China is in the grip of a dangerous downturn and may be forced to rescue large parts of its financial and economic system, the world’s leading expert on debt crises has warned.
Harvard professor Ken Rogoff said the key policy instruments of the Communist Party are losing traction and the country has exhausted its credit-driven growth model. This is rapidly becoming the greatest single threat to the global financial system.
“People have this stupefying belief that China is different from everywhere else and can grow to the moon,” said Professor Rogoff, a former chief economist at the International Monetary Fund.
“China can’t just keep creating credit. They are in a serious growth recession and the trade war is kicking them on the way down,” he told UK’s The Daily Telegraph, speaking before the World Economic Forum in Davos.
“There will have to be a de facto nationalisation of large parts of the economy. I fear this really could be ‘it’ at last and they are going to have their own kind of Minsky moment,” he said.
This refers to the financial instability hypothesis of Hyman Minsky. It is when a seemingly unstoppable debt bubble collapses under its own weight in a cascade of falling asset and property prices. The authorities can cushion the crash, but they cannot escape the brutal mechanics of reversion.
Prof Rogoff is co-author of a magisterial history of debt delusions, This Time is Different: Eight Centuries of Financial Folly, written with former IMF firefighter Carmen Reinhart.
He said it is an error to think that China’s current slowdown is entirely deliberate and calibrated. While the People’s Bank undoubtedly wishes to curb the credit boom, it is also riding a tiger that it cannot fully control.
“I fear this will be the third leg of the global debt supercycle, after subprime in the US and the eurozone debt crisis. Nobody knows how this is going play out but it could be on the scale of 2008 and will be very bad for Asia, and there will be spillovers in Europe,” he said.
The eurozone is already suffering the fallout from the Asian downturn. Most of the region is in industrial recession. Germany and Italy buckled in the second half of 2018, and confidence has slumped to crisis-level lows in France.
“I am very sceptical that the eurozone system can handle another big shock. It is a house half-built, and if there is something like 2008, it is all going to blow up. Some countries will have to be ring-fenced with capital controls,” he said.
The eurozone has little policy powder left to fight deflation. Interest rates are already minus 0.4 per cent and the ECB’s €2.6 trillion ($4.2 trillion) blitz of bond purchases has pushed the institution’s balance sheet to 43 per cent of GDP. The political bar to renewing quantitative easing is very high.
Europe’s leaders have yet to build a crisis machinery fit for purpose. There is still no proper banking union with shared deposit insurance, let alone a fiscal union. The rigid rules of the stability pact inhibit use of budget stimulus a l’outrance in a recession.
Professor Rogoff said there is a danger that China and Asian tigers could be forced to pull in some of their trillions of offshore global funds to cover urgent needs at home, drying up or even -reversing the Asian “savings glut”.
This would have the unpleasant -effect of driving up “real” interest rates across the world, which would be awkward for the US at a time when President Donald Trump’s trillion-dollar deficits risk crowding out bond markets. Higher real rates would be trial by fire for parts of Europe.
“This is the Achilles’ heel for Italy. Real borrowing costs could rise by 2-3 percentage points,” he said. Italy’s debt dynamics could not withstand a regime shift of this sort. Markets would see the trouble coming and precipitate events.
Professor Rogoff says China still has room for manoeuvre but it cannot escape the forces of economic gravity. Debt ratios have doubled to 270 per cent of GDP in barely more than a decade. Surges of this kind in a developing economy invariably lead to imbalances that prove malign when the cycle turns.
The one thing the Chinese have in their favour is state control over the banking system. “They will be able to socialise the losses in a much fairer way then we did in the US and Europe, where it was just intractable,” he said.
The country has begun to pay a price for abandoning market reform and -reverting to the iron-control of the Maoist state under Xi Jinping. The tariff will rise with time.
Official GDP figures clocked in at 6.6 per cent last year, the slowest since 1990. While in line with analyst expectations, it was slower than the 6.8 per cent posted the year prior.
The economy faltered most at the end of the year, recording 6.4 per cent growth for the fourth quarter. But true growth has already slipped to near 4 per cent in this downturn based on proxy measures. Capital Economics thinks the rate will slow ineluctably to nearer 2 per cent by the early 2020s. There lies the middle-income trap.
China’s corporate debt levels would be manageable if the torrid catch-up rates of growth of the past were still plausible. It is a harsher story in a future of structural stagnation.
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China has kept most of Asia at the crest of their wave for the last decade. If it goes south for them hang on to your hats.
Rogoff really went out on a limb there-Whew! (dah)
He’s the jackoff who reasons why the $100 must be removed. Bad people do bad things with it. He’s a globalist sock puppet…
Since everything is illegal, maybe moral politicians are afraid to speak out against wars, debt, and the police state because they fear being prosecuted.
Anyone who supports wars, debt, and tyranny gets a free pass.
All the economies of separate countries seem to be linked or connected. If one goes bad, it will pull the others down. The Chinese economy seems to be the biggest house of cards. Most of the money the new middle class in China went into real estate. Most of that real estate is unoccupied, whole ghost cities in some places. The people who bought it were told it was a solid investment, guaranteed to go up in price over future years. Real estate is their savings account for their old age. No Social Security there. Won’t be any here within a few years, but that is a subject for another discussion.
Now, even with easy financing, newly constructed condos and houses are offered at a much lower price than in previous years. I have seen videos and written reports of large crowds of Chinese people rioting and beating housing sales agents when new condos are offered at prices 25% to 50% lower than what buyers paid 2 and 3 years ago.
The poor quality construction will compound the problem. I have seen numerous YouTube videos by foreigners documenting the problem. Newly constructed buildings start falling apart withing one to two years. In one really scary video inside an empty multi-story housing tower in a ghost city, guys were using pieces of common rebar to poke holes in concrete support pillars. Interestingly enough, foreigners who can speak the main Chinese language, Mandarin, are being pressured to leave China. No Mandarin speaking foreigners living in China equals no information getting out about internal problems.
I see a general uprising coming in China. According to reports coming out, thousands of small protests happen every year in China, but they are snuffed-out fairly quickly by the police and military before the protest has a chance to grow. What happens when millions of angry Chinese who invested all their life savings in unoccupied condos or houses for retirement income finds that his investment has not just lost 50% due to oversupply, but the investment has lost 100% when the building collapses or just falls apart?
Any problems in China will have big consequences here. The least consequence could be the loss of the flow of cheap consumer goods. The biggest consequence could be a big war. Countries have historically started wars to distract the population from internal problems. Recent speeches by Xi Jinping, their leader, have been full of militaristic threats.
On the other hand, if the US collapses, China will likely descend into violent revolution. China is dependent on importing American soy beans and other agricultural products. The history of China is basically a series of famines, even during the 1960’s. The Chinese people in general only began to eat well with the importation of vast quantities of food paid for with exports of boatloads of cheap consumer goods. If the US collapses, either for a short term or decades, the food exports from South American and elsewhere will not be enough to cover world markets.
In the past, most of the Chines people lived in rural villages and grew their own food. A large portion of the peasants , who know how to grow food, have been encouraged to more to the cities to work in factories, and what agricultural land China still has is rapidly being lost to urbanization & the creeping spread of deserts in the north of the country.
So, China is under pressure to import more basic foodstuffs from the western world. But, much of the basic foodstuffs grown in China or imported from the western world are fed to animals instead of humans. Feeling newly rich, the Chinese eat much more meat. Takes several pounds of grain and soybeans to produce one pound of pork or chicken. When people have been eating all the pork and chicken they want every day, be some really unhappy people when they must go back to eating a small ration of rice and veggies.
“The poor quality construction will compound the problem.”
What happened to the money? These buildings are crap because they cut every corner imaginable, and lined their own pockets with what they managed to not spend on decent construction methods.
They had to bribe every official in the local government where these things were built, too.
If the general populace figures out that not only have them been royally scammed, but that the entire Chinese government was an integral part of it, things might become very entertaining in China.
AC asks: “What happened to the money?”
See Vancouver real estate for starters.
Good. Let it all fall. Seriously. Get on with it already. The “growth” in China has been a fiction. They took our jobs via our crooked politicians in cohort with the corporations playing “labor arbitrage” with the middle class. Then, they saw what our Fed did with money printing, and decided that was the path to the promise land. Now, like us, they figured out that there is nothing left to plunder and “financialize”, and are facing the inevitable snap back.
Many, who see through this bubble of BS, would like to start getting on with the business of REAL commerce, REAL value, and REAL business. Without having to constantly worry about the competitor that has close proximity to the free money spicket.
Max, really liked this, it could have been an article instead of a comment.
let me guess, you teach English somewhere in Asia?
Thanks for the compliment. If you want to see the comment as an article, feel free to suggest it to the Site Admin/Owner.
My only time in Asia was in 1969/1970 at Danang, South Vietnam. During the last couple of years, I have read much on the internet, and viewed numerous youtube videos, trying to get a good picture of where we are and where we are going in this country, and the world in general.
Max, we would love to hear your insight or findings on where you think things are heading. I ranted above incoherently at 7 am before coffee. Surely you can do better! LOL
Good one Max.
Another Ivy League tool/mouthpiece for The Evil Fuckers; warming up the Davos attendees to get ready to acquire a shit-pile of easy “bailout” money from The Central Banksters and also to be able to purchase some moar prime real estate, politicians, castles, jets, islands, art, and yachts for nickels on the dollar.
The fun really starts at 1:20 mins into the video.
President Xi Jinping is not going to be amused, however; fucking Roundeye academic asshole making big laffs of Chinese economic acumen causing loss of face just before Year of The Pig new year’s celebrations.
He states their gdp goes from 6.8% down to 2% by mid 2020. Thats a crash of 70% in 18 months. Thats epic…….He says they will cushion the crash. Like putting out some marshmallows on the tip of a nosediving plane to cushion that crash. WTF? The Chinese have been manipulating currency for growth since mid 80’s and time to pay the piper.
Sadly we (Clinton) with nafta implementation, allowed them to become a major player and will now affect us terribly as they will the world. Causing a contagion. Hardest hit real estate will be large coastal cities higher dollar where chinese wealthy have portfolios but much of it mortgaged causing serious 2008 like bank issues. We will be in a price deflation but high interest rates and bank not lending. Something rare and to be avoided at all costs. Real estate will be worse than 2008 by far. Currency fluctuations and fears will skyrocket metals in most countrys making the last top price points seem small. Think silver at $75 and gold at $4k. S/G ratios around 55 as normal not like the current 80. All thats old or used will be in more demand than new. Consumerism will be out of favor. Staycations vs vacations. Maybe victory gardens will be envogue.
Immigration from emerging markets will cause significant strains on budgets. Increased Tax rates and democrats in charge will be blistering to pay for more brown peoples transplantation to here. To keep peace expect full amnesty. At least thats the motive so the democrats get their wave of voters to shoe in dictatorship. By 2021 if you dont have your metals, including lead and the means to projectile that lead, fully secured, you will never have another chance. Your constitution will be in peril. Farm land will be the most expensive. Expect draconian measures on freedoms. Even travel. But especially speech. China will cause a world contagion because we allowed them to fake their growth for 40 years. There is a price to pay.
The millenials will be taught there is so so much worse than name calling and that words really dont matter as much as they thought. THeir pain will be real and significant. Will do them good. They will finally mature. Most of them. The others will crumble in their safe spaces. Men will surely be seen as men and the metrosexual gender fluid will the like lepers of society. Hairy toxic masculinity will again be envogue. Because men will be needed. Men willing to work and get dirty and bring home the bacon. They will be respected again. When everything is free and fighting means instant death or incarceration under new rules men become boys. but when shit gets real and gets tough, real men, men of protection, men of means, become the hottest most sought after commodity. And gender fluid girly men are cannon fodder in a jiffy lube second. Skills will be sought after. Not skills in how to flip a house but real skills like how to fix a carburetor. We will look like one big assed Cuba right after the missle crisis. I was birn in 1970 so I dont recall what thebfirst ten years of Cuba looked like but I can base my theory on facts of economics and have a general idea. And probably be close.
Sorry, I morphed into a rant of facts from my years of research so I will just end here.
The one thing the Chinese have in their favour is state control over the banking system. “They will be able to socialise the losses in a much fairer way then we did in the US and Europe, where it was just intractable,” he said.
Newspeak for “rob the people”