(4 mths ago)
After many years of 7- to 10-percent growth, economies tend to overheat, creating bubbles that burst. That’s what happened to South Korea and Japan in the 1980s and 1990s. But China’s economy keeps plugging along (though probably not at its published growth rate of 6.7 percent), defying the predictions of doomsaying pundits. Some indicators show a recovery this year.
That doesn’t mean that the danger of a crash has passed, however. There is growing evidence of a real-estate bubble, and the economy seems increasingly dependent on government stimulus and private-sector credit growth.
I see a few reasons why the Chinese economy really is different from most Western models, and these imply that forecasting the Chinese economy is more like predicting the winner of a race than analyzing a bubble.
(4 mths ago)
In a note by Morgan Stanley's Chetan Ahya released on Sunday, the strategist reminds us that a little more than a year ago, the global economy was facing intense disinflationary pressures. Global commodity prices were declining significantly and the slowdown in China and other major commodity-producing EMs had led to some concerns that it could pull developed markets into recession and drag inflation down along with it.
At the same time, in China, producer prices fell by almost 6%Y and the regime change in its currency management approach meant that China was no longer absorbing disinflationary pressures from abroad.
And while this seems like a distant memory today, thanks to China which has played a pivotal role in driving the global inflation cycle – this time on the upside – as the cyclical recovery has both lifted China’s own inflation and transmitted it globally, here is how this happened: the recovery in China has been driven by yet another round of debt indulgence.
Debt in China has grown by US$4.5 trillion over the past 12 months, by far the highest amount of debt creation globally as compared to US$2.2 trillion in the US, US$870 billion in Japan and US$550 billion in the euro area.
Indeed, China on its own has added more debt than the US, Japan and the euro area combined.