Party leaders have allowed a massive state and private sector borrowing binge that the IMF sees as a threat to China’s stability
T here is a steel toboggan run offering rides down the side of the Great Wall of China that would fail the UK’s most basic health and safety tests. It could be a metaphor for the Chinese economy if, as many people believe, Communist party leaders allow a credit bubble to run out of control in a desperate attempt to maintain an electrifying 7% growth rate.
The Chinese are not alone when they turn a blind eye to excessive borrowing. Most nations depend on large and growing amounts of borrowing to fund everything from investment to the most basic services. In China’s case much of the debt is being used to offset the transition from a state that manufactures iron, steel and cheap electronics, textiles and consumer goods to one that embraces hi-tech industries attuned to environmental concerns. This creates millions of losers in traditional smoke-stack industries, lots of them in the north and west of the country.
It’s a story that is familiar in Europe, where governments spent the 1980s racking up huge debts to support dying industries while the UK spent its oil revenues funding the unemployment benefits of steelworkers and miners. But the scale of China’s industries is such that when a transition is under way, the borrowing is colossal and the threat to the rest of the world is unnerving.
The International Monetary Fund warned last week that the debt building up in China’s state-owned industries was a threat to the country’s stability. Private debts are also stratospheric, mainly from a property boom that has left many people with sky-high monthly mortgage payments or dizzying rents. Erik Britton, director of Fathom Consulting, an economic consultancy, says he is concerned that China’s debt-fuelled growth is building towards a major crash some time in the next five years.
Diana Choyleva, a China expert who runs Enodo Economics, a consultancy, says that in answer to the growing crisis the Communist party is exerting greater influence over indebted state-owned industries, ending a long period when competition with foreign companies was considered a solution.
