Big Trouble in Big China
In comparison with those of Western economies, China’s countermeasures against the 2008 financial crisis were more drastic. While in the United States the balance sheet of the banking system increased by $4 trillion in the years after the global financial crisis, the balance sheet of the Chinese banking system expanded by $20 trillion in the same period. For reference, this is four times the Japanese GDP.
Too Much Debt
The most recent crisis does teach us, however, that the Chinese are prepared to take drastic measures if necessary. China fought the financial crisis by flooding the credit markets through the state-run banking system. In one year, total credit grew by as much as 35 percent on the basis of a classic Keynesian spending program.
This money not only inflated a property bubble domestically but also around the globe (e.g. in Sydney and Vancouver), although further support for the global property markets is now in question, given some restrictive measures. Due to financial problems, Chinese financial companies like Anbang and HNA will have to swap the role of buyer for that of the seller.
But this is not the end of the story. The IMF is forecasting another doubling of total Chinese debt outstanding, from $27 trillion in 2016 to $54 trillion in 2022. By comparison, in 2016, China’s GDP was $11 trillion. From our point of view, this development—which we can also see in the West on a smaller scale—is unsustainable.
In its most recent report, “Credit Booms – Is China different?”, the IMF states that in 43 cases worldwide of strong credit growth (i.e. the ratio of credit to GDP grows more than 30 percent over five years), only five cases ended up without a significant slowdown or a financial crisis.
The IMF also points out that no expansion of credit that started at a debt-to-GDP ratio above 100 percent of GDP ended well. It is worth noting that China has a high percentage of domestic as opposed to foreign debt, which definitely makes matters easier for the country. But the question is, will it be different for China this time?
Trade Wars and Demographics
If necessary, China could stir up anti-Western sentiment in order to implement measures that are hard on its own population, even if they are unpopular.
The 19th-century Opium Wars China fought with England are deeply rooted within the collective memory of the Chinese people, historical events of great importance as are the punitive tariffs imposed by the United States in history.
The buck would, of course, stop with the Americans. And American politicians could shoot themselves in the foot with an escalation of the trade war, as the ability to involuntarily bear hardships of Chinese society is stronger than of American society.
Maybe China loses more but Americans will feel it more and care more about it. And they have a tool to vent their anger, whereas the Chinese—ruled by a totalitarian regime—do not.
Demographics look less favorable. The World Bank forecasts a population peak of 1.4bn for China in 2028. The decline in population predicted to set in around that time should proceed at a similar pace as the increase towards the peak.
The fit-for-work population (aged 16 to 59) has been decreasing since 2012, and is expected to decline by almost 25 percent to 700 million by 2050. Thus China, much like the West, has the problem of an aging population.
Unlike his Western competitors, China’s new strongman, Xi Jinping, can implement his long-term strategy in a targeted and gradual fashion. Xi explicitly underlined his goal of asserting China’s interests in the world by referring to military, economic, political, and diplomatic means in his speech at the National Congress in October 2017. He left no doubt that China was not willing to compromise in any shape or form with regard to its territorial integrity (N.B. Taiwan, Hong Kong, Tibet), and he issued point-blank threats against separatist tendencies. However, the transformation of the economy could (intentionally or otherwise) cause economic distortions not only in China but globally.
But recent years have been dominated by a massive expansion of credit. In fact, it is often said that China has blown the biggest credit bubble in history.
It seems there are greater similarities between China and the United States than may be visible at first glance. China builds real estate for a shrinking population, invests for an overindebted client (United States) and finances all this with money it does not have.
Unfortunately, these similarities don’t bode well for financial stability across the globe.
Ronald-Peter Stöferle is managing partner and portfolio manager at European asset management firm Incrementum AG. This article was first published at Mises.org.