After their “coming collapse” theory failed to materialize for over 30 years, China critics seem to think they are vindicated by the latest GDP numbers. Having registered only 6.6% growth in 2018, the lowest rate in 28 years, critics are quick to say, “I told you so.”
They opine that China’s economy will be heading to a hard landing because of “hidden huge debts,” which they estimated at over 300% of GDP. The critics also claim the ongoing US-China trade war has closed many factories. The “proof” is the gradual decline of China’s quarterly GDP growth rates in 2018: 6.8%, 6.7%, 6.5% and 6.4% in the first, second, third and fourth quarters, respectively.
Are the critics right?
Whether the China critics are right or not, one should examine the claims and economic realities on the ground.
As alluded to earlier, the Western media and pundits have been repeating the “drown in a sea of debt” message for over 30 years. The US-based lawyer Gordon Chang wrote in his 2001 book The Coming Collapse of China that its economy would collapse in 2011 for the same reason. The world knows what happened to their theory.
Peterson Institute for International Economics analyst Nicholas Lardy wrote in the January 16 edition of the Financial Times that Chinese President XI Jinping’s decision to roll back reforms culminated in a total debt-GDP ratio of over 300% in 2018. He claimed that over 20% of state-owned enterprises (SOEs) went out business, requiring substantial bailouts by state-owned banks (SOBs).
The Chinese economy has not only defied its critics but, in fact, performs better than the US and its G7 allies. According to the International Monetary Fund (IMF), the US, EU, and Japan GDP growth rates were 3.0%, 2.1% and 1%, respectively in 2018. The IMF further estimates that the G7 nations’ growth rates will be slower in 2019, at 2.3%, 1.9% and 0.5%, respectively, for the US, EU and Japan. Whereas China’s growth rate is expected to be between 6.2% and 6.4% in the same year.
Other data on the Chinese economy discredit the “coming collapse” theory.
Chinese key economic indicators
In 2018, Chinese total debt to GDP was 266%, according to the US-based financial media service Bloomberg whereas those of the US, EU and Japan were, respectively, over 310% and 307.0%. When taking external debt to GDP into consideration, China’s 15% versus the average G7 country’s 156%, its financial posture is in even better shape, according to Wikipedia. China’s debt is largely internal.
According to the China National Bureau of Statistics (CNBS), SOE debt totaled US$17 trillion (125% of GDP) in 2018. The total corporate debt-GDP ratio is approximately 156%, and since SOEs borrow from SOBs, the lending-borrowing arrangement is a “family affair.” It is more of an accounting issue than a debt burden one.
CNBS also indicates that SOEs posted almost US$500 billion in profits in 2018, a year-on-year rise of 12.9%. This picture hardly points to a “financial bubble.” What’s more, in order for the financial system to collapse, all SOEs must default on payments, a highly unlikely scenario.
It should also be pointed out that China’s total bank assets are over $37 trillion, the largest in the world according to the China Banking Regulatory Commission (CBRC). With over $26 trillion in bank deposits and over $3 trillion in foreign exchange reserves, China could withstand any financial or economic problems.
Without exception, China’s economic performance outshines that of the US and its G7 allies. According to the CNBS, Chinese wages, consumption and employment rose by 6.5%, 6.2% and 13.6 million new jobs, respectively, in 2018. Nominal wages in the US increased by 2.7% but inflation was 2.9% in 2018, according to the US Department of Labor. The EU and Japanese figures are equally bleak.
The low wage increases coupled with high consumer debt to income explain why private consumption increased only marginally in the G7, estimated at less than 1% by the IMF. Since private consumption accounts for over 70% of GDP in the G7, the club would likely find it extremely difficult to climb out of the hole that the US-engineered 2008 financial crisis had dug.
China’s economy is not collapsing
Unless the Chinese economic statistics are “fake” or the critics know something the rest of us don’t, there is no reason to believe that China’s economy will collapse anytime soon. Indeed, one could argue it will likely remain the “beacon” of the world economy, continuing to contribute over 30% of global economic growth as the biggest trade partner of 130 countries.
Contrary to charges of “predatory economic” practices or setting up “debt traps” for developing economies, increasing numbers of countries in both the developed and developing worlds are participating in China’s highly successful Belt and Road Initiative (BRI). According to the China General Customs Commission, over 80 countries have joined the BRI with a total investment of over $180 billion and$ 5 trillion in two-way trade since its inception in 2013.
China’s huge domestic market of 1.4 billion people, of whom over 400 million are middle class (defined as anyone earning between US$12,000 and $72,000 a year), offers foreign investors tremendous opportunities. This probably explains why most nations, including staunch US allies such as Japan and the EU, are seeking rapprochement with “commie China.”
Contrary to US media claims, only a handful of countries are joining (pressuring more likely) it in banning Huawei from their telecommunications architectures. These countries – Australia, New Zealand, Britain, Canada, Germany, and Japan – will find it difficult to find alternative suppliers because the Chinese telecom company produces or has patented the 5G parts. What’s more, switching fro Huawei to other sources would delay 5G implementation and cost these companies billions of US dollars.
Since there is no evidence to prove that Huawei is guilty of the US spying charges, the US is dragging its allies down the road of disaster.
The US and other China bashers should do their citizens a favor: stop inventing “fake news” to demonize or belittle the Asian giant. China is not going anywhere unless there is a nuclear war that would also destroy the US and its allies.
Proclaiming 3.0% growth in the US is a “miracle” while saying China’s 6.6% constitutes collapse is twisted logic.