domingo, 24 de janeiro de 2016

China’s Party Isn’t Over—That’s the Problem

China’s Party Isn’t Over—That’s the Problem

The country that stabilized the world in the aftermath of the financial crisis now threatens to capsize it

Jan. 19, 2016 4:41 p.m. ET

In the aftermath of the Wall Street crisis that brought down Lehman Brothers in 2008, Chinese state capitalism came to the rescue.

Thank China for constructing, in record time, the world’s most extensive high-speed rail network, airports, subways and intercity highways. The frenzied spending prevented the global economy from toppling into a depression, argues the Nobel-winning economist Joseph Stiglitz.
Today, the mountain of debt and massive industrial overcapacity dating from that government-directed stimulus is often described as China’s “hangover.” But the party hasn’t stopped. In fact, it’s heating up.

Total debt has ballooned from less than 160% of gross domestic product to nearly 260% now. More was added, relative to the size of the economy, over the past 12 months than at the outset of the investment binge. Except now China can’t absorb all the extra investment. Much of it is going to waste, and companies are using new debt to pay off old.

The momentum hasn’t flagged because Chinese leaders demand growth at all costs; though the economy is successfully transitioning toward a consumption-driven model, it can’t make up for lost growth in manufacturing and investment.

Chinese state-owned companies in industries like steel and coal are suffering from declining profits and big debt loads. Here, a worker walks past a pile of steel-pipe products in Tangshan in China's Hebei Province late last year. PHOTO: KIM KYUNG-HOON/REUTERS
Economists have long asserted that China can afford the profligacy. They note that the government’s overall debt is modest, national savings is high, and the debt is overwhelming in local currency so there’s no risk of foreign creditors pulling out their money and triggering a classic payments crisis.

These arguments now sound like lullabies. As debt mounts, the markets have become convinced that China’s day of reckoning is coming.

They are right. But when? Investors are mistaken if they perceive a Chinese financial crisis just around the corner. There’s no cause for immediate panic. By some calculations, the current pace of debt expansion will place China in the danger zone around five years from now. That’s when the imbalances may start to resemble those of other East Asian nations, like Indonesia and South Korea, before their financial systems blew up.

But the science of financial failure is unreliable. Japan, which appears capable of growing its colossal pile of debt almost indefinitely without provoking a crisis, underscores that point. In China’s case, though, one thing is certain: Unlike the big debt binges the country went on in the past, this time around it can’t grow out of its debt woes. Debt is growing faster than GDP.

Much of it sits on the books of state-owned companies in traditional industries—steel, shipbuilding, coal, glass, cement—whose profits are declining. Factory prices have been falling for almost four years.

Chinese state-owned companies in industries like steel and coal are suffering from declining profits and big debt loads. Here, a worker walks past a pile of steel-pipe products in Tangshan in China'
The ironic result is that the country that stabilized the world economy seven years ago is now the source of impending turmoil—whenever, and however, that may strike.

It’s precisely this uncertainty that unnerves investors from Rio de Janeiro to Jakarta. Rich Chinese who can pull their money out are doing so. Mainstream economists, not just China doomsayers, are starting to adjust their forecasts for the possibility that China will never ease up on lending, that debt will just keep stacking up until it collapses under its own weight.

Maury Obstfeld, the International Monetary Fund’s Economic Counsellor and Director of Research, nodded to the risks inherent in China’s attempts to squeeze growth out of an exhausted industrial machine in his recent survey of the 2016 global economy. China’s “time-honored methods of enforcing growth targets,” he wrote “could simply extend economic imbalances, spelling possible trouble down the road.”

Big trouble. China accounts for some 30% of global GDP growth, 12% of oil consumption and about half the demand for steel, copper and cement.

“Will there be a crisis?” asks Louis Kuijs, the Head of Asia Economics for the research group Oxford Economics. “It depends how you define it.” He sees a government bailout of the banks coming in a few years, although he believes it will be manageable.

Rhetorically, at least, President Xi Jinping acknowledges the exact dilemma that spooks the rest of the world. If China falls back on excessive stimulus, he was quoted recently as saying in the Communist Party’s flagship journal, Qiushi, it will “create new contradictions and problems.”

Yet he seems to ignore his own advice. Two years ago, in a much-heralded effort to address the problem of bad debt in the banking system, financial authorities introduced a program to swap the bank borrowing of local government-controlled entities—much of it linked to the slumping real-estate sector—for municipal bonds. The arrangement should have reduced the overall volume of bank loans. Instead, banks simply filled the slack with new lending. In effect, the government had created a whole new stream of credit.

One sure sign that the debt problem is now out of control: Politicians have stopped talking about it, except in the vaguest terms.

It hardly rated a mention at the recent Economic Work Conference, the annual meeting of China’s top economic mandarins.

Politics largely explains the reluctance to face uncomfortable realities. Mr. Xi’s own credibility is on the line. Upon taking office three years ago, he promised a “great rejuvenation” of the Chinese nation. So growth must stay robust; missed targets can’t be tolerated.

He’s chasing other goals, too. By 2021, the centenary of the founding of the Communist Party, China is supposed to have doubled per capita GDP from where it was in 2010. And by 2049, the centenary of the founding of the People’s Republic of China, state planners decree, China must be among the world’s “moderately developed countries.”

Unfortunately for Mr. Xi, the laws of gravity are immutable. Burdened by a debt problem it can’t resolve, a China that’s been rising for decades will come back down to earth.

Write to Andrew Browne at

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