China’s Coming Austrian Collapse

From TBWNS:

“The coming collapse of China” has been predicted many times. Indeed, an excellent book of that title was a best-seller back in 2001. Yet the fictitiousness of Chinese economic statistics remains, and the over-leverage in the economy worsens. Like several other successful non-market economies, China has successfully sought rents from other countries through flaws in the global economic system. 

Thanks to President Trump, that is now changing, and the result for China will not be pretty. Conventional wisdom is that China is the most successful growth story ever seen, that it will overtake the United States in terms of GDP in the early 2020s and (for some China optimists) that it will overtake the U.S. in terms of GDP per capita by 2050. 

Certainly, that’s what Xi Jinping is aiming at, with his removal of the limits on his tenure and his attempt to dominate the world’s intellectual property by 2025. There is just one problem: China’s economic statistics are largely fictitious, and the gap between statistics and reality is growing ever larger. 

If the statistics are nonsense, then probably the economic power is nonsense as well. The most egregious flaw in China’s statistics is the savings rate. For decades we have been told that the Chinese people are extraordinary savers, with a savings rate of some 46% of GDP, according to the latest figures, compared with around 6.8% of GDP (Itself a figure recently and dubiously inflated by the Bureau of Economic Analysis) in the United States. 

Touchingly sentimental pictures are painted of the noble impoverished Chinese, earning one fiftieth of a Western wage but nevertheless saving nearly half of that pittance, seven times the American rate of saving, because of the country’s notorious lack of social services for the elderly. 

If China really had a savings rate of 46%, the economy would look quite different. There would be very little debt in the system; the banks would have a very low loans to deposits ratio and low leverage, like banks in nineteenth century Britain. Consumer debt would be almost non-existent, while the Chinese market would have an enormous variety of saving and investment schemes, to take care of all the accumulated wealth. New company formation would be very high, but “venture capital” would be very scarce, because new companies would be capitalized from the savings of the founders’ relatives and friends. 

Overall, China might well have a rapid growth rate, but it would be a very contented, stable economy. A recent Financial Times examination of China’s economy illustrates the problem; it shows consumer debt almost doubling as a share of GDP, from roughly 20% to 40% in the last five years and tells pathetic stories of young, highly educated Chinese who max out their credit cards, desperately hoping to boost their earnings sufficiently to pay that debt back. 

But Chinese elite youths brought up in a society with a 46% savings rate would have neither the desire nor the need for heavy credit card usage. First, they would have been brought up in families with a fanatical devotion to deferring consumption, so would regard the over-indebted Western Millennial lifestyle with undiluted horror. Second, because of their families’ savings habits, such elite youths would be beneficiaries of very substantial trust funds from their relatives, and so would have no need of credit cards. 

If the savings rate is fiction, then so are all China’s economic statistics. GDP is at least one third lower than claimed, to account for the missing savings, and growth rates over the last decades correspondingly lower, On the other hand, China’s foreign debt is all too real, and most of the domestic debt also appears to be solid, so China’ s gross debt, already alarmingly high at 299% of GDP according to the Institute for International Finance, is in reality about 450% of true GDP, substantially higher than that of any other country.

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