China’s debt-fueled turbo growth will end in tears
The old ‘Yellow Peril’ with its racist undertones and vision of the ‘Golden Horde’ sweeping towards Europe may have been a thing of the past, but a new one is taking it place. This one is a debt crisis which threatens to take China down.
We have all marveled at the economic miracle which has taken place in formerly backward China during the last thirty years. It is now the world’s second largest economy, and if its double-digit growth continues for one more decade it will overtake the mighty United States. But a very big if hangs over that prospect.
The phenomenal growth that China has enjoyed in recent years has been based on debt – astonishing and unsustainable debt. To make matters worse, it is mired in corruption on an equally gargantuan scale.
One of the prices we in the West have had to pay for China’s breakneck progress is to see many of our traditional industries relocate to the low-wage, low-overheads Far East. The flood of cheap consumer goods helped the West keep inflation down – at the price of seeing its own unemployment rise.
Yet all was apparently well until the banking crisis struck in 2008 and the West stopped buying – at least in the quantities it had. China faced ruin. It had two options: it could either invest heavily in infrastructure and property (it had millions to house who had flooded into the cities) or it could turn its people into a consumerist society modeled on the West and sell to itself – God knows there are enough of them. It chose overwhelmingly the first.
Unfortunately no one knows how to get the Chinese to spend on themselves. It may be this is because there is no safety net of a welfare state to sustain people either in old age or in sickness, so they have to do it themselves and save a much higher proportion of their earnings to make good this shortcoming. They decided not to put their savings under their beds but to invest it in property and to a lesser extent in factories. Unfortunately this launched a runaway property boom. Stupidly this was at the higher end of property market so that the average apartment came out at £300k – 70 times what the average factory worker earned. Consequently, while there are scores of millions in the cities desperately wanting to get out of sub-standard and crowded accommodation, they cannot afford to buy. A similar glut of unwanted factory units has taken place.
This was at the time the Chinese government had ordered its state run banks to open their wallets wide and lend. And, boy, did they obey orders. The result is a debt crisis of unimaginable proportions and one which is set to grow exponentially. The Communist government is at a loss to know what to do about it and still maintain power in a one party state.
It has long been thought an anomaly that a Marxist state can stay communist while operating a capitalist system. The reason the Chinese have so far pulled it off is they have markedly raised the standard of living in the cities – though they have neglected the countryside. This has bought the party time in a country which elevates stability above everything and avoided people taking to the streets demanding more political freedoms. The hypocrisy of the party in abandoning Marxist economics to gain the fruits of the super-abundant capitalist table is breathtaking. China’s volte-face has allowed the party to stay in power while the USSR collapsed. It has delivered materially where the Soviets did not. But the capitalist system which Beijing let rip has none of the constraints and rule of law which developed over centuries in the West.
The ‘entrepreneurs’ which it put in place to run its factories and the like did not earn their spurs through the fierce blast of competition; they were placemen and apparatchiks who had no experience of business. They set about lining their pockets with shady deals and kickbacks which would cause Marx to turn in his grave. And because the system is run by the party faithful right across the country, from the very top all the way down to the lowest jobsworth, there is no chance of reforming it.
The party bosses in Beijing are waking up not just to the enormity of the task ahead of them to address this but to their debt crisis. They are telling their factory managers that the centre can longer subsidise their inefficiencies. They are going to have to lay off tens of millions who will be forced to return to their poverty-stricken countryside homes, many of which have been forcibly taken over by the state for land development. It is a recipe for insurrection.
Already the West is seeing many of the jobs which went to the Far East being repatriated because the economics have changed: Chinese workers have demanded, and got, big pay increases as well as better working conditions. All this costs money and the result is that the Chinese competitive edge is being eroded year by year.
When the West’s financial crisis struck in 2008, we were all enormously relieved that the world economy, chiefly driven by China, kept on growing, albeit it at a smaller pace. Now China must hope that the West’s efforts to restore order in its own financial house will be completed in time to alleviate its own coming time of distress. One pundit opined the Chinese are where we were in 2005-6, so there’s not much time. However, we must never forget that China remains a totalitarian state.
In seeking to restore its finances it has none of the experience and sophisticated tools at its disposal which Wall Street and the City have. If things go wrong, it is liable to lash out in frustration and seek a foreign adventure to rally the people and take their minds off their troubles at home. Galtieri did it over the Falkland Islands and China may well do it over those oil rich islands in the South China Sea.