“China can achieve growth of over 6% only with rapid rises in indebtedness. All escapes from this trap are hard. The economy is now slowly rebalancing into consumption. But this will take well over a decade. Will the growth of debt be sustained until then? I doubt it”.
Rüdiger Dornbusch: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought”. Growth at rates targeted by the Government require a rapid rise in the ratio of debt to GDP. This cannot continue forever. So it will stop. But the Chinese Government controls the financial system, so it can continue for a long time. The longer the ending is postponed, the greater the likelihood of a crisis. The rapid growth of China’s indebtedness and the size of its financial system threaten global stability. Ergo, China needs to rebalance its economy and stabilise its financial system before opening up capital flows. Stable growth has coincided with an explosive growth in debt. IMF: “Credit growth has been averaging around 20% per year between 2009 and 2015, much higher than nominal GDP growth”. The picture is like that of pre-crisis Japan, Thailand and Spain. Thus, China could unleash global mayhem. Between 2000 and 2007, gross savings soared from 37% to nearly 50%. When the financial crisis came, China saw its trade surplus as not sustainable. It raised investment, instead. It rose from 34% of GDP in 2000 to 41% in 2007, and then to 48% in 2010. To achieve this, Beijing promoted explosive credit growth. Credit needs to grow about twice as fast as nominal GDP to grow at 6.5%. The credit growth coincides with declining returns on corporate assets and deteriorating corporate creditworthiness. We have seen this elsewhere. So will China be any different? Yes because, like Japan, China is a high-saving, creditor country. Beijing controls the financial system and operates exchange controls. It may avoid a crisis. Yet the answer is also no: Ever more credit expansion is needed for ever less growth. Chinese growth might then expire with a whimper, not a bang.