China perma-hawk Gordon Chang has been predicting the imminent collapse of the Chinese economy for decades. That was what I was prepared for when I read his most recent offering at Newsweek. However, I was somewhat surprised when what I read made a certain amount of sense:
In 2008, China’s President Hu Jintao and Premier Wen Jiabao decided they would not allow the economy to suffer, so they embarked on perhaps the biggest stimulus program in history.
The result was historic overbuilding, and the country now has too much of almost everything. For instance, He Keng, a former senior statistics official, in 2023 publicly revealed that China had enough vacant apartments to house the entire population of 1.4 billion people. He noted that some believed that empty homes could hold three billion.
To deal with the severe imbalance, some Chinese localities are demolishing newly completed but vacant apartment buildings. Yet this is only a temporary fix. After all, destroyed buildings cannot produce revenue to pay for their construction and demolition.
“Without paying for the bad investments—largely real estate—the economy can’t grow,” says Anne Stevenson-Yang of J Capital Research, author of Wild Ride: A Short History of the Opening and Closing of the Chinese Economy. “And it definitely can’t pay for the bad investments. At least within the next decade.”
The crisis will almost certainly last a long time. “China has grown almost entirely through capital investment,” notes Stevenson-Yang. “Because there isn’t enough to invest in, a lot of good money chases bad, and they have reached a limit. The Chinese economy is having a heart seizure.”
The seizure looks fatal. China’s total-country-debt-to-GDP ratio is extraordinarily high. After taking into account so-called “hidden debt” and adjusting for inflated GDP claims—the country did not grow anywhere near the reported 5.0 percent pace last year—the ratio could be, according to my estimate, 375 percent. Higher figures are also plausible.
That dovetails with what I’ve been saying literally for decades. I should interject that Ken Rogoff’s and Carmen Reinhart’s empirical findings remain controversial but unrefuted: debt overhang impedes economic growth (please take note, Trump Administration).
In the 1990s and early Aughts, China invested in productive capacity. That resulted, for example, in having enough excess capacity in automobile production to supply all global demand for cars and trucks for the foreseeable future. That is now the case for a vast array of goods. Then they turned their attention to real estate and built enough apartment buildings for their entire population if China’s population had continued to grow which it did not.
The U. S. economic system has certain weaknesses but one of the strengths of our semi-market system is that it tends to wring out excess productive capacity. China’s semi-market system suffers from an inability to do that.
Decades ago I observed that China needs to consume more and import more. To date the CCP has been reluctant to let that happen, preferring to build excess capacity despite chronic over-building. The difference between now and twenty years ago is that 20 years ago keeping China’s economy sustainable depended on consuming and importing more. Now the global economy does.
