China slow­down big­gest threat to econ­omy

The Prince George Citizen - - Worklife - Matt O’BRIEN

You shouldn’t worry too much about the big U.S. stock mar­ket sell­off. You should worry about China’s in­stead. In­deed, while it might not have got­ten as much at­ten­tion, China’s bench­mark stock in­dex was, with its 25 per cent drop, the world’s worstper­form­ing in 2018. Part of this was be­cause of the fear that U.S. Pres­i­dent Don­ald Trump’s nascent trade war might turn into some­thing even more se­ri­ous, but only a part. More sig­nif­i­cant than what Washington was do­ing, you see, was what Bei­jing was up to. That’s be­cause, in what has seem­ingly be­come an ev­ery-other-year tra­di­tion re­cently, China’s gov­ern­ment has stepped on the eco­nomic brakes pretty hard in an at­tempt to put an end to what looks like some bub­bly be­hav­iour.

The im­por­tant thing to un­der­stand here is that, in the depths of the Great Re­ces­sion, Bei­jing un­leashed a stim­u­lus the likes of which the world hadn’t seen since the Sec­ond World War. It amounted to some 19 per cent of its gross do­mes­tic prod­uct, ac­cord­ing to Columbia Univer­sity his­to­rian Adam Tooze. By point of com­par­i­son, U.S. Pres­i­dent Barack Obama’s stim­u­lus was only about five or six per cent of U.S. GDP. Aside from its size, what made China’s stim­u­lus unique was the way it was ad­min­is­tered. The cen­tral gov­ern­ment didn’t bor­row a lot of money it­self to use on in­fra­struc­ture, but it pushed lo­cal gov­ern­ments and state-owned com­pa­nies to do so. The re­sult was a web of debt that’s been even harder to clean up than it might have been be­cause of all the money that un­reg­u­lated lenders – “shadow banks” – were fran­ti­cally hand­ing out above and be­yond what Bei­jing had been hop­ing for.

The chal­lenge then has been for Bei­jing to stop even more debt from turn­ing this boom into a bust with­out stop­ping the boom in the first place. In other words, to nav­i­gate the econ­omy be­tween the Scylla of a bub­ble and the Charyb­dis of a se­vere slow­down.

Not that this is new. It’s what the Chi­nese Com­mu­nist Party has had to do ever since it sub­sti­tuted ever-in­creas­ing pros­per­ity for Marx­ist-Lenin­ist ide­ol­ogy as the ba­sis of its le­git­i­macy. And the good news, in­so­far as both Bei­jing and the world econ­omy are con­cerned, is that it’s be­come ex­ceed­ingly ef­fi­cient at it. As Bloomberg News’ Noah Smith points out, China has man­aged to avoid a re­ces­sion for 25 years, in large part be­cause of the gov­ern­ment’s novel use of credit pol­icy – direct­ing banks when and how much to lend – to smooth out the usual ups and downs of the busi­ness cy­cle.

What is new, though, is that this isn’t work­ing quite as well as be­fore. As the In­ter­na­tional Mon­e­tary Fund re­ports, China seems to have reached a point of di­min­ish­ing re­turns with this kind of credit stim­u­lus. So much new debt is ei­ther go­ing to­ward pay­ing off old debt or to­ward eco­nom­i­cally ques­tion­able projects that it takes a lot more of it than it used to just to achieve the same amount of growth. Three times as much, in fact. Whereas it had only taken 6.5 tril­lion yuan of new credit to make China’s econ­omy grow by five tril­lion yuan per year in 2008, it took 20 tril­lion yuan of new credit by 2016. Which is why Bei­jing has had to re­sort to even more old-fash­ioned stim­u­lus like tax cuts and in­fra­struc­ture spend­ing – in par­tic­u­lar, it re­cently an­nounced a new wave of sub­way con­struc­tion around Shang­hai and Hangzhou – to try to keep growth above the six per cent that the party thinks it needs to keep peo­ple from protest­ing.

The global econ­omy needs it, too. Ap­ple, for one, has al­ready re­vised its rev­enue pro­jec­tions down be­cause of soft sales in the Mid­dle King­dom. And Wall Street thinks the rest of the For­tune 500 won’t be far be­hind. Al­though even that doesn’t give you a true sense of how much the world has come to de­pend on Chi­nese growth. To get a bet­ter idea of that, it helps to look at a Fi­nan­cial Times chart of crude steel pro­duc­tion. Con­sider this: Be­tween 1978, when it be­gan its mar­ket re­forms, and 2000, China’s share of world steel pro­duc­tion in­creased from 4.4 per cent to 15.1 per cent. This was, as far as eco­nomic de­vel­op­ment goes, a fairly typ­i­cal suc­cess story that saw China’s pro­duc­tion nearly match North Amer­ica’s. What’s hap­pened since, though, has no prece­dent in eco­nomic his­tory. China’s steel pro­duc­tion didn’t plateau like ev­ery­one else’s – it grew to the point that it now makes up 49.2 per cent of the world’s to­tal.

To put that in per­spec­tive, Europe and North Amer­ica to­gether went from mak­ing 2.5 times more steel than China in 2000 to China mak­ing three times more steel than them in 2017.

It’s long been said that when the United States sneezes, the rest of the world catches a cold. Well, it’s been a long time since China has sneezed, but with its in­dus­trial prof­its fall­ing for the first time in three years and its car sales drop­ping for the first time in nearly 30 years, we might find out just how sick it can make ev­ery­one else.

That’s one Chi­nese ex­port we don’t want.

The chal­lenge then has been for Bei­jing to stop even more debt from turn­ing this boom into a bust with­out stop­ping the boom in the first place.

BLOOMBERG PHOTO

Work­ers pre­pare to lift bun­dles of steel rod with a crane at a stock­yard on the out­skirts of Shang­hai in July. China made three times more steel than Europe and North Amer­ica in 2017.

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