Down day


China’s economy is a juggernaut, we often hear. It can keep growing forever. After all, it has 1.3 billion people, with a near-bottomless need for goods and services. But in fact, China’s growth miracle is looking a bit bubble-ish these days.

Yes, China’s economy is growing. Last year, China’s GDP grew 6.7%, down from 6.9% in 2015, 7.3% in 2014, and 7.8% in 2013. See the downward trajectory there? Current GDP growth, even if you accept the Chinese government’s self-admittedly phony economic data, is half the growth rate just before the global financial crisis hit.

The problem is, it needs rapid growth to pay off its enormous investments fueled by massive amounts of government credit.

“The real risk that China poses to the U.S. and global economies is that its rapid economic growth since the 2008-2009 global economic recession has been powered by a credit bubble of epic proportions,” wrote Desmond Lachman, an American Enterprise Institute fellow who previously served as a deputy director of the IMF, earlier this year.

What does “epic” mean? By one account, China has expanded credit by nearly 100% of the nation’s GDP since the end of the credit crisis. Since 2007, China has added $24 trillion in debt at all levels, which is more than the U.S. government’s total debt of just under $20 trillion.

It’s fueled an investment boom and excess capacity. The Washington Post in 2015 reported that China used more cement in just two years — 2011 to 2013 — than the U.S. used in all of the 20th century. Let that sink in for a moment. Meanwhile, China now produces five times as much steel as all of Europe each month.

But where are the customers? China built cities without people, malls without customers, and roads without cars, in anticipation that all of those would soon be filled. But many remain empty. China’s population is aging fast, and its growth is grinding to a halt. Still, many of China’s heavily-indebted businesses continue to borrow from government lenders, who have no incentive to stop the game.

One of these days, China is going to need to create a restructuring industry, as we’ve been saying for some time. Just when, nobody knows. And speaking of restructuring…

Leave a Reply