£1.6 trillion Chinese debt crisis that could sink us all

EBy Hugo Duncan

VERY day around 1,300 cars roll off the production line at Britain’s biggest car plant in Sunderland.

The Nissan factory has been one of the country’s great success stories.

The cars churned out by the 6,700 staff don’t just stay on these shores, but are exported all around the world in what has become a motor export boom.

But suddenly, though the UK seems to be shrugging off the concerns about Brexit, there are worries about the future – and they’re coming from halfway round the world. That is because the economic slowdown in China poses a threat to every car plant in the UK – and many more businesses besides.

China has become a voracious buyer of all things British – from cars, precious metals and plastics to pork reared on UK farms, Scottish salmon and whisky.

Exports of British goods to China have risen sharply over the last two decades, jumping from £877m in 1998 to £15.5bn in 2014, making the country the UK’s sixth biggest market.

But sales to China of goods stamped ‘Made in Britain’ fell 22pc in 2015 to £12.1bn with car exports down a thumping 37.5pc.

Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders, warns that car makers face ‘export challenges’ from China. These challenges could be about to get worse. Ken Rogoff, a leading economist, yesterday warned that China now poses the biggest threat to the global economy as its debts rise at break-neck speed.

‘There is no question, China is the greatest risk,’ says the 63-year-old American, the former chief economist at the International Monetary Fund who is professor of economics at Harvard University. ‘China has been the engine of global growth. China has been really important. But it is going through a big political revolution. And I think the economy is slowing down much more than the official figures show.’

Figures published by the authorities in Beijing show that the Chinese economy grew by 6.9pc in 2015 – the slowest rate of expansion for 25 years and down from 7.3pc in 2014. The IMF is forecasting growth of 6.6pc this year and 6.2pc next year – although these predictions are likely to be revised next week when the watchdog publishes its latest World Economic Outlook in Washington DC.

But it is widely thought that the official figures – and the IMF forecasts – over state the strength of what is now the world’s second largest economy behind the US.

Capital Economics reckons the Chinese economy grew by just 4.2pc last year and has pencilled in expansion of 5pc this year and 4.5pc next year. Andrew Polk, a senior economist at The Conference Board in Beijing, believes the Chinese economy is growing by no more than 4pc. For a western economy these figures sound stellar. But as Polk explains, for a country such as China this could be a problem.

‘For a fast-growing emerging market like China’s, which is in the mode of playing catch-up with the wider world, a growth rate of 3pc or 4pc is in or close to recession,’ he says. ‘It’s like zero growth in a mature economy like Britain’s or America’s.’

Rogoff now believes that China could suffer a ‘hard landing’ – a much sharper slowdown that would have disastrous consequences for the rest of the world.

China not only produces cheap goods for countries all over the world – Britain bought £37.8bn worth of Chinese goods last year, making it the second biggest source of imports behind Germany – but is also the world’s biggest consumer of cars and smartphones. ‘Everyone says China’s different, the state owns everything, they can control it,’ says Rogoff. ‘Only to a point. It’s definitely a worry, a hard landing in China. We’re having a pretty sharp landing already and I worry about China becoming more of a problem. We’ve taken it for granted that whatever Europe’s doing, Japan’s doing, at least China’s moving along and there isn’t really a substitute for China.’ The slowdown in China is not all bad news for Britain. One benefit millions of families have enjoyed over the past two years is the slump in the oil price – partly reflecting subdued demand from China. The price of oil has fallen from $115 a barrel two years ago to below $50 a barrel today – pushing down the cost of petrol and energy bills.

BUT it has wreaked havoc in the North Sea where thousands of jobs have been lost.

The slowdown in China has also taken its toll on UK steel.

Lower growth in the Asian powerhouse has left it with an excess of steel which it has dumped in Europe – with the deluge of cheap steel devastating the industry in Britain. British companies such as fashion house Burberry and drinks maker Diageo have also felt the pain of the Chinese slowdown. China now accounts for 40pc of Burberry sales so any fall in demand is likely to hurt.

The Bank of England is also worried about the banking sector. British banks have more than £400bn tied up in China and Hong Kong – or around 16pc of all foreign assets held by UK lenders.

The central bank’s Financial Policy Committee last week said Britain’s banks will be tested on their ability to weather a meltdown in the Chinese economy. The big concern is debt. Government, corporate and household debt accounts for 240pc of national income as measured by gross domestic product in China.

The FPC warns that debt levels in China are ‘very high by international standards’.

Ratings agency Fitch warns that bad debts in the Chinese banking system are ten times higher than officially reported.

Official estimates suggest 1.8pc of loans are ‘non-performing’ but Fitch puts the figure at between 15pc and 21pc and warns it would cost £1.6trillion to clean up this toxic legacy.

‘If you want to look at part of the world that has a debt problem, look at China,’ says Rogoff. ‘They’ve seen credit fuelled growth and these things don’t go on forever.’

Mark Williams, chief Asia economist at Capital Economics, says debt levels in China ‘have been rising at a dizzying rate’.

He adds: ‘One of the lessons of economic history is that rapid increases in debt in short spans of time usually end badly – typically with a financial crisis.

‘If the current trend of debtfuelled growth continues I think it is very likely that China’s economy will struggle over the next few years. We’ve all got used to the idea of China as one of the great locomotives of global growth, but it could look very different five years from now.’