January 31 marked the Chinese New Year (#4712). The Year of the Horse; unfortunately, its early going is beginning to look a little like the Year of the Dog.
China’s GDP growth rate is dropping fairly dramatically, from double-digits in the early 21st Century to 4-5% now. In a mere 20 years, China has moved from a giant, economically sleepy dictatorship, the population of which struggled to feed itself, to today’s dynamic (though government controlled) manufacturing engine that has produced not only a size-able, legitimate middle class but also a Top 1% income group. All of that progress was based on a limitless supply of very cheap labor… China’s vast and rapid awakening to the modern world was just in time to grab a share of the global Tech Revolution. The youth of dirt poor farming families fled in massive numbers to job opportunities in the big cities.
China’s securities market is still viewed as “emerging” by the “developed” world. But, it’s turning out that the most prominent emerging thing about China’s economy is a ton of government debt. In the 1990s, total US federal and local government debt equaled about 1/3 of total world GDP growth, while China’s ratio was only 10%. But, when the 2008 world recession hit, China panicked, fearing that its world-beating growth would suddenly run amok. By 2011-13, China’s debt/ global GDP growth ratio had soared to 36% and was still rising. The US’s ratio had fallen to 19%, despite the fact that, as we all know, the US’s federal public debt had risen from under $10 trillion to $17 trillion after 2008, while the GDP itself was actually stagnating, or shrinking. Even with such a debt-bomb and dismal GDP growth, the US hasn’t yet breached a 100% debt-to-GDP ratio.
China’s debt is now more than 230% of its GDP! A number of economists have published views that public debt loses its leverage, i.e., it becomes an albatross, when it goes above 100% of GDP. The not-so-evident underlying cause of China’s public debt explosion is its local provinces. Local politicians, apparently, had an open option to pump unlimited (borrowed) money into all things structural.
If China is indeed walking near an economic chasm, then the rest of the most prominent emerging markets (Brazil, India, South Africa, Indonesia) are swinging on a thin rope, while Argentina appears to be headed for self-destruction… again. Signs of troubles for China’s currency, not seen in the past, are getting louder. (And, if any major currency weakens, the US dollar will strengthen which will not be good for the economy, although it does form a tailwind for dollar-holders’ international investments.) …
Click here to continue reading the PDF version of the entire White Paper Chinese New Year.