Change is inevitable and can often come with surprising twists. Recently, it was disclosed that China’s economy is experiencing an annual growth rate of only 7 percent—the slowest since 2009, during the global financial crisis. What does this mean for the future of the Middle Kingdom?
To put this in context, a 7 percent growth rate in the United States or Europe would be considered remarkable. Yet, in China, this figure is perceived as a troubling sign of impending decline.
“We are encountering a complex international situation and facing increasing downward pressure on the domestic economy,” stated the National Bureau of Statistics earlier this week.
“The government has implemented targeted easing measures aimed at invigorating the economy and achieving our growth target, which is crucial for creating at least 10 million new jobs this year.”
Indeed, the benchmark of creating ten million new jobs is extraordinary. To meet this goal, approximately 835,000 new positions must be generated monthly. For comparison, the U.S. economy added just 126,000 jobs last month. This means China must outperform the U.S. by a staggering 662 percent.
Splattering Massive Amounts of Cement
Accomplishing this task is no small feat, especially since jobs cannot be produced like mass-produced items. You cannot simply increase production and magically create new employment opportunities.
While economic policies can play a role in job creation—such as tax reductions and less regulation—which generally favor business, China’s approach leans more towards financial manipulation, similar to strategies seen in the U.S., Europe, and Japan. This includes lowering interest rates and promoting debt-fueled spending.
Additionally, China’s favorite method for boosting GDP has been to channel credit into construction projects. However, this tactic has led the nation to excess, resulting in an overwhelming application of cement across its landscape. Between 2011 and 2014, China consumed 6.6 gigatons of cement—a quantity that is hard to grasp. To provide perspective, the U.S. used 4.5 gigatons over the past century.
Clearly, China’s obsession with cement far exceeds its actual needs. Consequently, Chinese leaders are now faced with the challenge of fostering economic growth without relying on excessive debt and concrete.
China’s Spectacular Reckoning
To delve into this topic and more, former Treasury Secretary Hank Paulson has published a book titled *Dealing with China*. While we have not read it, we did catch his recent interview with USA Today and gleaned some insights from excerpts.
From Paulson’s perspective, China’s financial system is overstretched. “It’s not a question of if, but when, China’s financial system, particularly the trust companies, will encounter a reckoning and grapple with a wave of credit losses and debt restructurings,” he asserts.
“It is vital for China to reduce its overdependence on municipal debt for infrastructure financing,” he further explained. “However, I take comfort in knowing that China’s leaders are aware of this issue.”
Of course, recognizing a problem and taking action are two different matters. Many are aware that a healthier lifestyle could lead to weight loss, yet many fail to act on that knowledge.
Chinese officials also recognize the need for change but struggle to implement lasting solutions.
“China is trapped in a monumental debt cycle,” emphasized former Congressman and ex-Director of the Office of Management and Budget David Stockman. “The leadership fears social unrest unless they consistently boost GDP alongside job growth, income, and asset values, all of which necessitates more credit and construction. Yet, they oscillate between credit restraint and curtailment almost daily.”
It seems evident that a reckoning is looming for China, as suggested by Paulson. In the meantime, the Shanghai Composite Index has soared by 70 percent since the Communist government initiated interest rate cuts last November, leading to a striking disconnection in the economy.
In conclusion, China’s economic landscape is at a critical juncture, plagued by mounting debt and a reliance on unsustainable growth strategies. As the nation navigates these challenges, it remains to be seen how it will adapt and what that will mean for both its citizens and the global economy.
Sincerely,
MN Gordon
for Economic Prism
