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Why We Should Worry About China

Many of our readers might remember the late 80s. There were hundreds of movies, songs and books about the inevitable Japanese economic invasion. The ones of you that did not live that period can see that it did not happen.

Why? Because the Japanese growth miracle was built on a massive debt bubble and, once it burst, the country fell into stagnation for the better part of two decades. It still has not recovered.

China presents many similarities in its economic model. Massive debt, overcapacity and central planned growth targets.

Many economists and investors feel relieved because China is still growing at 6.8%. They should
think twice. On one side, that level of growth is clearly overestimated. By any realistic measure of
growth, China’s Gross Domestic Product annual increase is significantly lower than the official
figures show. Patrick Artus, global chief economist at Natixis Global Asset Management, as well
as other economists have noted that there has been a significant decoupling since mid-2014
between the government’s official growth reading and more reliable indicators. On the other
hand, even if we agree with the official readings, this growth has been achieved using a
worryingly high level of debt.

Chinese growth of 6.5% per annum came with more than 14% annual growth in money supply.
Total debt has quadrupled since the financial crisis, and official messages of “measures to curb
indebtedness” have shown a different reality. China has added more debt in 2017 than the
The European Union, the US, UK, and Japan combined. The IMF estimates debt as a proportion of
Gross Domestic Product may rise from 235% to almost 300% by 2022.

 

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