If there has been one prediction made more than any other over the past couple of decades, it’s that China’s miraculous economy is headed for a fall. China bears have pointed to a long list of disasters-in-the-making, from questionable economic statistics to skyrocketing real-estate prices to ghost cities to centrally planned growth to corruption to pollution to civil unrest to debt. And yet, despite all of these concerns, China’s economic machine has just kept chugging along.
But this time it’s going to be different!, says an analyst from Fitch. This time, China really is screwed.
According to Ambrose Evans-Pritchard of the Telegraph, Fitch analyst Charlene Chu has concluded that China’s growth is being fuelled by a credit bubble that is unlike anything the modern world has ever seen. This debt bubble is leading to massive overbuilding, Chu says. And when it finally bursts, as debt bubbles always do, China will be looking at a Japan-style depression and deflation. Given the number of China doom prophesies that have been made over the past two decades, you can be forgiven for rolling your eyes at this one and moving on. But Chu does cite some startling statistics, including the claim that China’s debt-to-GDP ratio has quietly shot up to more than 200% and that each additional yuan borrowed is producing ever less growth. If there’s any hard law of finance, it’s that what can’t go on forever won’t. And borrowing at this rate relative to economic growth can’t go on forever. That said, as always, the key question is “when?” At some point, China’s economy is almost certainly going to go through the same sort of violent setbacks that every economy goes through, including the economy with which China’s is compared–the U.S. economy. The growth of the U.S. economy over the past century has been nothing short of miraculous. But it has been anything but a smooth ride. Amidst its decades of expansion, the U.S. has gone through several decade-long periods of depression and stagnation, often following debt buildups just like the one China appears to be experiencing. In fact, the U.S. economy is still struggling to move past its latest debt-fuelled bubble, the housing boom that turned to bust five years ago and took the country down with it. If China manages to avoid this boom-bust pattern forever, the country’s resurgence really will be miraculous. And what is likely to send the Chinese economy into its own depression is exactly the sort of debt buildup that Chu describes. But booms often last much longer than most analysts think they can. And unless or until we know exactly when China’s boom will end–which, if history is a guide, we won’t know until after the fact–it’s hard to make decisions based on this forecast. Yes, at some point, China’s economy will crack. Alas, no one knows when.
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