China’s House of Cards

China’s House of Cards, by Steven Mosher.

For the past twenty years, China has kept roughly half of the world’s cranes busy turning wheat fields and peasant huts all over China into skyscrapers. For someone like myself, who first visited China in 1979, the transformation is almost miraculous.

Jin Wan Plaza, in Central downtown Tianjin, 2017

The luster begins to fade when you realize that the land was stolen by rapacious Communist officials from poor workers and peasants who had lived in these huts, and farmed these lands, for centuries. It disappears entirely when you understand that many of these new apartment and office buildings are often nearly devoid of tenants. This means that the soft construction loans that were so generously doled out by the Party’s managers of state-owned banks to their Party comrades who run construction companies will never be paid back.

China’s Xi Jinping should have asked Donald Trump what happens when you overbuild.

Instead, back in at the 2012 Party Congress, the newly installed Party Supremo announced that he intended to double the size of the economy by 2020. The regime’s central planners swiftly calculated that this required an annual GDP growth of 6.5 percent, and ordered everyone to fall in line. In order to hit this target, the state has been recklessly printing money and rolling out debt ever since.

As a result of these practices, the country’s debt has been ballooning in recent years. The Institute of International Finance estimates that “China’s total debt surpassed 304 percent of GDP as of May 2017.”

Knowing something about Chinese accounting practices, I would guess that even this startling number is a gross underestimate.

Consider that most Chinese businesses keep three sets of books. The first two are cooked, one to convince the government that the company owes no taxes, the other to mislead business partners (especially foreign partners) that it is barely turning a profit. The only accurate accounting of revenues and expenses is to be found in the third set, which the proprietor keeps carefully hidden away from prying eyes.

It is a safe bet that many local, city, and provincial governments are fudging the numbers, or keeping bad loans off the books entirely, in the accounting they send up the chain of command to Beijing. …

Trump knows that the Chinese economy is essentially derivative. It feeds parasitically off of the U.S. consumer economy, soaking up $500 billion a year in foreign currency, which it then uses to prop up its failing state-owned enterprises. …

If anyone understands that China is sitting on a mammoth debt bubble of its own making, it is Donald Trump.

Print enough money, and you can make miracles occur as everyone dances to your tune. For a while. But eventually the debts have to be repaid or the money becomes worth less, and the spell fades. During the inevitable hangover, many will question whether it was worth it.

The great credit expansion happened all over the developed world from 1982, but that party ended with the GFC in 2008. Since then governments have made permanent the emergency measures intended to stave off depression — such as near zero interest rates. China is on a different, more recent trajectory, but their rate of credit creation surpassed everyone else’s by a big margin.

hat-tip Stephen Neil