Is the Chinese economy truly a miracle story? To a large degree, yes, but the story has taken a turn in direction in recent years. Speculation is now widespread in the country of 1.3 billion people. You can see physical evidence of this in one of dozens of Chinese “ghost cities,” where the grandiose boulevards, elaborate monuments, skyscrapers, and suburban blocs of town homes that line the landscape are also completely empty – effectively it is all productive capacity devoted to the expectation of infinitely-growing future demand. In a recent move, the Chinese government also reduced reserve requirements, signaling a desire to create even more lending in the face of a stalling economy.
In the United States, which existed without a central bank for many years, private banks could and did collapse from poor speculation, which was especially common with collapses related to railroad speculation in the 1800’s. Economic recessions were more frequent and sometimes quite sharp, but always short-lived and localized, as lending practices were far more stringent than by today’s standards. As a result, American real economic growth in the 1800’s was unprecedented, with little to no long-term inflation and extremely rapid rises in living standard.
Central economic planning, designed to “tame” economic crises, effectively eliminates the moral hazard that exists when lenders face the consequences of lending too many reserves in the expectation of future demand. China now has well over a 300% debt to GDP ratio. Chi Lo wrote an interesting piece in Barron’s entitled “China’s Debt Bubble: Why the Bears Are Wrong,” in which he downplays the risk of a debt bubble in China, due to banks using deceptively complex credit accounting (although the direction of debt-to-GDP is what matters), but correctly points to private bank lending as the culprit behind rising debt levels. I also think he misses the additional step further to examine why the blame needs to go towards central planners, who have made countless decisions to remove the moral hazard that keeps lending practices rigid and localized.
Despite the complexity in credit accounting, Chinese debt levels are rising quickly and American tariffs have evidently taken a hit on the Chinese economy. Chinese officials moving to “prime” lending by reducing reserve requirements, slashing interest rates, pegging their currency and even bailing out the stock market are some of many poor decisions the central government has taken in order to keep Chinese growth on an rapid upward trajectory. In our often blind praise of the Chinese economic growth story, we often forget that it is still very much a Communist regime. Of course, the Chinese are extremely hard-working and industrious, which is why they would be better off with a slower, more stable growth strategy that revolves around manufacturing for their own citizens. They would be better off forgoing the additional production that is devoted to fulfilling the IOU’s of American consumers…