Postponing the pain could prove costly for China
Growth cannot be sustained by increasing indebtedness indefinitely
By Martin Wolfe
Must China’s borrowing binge, like most others, end in tears? This is a hotly debated topic. On one side are those who predict a “Minsky moment” – a point in the credit cycle at which, as Hyman Minsky foretold, panic grips the financial system. On the other are those who insist China’s debt mountain poses no threat to economic growth: the authorities say it will be above 7 per cent and above 7 per cent it will be. Which side is right? Neither, is my answer. China will not have a financial meltdown. But the end of its credit addiction will lead to lower growth, properly measured.
Three facts about recent economic developments seem clear. First, if you take the official statistics at face value, China’s net exports shrank from 8.8 per cent of gross domestic product in 2007 to 2.6 per cent in 2011. This was offset by a jump in the share of investment in the same period, from 42 per cent of GDP – already high – to 48 per cent. There are reasons to doubt reported levels of investment, but it is less reasonable to question its abrupt rise.
Second, linked with the rise in the share of investment was an explosion in credit and debt. According to the International Monetary Fund, by the final quarter of last year total “social financing”, as Chinese authorities describe it, reached 200 per cent of GDP, up from only 125 per cent before the crisis. Moreover, much of this increase had been outside traditional banking channels. Instead, there has been explosive growth of what one might call a “shadow banking system with Chinese characteristics”. This does not rely on the complex securitisations or wholesale markets now notorious in the west, but on new intermediaries, such as trusts, and innovative instruments, such as “wealth-management products”. According to Fitch, credit outstanding to the private sector is now as big, relative to GDP, as it was in the US in 2007.
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As you can see by now, that we are not the only one s waiting for the bubble to burst here. The rippling effects are certain to be world-wide and it has the potential to make the 2008 Meltdown look like a dwarf's sneeze. This Godzilla may be bound for intensive care. When you think about 70 trillion in debt put in terms of physical assets it seizes the mind. We figured about 60% of the world's oil reserves. You can figure the rest out from there.
Shadow banking or boxing with Godzilla - both activities clearly have dangerous health concerns.
Investors' Insights
April 3, 2014
As you can see by now, that we are not the only one s waiting for the bubble to burst here. The rippling effects are certain to be world-wide and it has the potential to make the 2008 Meltdown look like a dwarf's sneeze. This Godzilla may be bound for intensive care. When you think about 70 trillion in debt put in terms of physical assets it seizes the mind. We figured about 60% of the world's oil reserves. You can figure the rest out from there.
Shadow banking or boxing with Godzilla - both activities clearly have dangerous health concerns.
Investors' Insights
April 3, 2014
