The problem of China as the axis of the world economy
The growth of corporate credit in China has been excessive in the last five years.
This credit boom is related to a substantial increase in investment after the Great Recession.
In the United States, the “debt crisis,” as Nassim Taleb called it, has not been corrected by corporations pursuing an intelligent strategy to reduce their debt. Chinese companies, however, have been following suit. Their profitability is deteriorating more and more. Some believe that the Chinese corporate debt is akin to a mountain; others, to a time bomb.
Those who suggest that the growth of local debt is stable and follows China’s development phase seem to forget that business efficiency and responsible decentralization are the keys to sustaining a credit expansion. Let’s examine each part of this argument.
The size of the debt itself is unimportant (or at least it does not deserve excessive attention) if the financial sector faces its losses despite a promise by monetary authorities to bail it out. If productivity increases are to be pursued via capital formation, corporate debt in China should be restructured based on guarantees of financial stability to avoid moral hazard.
This kind of guarantee, which only flourishes in a market economy, is the way to restructure the large number of state-owned enterprises in China that operate in sectors with evident overcapacity.
The Chinese debt is overwhelming not because of the volume—more than $34 billion—but because the figure has quadrupled in seven years (2007–14) according to estimates from the central bank, although, to be sure, Chinese authorities supplying such public information do not have an exemplary reputation (China is not Switzerland or Japan).
Debt is not a trivial problem. However, President Xi Jinping’s methods are those of a political leader who tries to inhibit the fluctuations of an economy with a plan. In the twelfth five-year stimulus plan (2011–15), Xi noted the need for “an economic and social balance” to guarantee long-term development goals, which include encouraging consumption, liberalizing interest rates, removing capital controls, and, crucial for Chinese propaganda, increasing the supply of services for citizens.
Xi’s plan seems great until we see that the data, as usual, fail to support it.
