by Steve Keen at Forbes
China has achieved a remarkable transformation in the last 30 years—something that you can only fully appreciate if, like me, you visited China before that transformation began. In 1981/82, I took a group of Australian journalists on a tour of China on behalf of the Australia-China Council. The key purpose was to take part in a seminar with Chinese journalists under the auspices of the “All-China Journalists Association”. Given the unfortunate acronym by our Chinese hosts of SAPS—for the “Sino-Australian Press Seminar”—it was the first seminar between Chinese journalists and those of any other nation.
After the seminar, we went on a tour of China, taking in Sichuan, Shanghai, and Shenzhen. Shanghai’s skyline then was dominated by Soviet-style architecture—mixed with French and Chinese touches—and on the south side of the river, paddy fields stretched as far as the eye could see. On the north side, we saw furtive black-market trading of currencies as we strolled along the banks of the Bund.
Today, some of the Soviet-style buildings still exist on the north side, while the south side is an extravaganza of skyscrapers that turn on an impressive light show every evening. So capitalism has come to China.
Almost. The one thing China hasn’t yet had is a full-blown financial crisis. But the plunging Shanghai stock market has raised fears that that quintessential capitalist experience has finally arrived in China.
In fact, this isn’t the first time that Shanghai has crashed: it did so in 2008 as well. Then the index plunged by over 2/3rds in one year (see Figure 1).
Figure 1: The Shanghai Stock Market undergoes its second crash
Banks in the West effectively ignore what the government wants: in the West, the political class is effectively subservient to the financial class. But in China, despite its economic transformation, the political class remains dominant: any Chinese entity that ignores a government directive does so at its peril. Things are not as they were in the 1980s, when every answer to every question that I and my group of touring Australian journalists asked began with “We followed the directives of the Central Committee of the Communist Party of China”. But it’s still not good for your health to flout Central Committee policy.
So the Chinese banking system and its satellites lent like crazy to any company and many individuals, and one of the biggest credit bubbles in history—possibly the biggest ever—took off. In 2010, the increase in private debt in China was equivalent to 35% of GDP. That dwarfs the rate of growth of credit in both Japan and the USA prior to their crises: Japan topped out at just over 25% per year, and the USA reached a “mere” 15% of GDP per year—see Figure 4.
Figure 4: China’s credit bubble is the biggest ever
As I have argued for a decade now, crises begin when the rate of growth of credit slows down in heavily indebted countries. China was not heavily indebted in 2008, which is why it could take the credit growth path out of the Global Financial Crisis. But now it is more heavily indebted than America was when its crisis began—even relying on official statistics which undoubtedly understate the real situation—and the momentum of debt may well carry it past the peak level reached by Japan after its Bubble Economy collapsed in the early 1990s (see Figure 5).
Figure 5: China is on course to reach Japan’s Private Debt to GDP peak
So China is having its first fully-fledged capitalist crisis. To date its response to it has been to try to sustain the unsustainable: to transfer the bubble from housing to the stockmarket, and to keep the stockmarket rising like some production target for wheat from the bad old days before the fall of the Gang of Four. It can’t be done. At some point, the Chinese government is going to have to make the transition from generating a credit bubble to trying to contain its aftermath.
How they might do that rather more intelligently than has the West will be the subject of a future post.