America's Creditor China Has Its Own Debt Bomb

Wall Street Journal ^ | 02/26/2013 | RUCHIR SHARMA

[SeekAndFind]

Six years ago, Chinese Premier Wen Jiabao cautioned that China's economy is "unstable, unbalanced, uncoordinated and unsustainable." China has since doubled down on the economic model that prompted his concern.

Mr. Wen spoke out in an attempt to change the course of an economy dangerously dependent on one lever to generate growth: heavy investment in the roads, factories and other infrastructure that have helped make China a manufacturing superpower. Then along came the 2008 global financial crisis. To keep China's economy growing, panicked officials launched a half-trillion-dollar stimulus and ordered banks to fund a new wave of investment. Investment has risen as a share of gross domestic product to 48%—a record for any large country—from 43%.

Even more staggering is the amount of credit that China unleashed to finance this investment boom. Since 2007, the amount of new credit generated annually has more than quadrupled to $2.75 trillion in the 12 months through January this year. Last year, roughly half of the new loans came from the "shadow banking system," private lenders and credit suppliers outside formal lending channels. These outfits lend to borrowers—often local governments pushing increasingly low-quality infrastructure projects—who have run into trouble paying their bank loans.

Since 2008, China's total public and private debt has exploded to more than 200% of GDP—an unprecedented level for any developing country. Yet the overwhelming consensus still sees little risk to the financial system or to economic growth in China.

That view ignores the strong evidence of studies launched since 2008 in a belated attempt by the major global financial institutions to understand the origin of financial crises.

[allendale]

China is a good example that an economis system that is part capitalist and part socialist doesn’t work. The Communist Party still controls the banks and the allocation of capital. The Party supposedly for political purposes directed huge amounts of capital toward a nationwide construction frenzy. Today China boasts huge complete cities of apartments, commercial and retail space, and community facilities that sit empty, deteriorating and have no return on investment. Over one trillion dollars has been squandered. Also most loans made by those state directed banks are based on overvalued urban real estate valuations. In short China sits on the granddaddy of all real estate bubbles. In many ways it is a tragedy that the Party has squandered the wealth created bt the underpaid people laboring in China’s export oriented factories.

[EricT.]

Slave labor means high profits for government-owned corporations. China has little to worry about.