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China is approaching its day of reckoning as it tries to reduce
its dependency on debt in its bid for growth, while creating a consumer society.
By John Mauldin (mauldineconomics.com) from an article* entitled Thoughts from the Frontline – A Five-Year Global Financial Forecast: Tsunami Warning.
China Enters a 12-Step Program for Debtaholics
The world is simply not prepared for China to experience an outright “hard landing” or recession, but I think there is a 70% probability that it will do so within the next five years and the probability that China will suffer either a hard landing OR a long period of Japanese-style stagnation (in the event that the Chinese government is forced to absorb nonperforming loans to prevent a debt crisis) is over 95%.
To be sure, it is still quite possible that the Chinese economy will be significantly larger in 2025 (ten years from now) than it is today, but realizing that potential largely depends on President Xi Jinping’s ability to accomplish an extremely difficult task: deleveraging the debt overhang that threatens the country’s MASSIVE financial system while rebalancing the national economy to a more sustainable growth model (either through either a vast expansion of China’s export market or the rapid development of “new economy” sectors like technology, services, and consumption; or both). This will not be the end of China, which I’m quite bullish on over the very long term, but such transitions are never easy.
Even given this rather stark forecast, it is still likely (in my opinion) that the Chinese economy will be 20 to 25% bigger as 2020 opens than it is today; and every other major economy in the world (including the U.S.) would be thrilled to have such growth. At the very least, though, China’s slowdown and rebalancing is going to put pressure on commodity exporters, which are generally emerging markets plus Australia, Canada, and Norway.
China’s massive GDP growth has been fueled by equally gargantuan growth in debt. Much of that debt is not on the official books, but when you look at all of the debt guarantees the government has in place, it is easy to come to a reckoning which suggests that Chinese government debt-to-GDP in China is already well above 200% and could be considerably higher. Given the nature of their socialist market economy, something that has no true analog in Western economic history, and the fact that official Chinese data are simply made-up numbers, we are left to our own devices in trying to figure out what is really happening.
To the credit of the Chinese leadership, they recognize the problem. They are attempting to do something that no country (to my knowledge) has done before, and that is to let the air out of their debt bubble in a controlled manner before it bursts, while simultaneously rebalancing the national economy toward a more sustainable growth path (which dramatically increases the chances of the bubble’s bursting). When the true nature and magnitude of China’s dilemma is properly understood, it is quite easy for Homo economicus occidentalis to predict disaster. However, Western economists would also have said what China has done over the last three decades wasn’t possible to do the way they have done it, so perhaps we should refrain from saying that what they’re attempting to do now is impossible.
What I will say is that I don’t think it is likely that they can transition from a debt-fueled economy to a consumer-driven one without suffering a serious slowdown at minimum. The odds are clearly in favor of a sharp, hard landing or else a Japanese-style stagnation in the coming years – but miracles are always possible.
Whether or not the official data will ever acknowledge the severity of China’s adjustment is beside the point. Even if Xi Jinping and the State Council manage to guide the economy through to a successful rebalancing without an economic collapse, it’s still likely that China will shake the world. Chinese purchases of a variety of commodities are going to decline and in some cases collapse outright, as commodity-intensive “old China” sectors such as infrastructure, real estate, and mining give way to commodity-light “new China” sectors like technology, services, and consumption. Despite the fact that this slowdown is already in progress, most commodity-exporting countries and businesses are still not prepared for such an eventuality…
China is a mystery to most investors, but it is central to an understanding of the global economy…
[The above article is presented by Lorimer Wilson, editor of www.munKNEE.com and www.FinancialArticleSummariesToday.com and the FREE Market Intelligence Report newsletter (sample here – register here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. This paragraph must be included in any article re-posting to avoid copyright infringement.]
*Original Source: http://www.mauldineconomics.com/frontlinethoughts/a-five-year-global-financial-forecast-tsunami-warning (Copyright 2015 John Mauldin. All Rights Reserved. See for yourself why over 1 million investors and financial professionals turn to John Mauldin and the Mauldin Economics’ team every week for economic insight. Go to http://www.mauldineconomics.com/subscribe to subscribe. Visit www.mauldineconomics.com/important-disclosures for further details.)
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