(10 days ago)
For China’s army of Western admirers, the conclusions set out here are disturbing.
Most strikingly, Chinese economic growth has, over the last decade, become a hostage to borrowing on a gigantic scale. Though used primarily for capacity expansion rather than for fuelling consumption, this borrowing has had a hugely distorting effect on growth. Were China to cease borrowing about 20% of GDP annually, as she does at the moment, growth would fall back from 6.5% to a trend rate of 3.4%.
There must be limits to quite how long China can go on using borrowing to create growth. Based on reported GDP, debt already stands at 246% of reported GDP, up from 141% just seven years ago. When measured against an underlying GDP figure stripped of estimated debt-funded consumption, the ratio climbs to 384%. On this underlying basis of measurement, the ratio could hit 500% within just five years.
In short, the Chinese economy is following the tried-and-failed Western policy of using debt to manufacture “growth”.
There are clear limits to how much longer she can go on doing this.