The China Syndrome

Here comes the next crisis, and it’s stamped “Made in China.”

WSJ has the story:

The problem is that China’s economic rise of late has been facilitated by a massive and unsustainable stimulus campaign. No emerging nation in recorded history has ever tacked on debt at such a furious pace as China has since 2008, and a rapid increase in debt is the single most reliable predictor of economic slowdowns and financial crisis. China’s debt as a share of its economy increased by 80 percentage points between 2008 and 2013 and currently stands at around 300%, with no sign of abating. Beijing policy makers have been trying to sustain an unrealistic and randomly selected growth target of 7% by steering cheap loans into one bubble after another—first housing, most recently the stock market—only to see each bubble collapse.

These setbacks set the stage for Beijing’s surprise devaluation of the yuan. Foreign-exchange reserves have fallen from $4 trillion to $3.65 trillion over five quarters, and around half of that $350 billion decline represented hot-money outflows, which is largely money being taken out by Chinese companies and residents. This vote of no confidence put downward pressure on the economy and, along with falling export growth, forced the surprise devaluation.


No surprises here — we’ve all been watching China for years now, try and fail at switching from an export-driven economy to a consumer-demand economy. It’s a transition China must make, because there’s a ceiling on the dollar value of Chinese exports which the rest of the global economy can afford to buy. After hitting that ceiling, China’s future growth rests in the hands — or rather the open wallets — of its middle class.

This next point can’t be stressed enough.

Beijing is a one-party government, and one-party governments do not and cannot engender the kind of trust in its people and hope for the future which a consumer-driven economy requires. We in the West spend freely, knowing (or at least we used to know) that we can kick the bastards out when we need to. Chinese have no such knowledge, which in part accounts for their abnormally high savings rate.

They won’t loosen their wallets until Beijing loosens the reins — all the rest is just details.


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