Is the Chinese Economy Sputtering for the Same Reasons as the American Economy?

Published on Global Research.ca, by Washington’s Blog, June 25, 2011.

It was tempting to believe that China was different.

With its command and control economy with some of the trappings of free market capitalism, trillions in reserves, and abundant natural resources, many thought that China would “decouple” from the Western world’s problems and sail into a prosperous future.

However, despite its long history, exotic names and seemingly strong position, China cannot avoid the rules of economics which have applied to all countries throughout history.

Corruption and Phony Bookkeeping: … //

… Debt … In China?

Westerners are also familiar with the debt problems of Western countries like Greece, Spain and the U.S.

But as CNN Money noted in 2009:

On the surface, China presents a fiscal study in contrast with the United States, keeping a remarkably low ceiling on debt even as it spends its way out of the financial crisis.

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The trouble is that excludes local government borrowing, the current surge in loans backstopped by Beijing and bad assets cleared from the banking system but still floating about.

When all are thrown into the pot, analysts estimate that China’s debt may be closer to 60% of GDP, putting it in virtually the same league as the United States, which was at 70% at the end of 2008 before it launched its massive economic stimulus program.

To be sure, Washington is now set on a path of exploding debt that Beijing will largely avoid. [And China is somewhat more shielded from derivatives than the U.S.] The United States budgeted for a federal deficit of 12.9% of GDP this year, whereas China is aiming for just 2.9%. [And to the extent that China practices more public banking than the U.S., it might be able to create more credit without having to pay high interest rates to its private banks in the process.]

But China’s finances are deteriorating more quickly than the government expected, fueling a rise in the stock of both explicit and disguised debt that will constrict its wriggle room.

“It is serious because, one, much of it is hidden and, two, local governments are currently doubling down on their bets,” said Stephen Green, economist at Standard Chartered Bank in Shanghai. “As with all fiscal deficits, it limits space for further stimulus.”…

Above and beyond that are 400 billion yuan in bad loans in banks’ hands and at least 1 trillion yuan in non-performing debt hived off their books and assigned to asset management companies. The buck stops with Beijing on all of these.

The record surge in bank lending this year means that its sum of liabilities is about to swell in size.

MarketWatch noted in May 2010:

China’s economy is teetering on the edge of a major slowdown … according to a noted China strategist.

David Roche, an economic and political analyst who manages the Hong Kong-based hedge fund Independent Strategy, says the world’s third-largest economy is now on the brink, faced with the inevitable reckoning that follows an extended bank-lending binge.

“We’ve got the beginnings of a credit-bubble collapse in China,” said Roche, predicting the economy will likely cool from its stellar double-digit growth rate to a 6% annual expansion as a result.

While that may not sound bad, Roche believes the collateral damage from the cooling will be anything but mild, as the banking sector comes under pressure from cumulative years of bad investment and mispriced capital.

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As Northwestern University’s Victor Shih points out, the Chinese government will slowly reveal more and more of the true ratio of bad loans to good loans, and raise its figures for local government debt. Shih says that recapitalizing Chinese banks to cover losses for the bad loans will eat up more and more of China’s reserves.

The Telegraph noted last June:

China’s chief auditor has warned that high levels of local government debt could derail the country’s economy, with some observers suggesting that a number of Chinese provinces are even more fiscally-troubled than Greece. (full long text).

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