If you have seen the news lately, you can not help but notice that China increasingly appears to be in trouble economically. There are more reasons for this than simply the tightening screws of the U.S.-China trade war. Many of China’s problems come from it’s continued reliance on investments in infrastructure.
Such investments represented a full 44 percent of the country’s GDP back in December of 2017. Compare this to from 20 to 25 percent in nations including the U.S., Germany, and Japan, per economic figures assembled by CEIC.
This has become a serious problem for the Middle Kingdom as its investments in fixed assets have slowed. In August, their investment growth level plunged to an all-time low. You may think that Beijing can simply borrow more money to up its public spending totals. They can not really any longer though.
The reason is that China has a dark and dirty secret. The second biggest economy on earth suffers from dangerously skyrocketing debt. Through the Global Financial Crisis back in 2008, Beijing managed to keep its debt under control and even semi-stable. With the advent of the crisis though, the government chose to escape from it by forcing through an incredible 12.5 percent of the entire annual economic output in spending to boost the stumbling economy.
How did the Chinese actually pay for all this? They pressed the banks of the country to offer a new all-time high of $1.88 trillion (12.65 trillion yuan) in loans for just year 2016. When investors and credit agencies called them out on this, the Chinese government authorities announced that they would get control over the dangerously fast debt pile buildup.
How have they fared in this pledge? The Chinese debt to GDP figures have rapidly increased since that point to nearly 250 percent (equating to $28 trillion) per CEIC and DBS credit ratings. Other organizations rate actual Chinese debt as significantly higher. Per the Institute of International Finance, it amounts to an eye-watering over 300 percent of total GDP.
Never one to miss out on a good national drubbing, the IMF doubled down on Beijing with their stern warning on the nation’s economy back in 2017. They issued a warning that the debt-pushed growth represents an entirely unsustainable solution over the longer term (translation: China is in big trouble). And as you can see from this graphic below, as goes China, so goes the world:
The Chinese did appear to order their state-operated banks back in April to cease and desist on local government lending. Yet with the lengthening trade war, they seem to now be back at investing in infrastructure as a means to keep people working and the economy growing.
This news came from the National Development and Reform Commission, which revealed in September that it is focusing on encouraging investment in infrastructure. This top Chinese economy regulator appears to have experienced a change of heart on the issue of borrowing to boost infrastructure spending. They are in favor of it suddenly again.
It is interesting that China is having a debt crisis and is embroiled in a trade war with the other global economic super power that is also having a debt crisis— the U.S. While no one can say for certain how things will end for either China or the U.S. in this increasingly acrimonious trade war, there is one disturbing fact that shows you how America is not in such a different position from its de-facto arch-enemy in the world— the Chinese.
Debt in America is increasing so rapidly that per the non-partisan CBO Congressional Budget Office, they estimate that the interest payments on servicing the debt will soon surpass the total defense spending in only a couple of years. According to the guide of history, this is the point that generally marks the death of any empire or great economy, when debt servicing is greater than the national defense.
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The sad truth is that the majority of these problems in both China and the United States are rapidly becoming far more serious thanks to demographics. There will be fewer workers to support either nation’s debt burdens or to pay taxes to service them in the near future. Whether the U.S. or China emerges victorious from the ongoing trade war, the victor will have little to celebrate when the dominoes from debt start to fall and take down the economy with them.
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