Change is constant. You can count on it. Earlier this week, for instance, it was revealed that China’s economy is growing at just 7 percent annually. The Middle Kingdom’s GDP hasn’t been this slow since 2009…during the midst of the global financial crisis. What’s going on?
For perspective, 7 percent GDP growth in the United States or Europe would be outstanding. In fact, the GDP for both economies are slipping and sliding around 1 percent. But in China 7 percent GDP growth is a signal that the sky is falling.
‘“We are facing a complicated international situation and increased downward pressure on the domestic economy,’ the National Bureau of Statistics said on Wednesday.
“The government has been using targeted easing measures to give the economy a boost and ensure the growth target is reached so that it can achieve another target: the creation of at least 10 million new jobs this year.”
Yikes! Ten million new jobs this year… Now that’s quite a performance metric. To hit this target the country must create about 835,000 new jobs per month. By comparison, last month the U.S. economy created just 126,000 jobs. China’s economy must do 662 percent better.
Splattering Massive Amounts of Cement
This is a difficult task, indeed. Particularly since jobs can’t be created like gumballs. You can’t just dial up production and somehow new jobs appear.
Certainly, economic policies can help stimulate new jobs. Lower taxes. Less regulation. Policies like these are generally good for business.
Yet China, like the U.S., Europe, and Japan, prefers money games. Cheapening the cost of credit. Encouraging more debt based spending. These are the popular policies of the day.
What’s more, China’s favorite trick for boosting GDP has been to pump credit and stimulate construction. The problem, however, is the country has taken this policy to a level beyond absurdity. Pumping credit to stimulate construction has had the ill-effect of compelling the country to do something extraordinarily incredible. In short, they’ve mixed up massive amounts of concrete and splattered it across the landscape.
Specifically, China’s economy has used 6.6 gigatons of cement between 2011 and 2014. What a gigaton is we don’t really know. But we assume it is something unfathomable heavy. To put this in perspective, the U.S. used 4.5 gigatons of cement over the last 100 years.
No doubt, China’s cement mania has far overshot its real limits. Thus the challenge for Chinese officials is to figure out a way to grow the economy that isn’t centered on debt and cement.
China’s Spectacular Reckoning
To address this topic, and others, former Treasury Secretary Hank Paulson just wrote a book called Dealing with China. We haven’t read it. But we did catch Paulson’s recent interview on USA Today, and an article including some excerpts from his book.
From Paulson’s vantage point, China’s financial system has been stretched too far. “It’s not a question of if, but when, China’s financial system, particularly the trust companies, will face a reckoning and have to contend with a wave of credit losses and debt restructurings,” writes Paulson.
“It is important that China stop its over-reliance on municipal debt to finance infrastructure,” he said in an interview. “I take comfort in the fact that China’s leaders understand this.”
Of course, understanding something and doing something about it are two very different things. There are plenty of plumpy people who understand that less food and more exercise will help trim up their waste line. But that doesn’t mean they do anything about it.
Similarly, Chinese officials know something needs to be done. Yet they can’t seem to make a lasting change.
“China is caught in a monumental debt trap,” recently noted former Congressman and former Director of the Office of Management and Budget, David Stockman. “Its rulers fear social upheaval unless they keep pumping GDP—and the associated rise of jobs, incomes and financial asset values—-with more credit and construction. Even then, they know better and have therefore hop-scotched from credit restraint to credit curtailment almost on alternate days of the week.”
Naturally, China’s reckoning, as suggested by Paulson, is approaching. In the meantime, the Shanghai Composite Index is up 70 percent since the Communist government began cutting interest rates last November. We find this economic disconnect rather spectacular.
Sincerely,
MN Gordon
for Economic Prism
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