The world of economics is in a constant state of flux and has shifted from an essentially US-based focus to Asia's point of convergence. After many years of driving economic growth, the pull of global wealth has shifted and is now largely concenrated in this region, and we analyse its structural success.
China took the right path when it turned to prop up growth after the financial crisis but then seemed reluctant to was wrong reverse this position when the economy had turned the corner.
China’s debt-to-GDP ratio has climbed from 150 per cent to nearly 260 per cent in the past decade. It is now a case of when, not if, real economic difficulties will hit the country.
The damage from a big Chinese credit blow-up would still be immense. China is the world’s second-biggest economy and its banking sector is the biggest, with assets totalling 40 per cent of global GDP. Its stockmarkets are worth $6 trillion, second only to America’s and its bond market is valued at $7.5 trillion.
The 2 per cent devaluation of the yuan last year sent global stockmarkets crashing; a real bust would do far more damage and a hard landing would be painful for all those who benefit from Chinese demand.
However, over the past year, China has spent nearly $200 billion to prop up the stockmarket, with $65 billion of bank loans going bad and $600 billion of capital has left the country. To pump up growth, officials have inflated a property bubble and debt is expanding twice as fast as the economy.
The end to China’s debt build-up would not look exactly like past financial crisis though, as although its shadow-banking system is large, it has not reproduced products as complex or international as America’s bundles of subprime mortgages in 2008.
But the longer China delays restructuring its inherent economic problems, the more acute the consequences will be. Perhaps it would be better off saving its resources for a real calamity rather than deploying fiscal and monetary stimulus to keep growth above 6.5 per cent.
More importantly, China must take serious action in curbing the inexorable rise of debt. It must become used to tolerating more defaults, failed companies and let growth drop a little. This will be a tough call, but the task is at hand to avoid an economic catastrophe later on.
Jonathan is a portfolio manager and senior analyst responsible for research on emerging market economies in Asia. He has 30 years of extensive experience, with special emphasis on Japan and China. Over the last 12 years, he has overseen a number of emerging market research teams.