This blog is notorious for getting things wrong, as my regular commenter 'JK' constantly reminds me, but one thing which I believe I have right is my longstanding suspicion that the Chinese economy is up shit creek without a paddle! I can't remember how long ago it was when I first picked up on those monstrous cities built in China which have something like a 5% occupancy rate. You don't need to be a trained economist to know that those echoing mausoleums were built on borrowed money. And again, we all know, do we not, that if you owe your bank manager £100 you call him 'sir' but if you owe him £1bn he calls you 'sir'! In China the banks are literally a busted flush and sooner or later the new regime will have to stop playing 'Age of Empires' and take some exceedingly painful decisions. As always, A E-P reports in The Telegraph:
The question is whether President Xi Jinping wishes to take his lumps now by pricking the speculative bubble and forcing capitulation – hopefully in a controlled deleveraging – or whether he will blink as his predecessor famously did in the summer of 2012 and let rip with another round of stimulus.
Blinking stores up greater trouble later. Credit has already grown to $25 trillion. Fitch says China has added the equivalent of the entire US and Japanese banking systems combined in five years.
The problem for Mr. Xi is that all the top dogs in the party machinery are up to their necks in this property bubble-bath and anyone who threatens to pull the plug and leave them shivering in an empty bath will be taking a huge risk. Beneath them, of course, is the eye-wateringly enormous number of ordinary Chinese people who have just become used to prosperity and who will take it very unkindly if it is snatched away from them. There is the difference between plural democracy and a one-party system, we at least have the chance every five years of throwing the rascals out - even if we know in our hearts that the next set of rascals will be no better - but at lest it is a sort of safety valve. The Chinese do not have that luxoury and if the pressure in the one party boiler become too great - watch out!
Not, alas, that they will be the only ones to suffer. A E-P sums it up better than me:
This policy decision – should President Xi stay the course – is equivalent in global scale to the decision by Fed chief Benjamin Strong to pop the US speculative bubble in 1928, causing a commodity slump that was transmitted worldwide through the dollar based currency system (Inter-War Gold Standard) and which later snowballed into something far worse.
The US was then the world’s rising creditor power, with foreign reserves above 6pc of global GDP, almost exactly the same as China’s holdings today. When China sneezes … you will catch a cold, wherever you are. [My emphasis]
Er, have a nice day!
