China: Gyrating Erratically
China has been an important driver of global economic growth for at least two decades, but when the United States went into crisis in 2008, China became THE driver of global growth. Between 2008 and 2014, Chinese bank loans increased by 2.7 times and Chinese imports soared by 75%.
Last year, however, China’s great economic boom came to an end. Imports into China contracted by 17%. Consequently, global commodity prices crashed and numerous commodity-producing countries, such as Brazil, went into severe recession. Now, rather than driving global economic growth, China has become a very heavy drag on global growth.
China’s economy has begun to resemble a spinning top that is running out of momentum. It is wobbling and gyrating erratically. A stock market crash, diminishing returns on credit, a plunge in imports, capital flight and currency volatility are all signs that China’s great economic boom is now coming to an end. In all probability, this is just the beginning of what is likely to be a very protracted economic slump.
Because of China’s importance to the rest of the world, I have begun work on a series of Macro Watch videos that will explain the nature of the economic crisis now unfolding in China. I will summarize some of the most important findings of that work here.
The Chinese “economic miracle” was fuelled by extraordinarily rapid credit growth over the last 25 years. The first video in this series (which has already been uploaded onto the Macro Watch website) describes how that credit was financed. By analyzing China’s Balance Of Payments and the policies of the People’s Bank Of China, it identifies the sources of the money that financed the boom. The principal source was China’s trade surplus. That may not come as a great surprise. However, it is important to understand that China’s very large trade surpluses could not have been sustained had China’s
central bank not “printed” the equivalent of nearly US$4 trillion and used it to artificially hold down the value of China’s currency.
The next video in the series will show how that credit was used, or “where the money went”. To be concise, it went to finance the greatest investment boom the world has ever seen – investment in steel, cement, chemicals, energy, agriculture, textiles, machinery and every other industry, plus investment in infrastructure and residential and commercial real estate, all on a mind-boggling scale.
The third video in the series will discuss the two insurmountable constraints that are bringing Chinese growth to an end. The first is the impossibility of continuing to finance the increasing amount of credit that would be necessary to keep this investment boom expanding. The second, and even more binding, constraint is insufficient aggregate demand to absorb the growth in output. China already has tremendous excess capacity across every industry, which neither the export market or the domestic economy has the purchasing power to acquire. Consequently, product prices are falling, companies are loss making and non-performing loans are soaring. At this stage, the more China invests, the more money it loses.
China’s economy need not collapse into a Chinese Great Depression to produce a global economic crisis, although the possibility of economic collapse in China cannot be ruled out. The 17% contraction in Chinese imports last year was already enough to tip the global economy into recession. The consequences of the economic hard landing now occurring in China will be felt in ever corner of the world.
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