10: The Coming Depression in China
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.
– from Economic Reform, December 2004