To stimulate the economy, Chinese regulators are forcing Chinese banks to meet high lending quotas.
(Editor’s note: Watch the author of this expert analysis, Gordon Chang, editor of 19FortyFive, on Fox News, discuss the tensions with China.)
To achieve elusive goals, resourceful bankers simultaneously lend and allow borrowers to deposit identical amounts with their institutions at identical interest rates.
Companies no longer want money to launch new projects. Pessimism about the economy dominates thinking in Chinese corporate boards and the rest of society.
The big story is not that the Chinese economy is collapsing. This is the case, at least outside the export sector. The big story is that China’s stimulus efforts, so successful in the past to revive growth, are no longer working. The country’s economy is, in a word, exhausted.
In the past, when the economy looked tired, China’s business community could rely on the central government to create growth with massive stimulus packages. This is, after all, how former Premier Wen Jiabao staved off contraction in China as the rest of the world suffered in the 2008 recession.
Wen has grown tall. In the half-decade beginning in 2009, Beijing added an amount of credit equal to that of the entire US banking system. The Prime Minister flooded an economy that at the end of 2008 was not even one-third the size of the United States.
Wen has grown too tall. Anne Stevenson-Yang of J Capital Research tells me that the Chinese have long compared their country to a train whose last carriage is on fire. The train has to go fast to make sure the flames blow backwards. As soon as the train slows down, the flames engulf the passenger cars.
“It’s China and the debt,” Stevenson-Yang, also author of China alone: coming out of isolation and potential return to isolation, said. “If you add enough money to the system, you can continue to refinance old debt, but you have to add money exponentially.”
The country has gone into debt exponentially, perhaps creating debt about seven times faster than it has produced nominal gross domestic product.
Nobody knows how much debt China has accumulated, but the country’s total debt could amount to an amount equal to 350% of GDP. Due to Beijing’s infamous “hidden debt” and misrepresentation – exaggeration – of economic output, the percentage could even be higher.
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No matter how big the debt, China’s top leaders face problems they can’t solve, as evidenced by, among other things, defaults by major property developers, the so-called “mortgage boycotts » owners refusing to repay their loans and bank runs.
The Communist Party knows — and has known for a long time — that the game cannot go on forever. Wen Jiabao himself spoke in 2007 about what has become known as the “Four Ones” of the economy. Growth then was, he said, “unstable, unbalanced, uncoordinated and unsustainable.”
What happens now?
Wen’s successor, Premier Li Keqiang, announced in March a growth target of “around 5.5%” for 2022, but senior leaders are now telling ministry and provincial officials that figure is only an “orientation” and not a “difficult objective”.
Official figures from Beijing suggest that the lowering of expectations is an acknowledgment of reality. The National Bureau of Statistics reported growth of 4.8% in the first quarter of this year and 0.4% in the second.
Most analysts simply assume that growth will decline moderately in the coming years. However, this assessment seems wrong. “We would not only return to the sustainable growth rate, but we would also reverse much of the previously unsustainable growth,” said Michael Pettis of Peking University’s Guanghua School of Management. predicted in a tweet from September 3.
Pettis, also a senior fellow at the Carnegie Endowment for International Peace, politely suggested with his tweet that China’s economy would enter a long period of contraction. Given the country’s massive debt overhang, a slowdown actually means a crisis.
Last fall’s failure of the Evergrande Group, which effectively triggered further defaults in the crucial real estate sector, is a warning of what is to come across the country.
Beijing is now trying to avoid the slowdown and analysts are happy that Beijing is taking various measures to create a gross domestic product. At a State Council meeting late last month, Premier Li said the central government’s stimulus programs were “more aggressive” than those in 2020. He also called the programs of “reasonable” and “appropriate”.
Li released his comments after announcing a 19-point plan, which included more than 1 trillion yuan ($145 billion) in funding.
As Bloomberg reported, the Prime Minister’s announcement was met with skepticism by economists. However, you don’t have to be an economist to worry. It is obvious that spending more money on non-productive investments cannot avert a crisis for long.
After all, fire, as Stevenson-Yang might say, engulfs the passenger cars of the train called China. There is no longer any hope that the country can avoid one of the greatest economic crises in history.