10:   The Coming Depression in China

David Gracey

Lately the business press has been  salivating over the Chinese  economic miracle – double digit  growth for a decade, a huge trade  surplus, booming real estate and  manufacturing, etc. The Globe and Mail  recently devoted an entire edition to  China.

Most of the coverage is of the cheer-leading sort. Here’s the next super  tiger economy. Don’t miss this  opportunity! There is the occasional  nod to problems and divisions in  Chinese society such as the lack of  democracy and human rights, but the  general tone is strongly positive.

For a different (and more realistic)  assessment of China we have Russian  economist Krassimiv Petrov  (www.gloomdoomboom. com). He  sees an economic bubble building in  China, similar to the one in Japan in  the 1980s. As always, the Chinese  bubble is derived from a huge credit  expansion. The Chinese money  supply, according to the Chinese  central bank, rose from 11.89 trillion  yuan in January 2001 to 22.51 trillion  yuan in January 2004 – almost a 100%  increase. This is greater than the credit  expansions that preceded the Great  Depression in the US, and the Japanese depression of the 90s. Lately the  Chinese central bank has attempted to  dampen the boom by raising interest  rates and restricting credit to certain  sectors, but these measures appear to  be having little effect (The Globe and  Mail, Oct. 30). Petrov predicts that the  bubble will inevitably burst by 2008,  and the great Chinese depression will  ensue.

The effects will be felt here. The  credit expansion has helped maintain a  low exchange rate for the Chinese  currency, which in turn has fuelled a  huge trade surplus. The US has a vast  trade deficit with China, but that is  covered in part by the Chinese  purchases of US debt. A Chinese  depression will, of course, end this  symbiotic relationship and the US  economy will plunge into depression  as well as China is forced to repatriate  its US assets.

Petrov postulates an exact parallel  between the current US – Chinese  relationship and that which existed  between the US and Britain/Europe  in the 1920s. At that time Britain was  an overstretched imperial power (as  the US is today) trying to maintain a  strong currency but heavily dependent  on borrowing abroad. The US ex- tended loans to Europe in order to  maintain demand for US exports (like  China today) but most of the loans  were unsound, and could not be  repaid. So the bubble inevitably burst  and the Great Depression followed.

Of course the root of the problem  then as now is a monetary system that  facilitates such a credit expansion and  its subsequent collapse. The Chinese  banks, like their Japanese counterparts  in the 80’s, have been pouring money  into real estate and the other expanding sectors. These loans are  predicated on continual high rates of  growth. When the growth slows or  stops, many of the loans become  “non-performing.” The banks are  forced to retrench and the money  supply falls. It is a pattern that repeats  endlessly with disastrous consequences  yet, when the crash comes, you can be  sure that the media will advance any  number of explanations that have  nothing to do with the root cause.

David Gracey

– from Economic Reform, December 2004