I strongly recommend that you read Ambrose Evans-Pritchard’s column at The Telegraph to get a better sense of the actual situation in China. It’s full of interesting observations. For example:
Maurice Obstfeld, the IMF’s chief economist, said the trade-off for this year’s growth spurt is even more trouble down the road. “While we have upgraded near-term projections, we have downgraded the farther out projections,” he said.
“Our concern is some of the stimulus is likely to take the form of higher credit growth, more support for sectors that are in a secular sense declining and not that productive. We worry about the quality of growth more than the quantity of growth,” he said.
There you have the nub of the matter. Stripped of IMF circumlocutions, he is telling us that the Communist Party has once again let rip with debt-driven stimulus for the housing market and rust-bowl industries already chocking with overcapacity, stoking yet another mini-cycle to put off the day of reckoning.
The likelihood that China will fail to grasp the nettle of reform in time to avert a structural crisis is rising from probable to almost certain. As the well-meaning premier Li Keqiang keeps warning his colleagues in the Standing Committee, the current course leads straight into the middle income trap.
The factors that Mr. Evans-Pritchards documents include China’s exchange rate, credit overhang, lengthening delays in payments to suppliers, total debt, and growth of the working age population. Overall it does not paint a picture of an economy in robust health.
This observation may be heartening or disheartening, depending on your outlook:
We can put away those charts projecting China’s ‘sorpasso’, the moment when the country overtakes the US to become the world’s biggest economy. It is not going to happen in 2020, and will look even less likely in 2030, when China’s demographic dividend turns to deficit and the workforce goes into precipitous decline.
Add to this that China has yet to live up to the commitments it made when it was admitted to the WTO more than 15 years ago (it’s far behind schedule) and that China’s trading partners are chafing under China’s system of export subsidies—in violation of international agreements. China’s challenges are mounting rather than abating.
China is a Ponzi scheme built upon a house of cards built upon a pyramid scheme built upon thin air built upon an illusion. Internally, the end result is not necessarily a collapse. They are still an authoritarian and technically Communist country. Internally, the yuan is what the Communist Party says it is, and they can define a financial default any way they want.
(The Chairman has “no clothes” only if they say he has no clothes, and all disagreement will be dealt with in a rather disagreeable manner.)
One part of the China Ponzi scheme was built by using foreign credit as the basis for leveraging more credit. This distorts the foreign markets into creating credit for a phantom Chinese demand. When the Chinese internal financial system collapses, the external problems cannot be mitigated through the barrel of a gun.
For financial systems that cannot use the barrel of a gun to set market prices, it is probably not such a good idea to build a large portion of your economy upon the phantom foundation of another. What happens to foreign financial systems that have large portions built upon credit created by Chinese demand?