extended period of contraction. Given the country’s massive debt overhang, a slowdown in reality means a crisis.
Last fall’s failure of Evergrande Group, which effectively triggered other defaults in the crucial property sector, is a warning of what will happen country-wide.
Beijing is now trying to avoid the downturn, and analysts take heart that Beijing is adopting various measures to create gross domestic product. Premier Li at the end of last month at a State Council meeting said the central government’s stimulus programs are “more forceful” than those of 2020. He also called the programs “reasonable” and “appropriate.”
Li issued his comments after announcing a 19-point plan, which included funding of more than 1 trillion yuan ($145 billion).
As Bloomberg reported, the premier’s announcement was greeted with skepticism from economists. One does not need to be an economist to be worried, however. It’s obvious that the spending of more money on nonproductive investments cannot avoid a crisis for long.
After all, fire, as Stevenson-Yang might say, is engulfing the passenger cars of the train called China. There is now no hope the country can avoid one of the biggest economic crises in history.