Should The West Be Nervous About China?
Why does the sovereign debt fever keep on sweeping world stock markets like a relentless case of the flu? Because so many nations are fiscally unhealthy and unwilling to discipline their lavish spending habits. Every sovereign bailout is followed by another chilling wave of fear about the next bailout that must surely follow if government spending habits continue.
About: Alistair Barr, MarketWatch, China Economy, China economic growth, The Second Debt Storm, Chinese capitalist explosion
The crippling effect of debt on the economic growth of developed economies has finally been summarized. Kudos to Alistair Barr of MarketWatch for his sweeping report, entitled “The Second Debt Storm.”
Barr writes that “over the past two centuries, government debt in excess of 90% of GDP produced economic growth of only 1.7 percent a year on average. That was less than half the growth rate of countries with debt below 30 percent of GDP.”
According to the CIA Greece had 108% debt relative to GDP last year. Japan was second only to Zimbabwe with 192 percent debt to GDP! Spanish, Portuguese and Italian debt may be the next dominos in line with debt loads approaching that of Greece. U.S. government debt may exceed 100% of GDP in coming years, according to Barr’s survey of economists. Lenders eventually become unwilling to finance out-of-control sovereign debt, except at premium prices, and higher interest rates which are a drag on growth.
By this standard China is a rich nation. China’s debt is only 18 percent of GDP.
Sovereign debt should be used to finance major investments like infrastructure with an eye to repayment. It should not be used to fund unproductive government programs and policies that have no end in sight. That is the western road to national financial ruin.
That’s also one reason foreign investors continue to crowd into China bringing record amounts of money with them. They would not do so if they did not have confidence in the viability of China’s fast-growing economy.
In the latest survey, foreign direct investment in China climbed for the ninth straight month in April. Foreign investment rose by an unexpected 24.7 percent year-over-year to $7.34 billion, compared with an increase of 12.08 percent in March.
The government approved the creation of an astonishing 2,047 new overseas-funded companies last month alone, up 21.3 percent from a year earlier. These are foreign businessmen jostling to build new enterprises in China.
Investors should keep these absolutely remarkable Chinese numbers in mind while stock markets in developed countries are rocked by waves of panic and uncertainty about the viability of national economies. There are always doubters when it comes to statistical reports from China. But these latest figures reinforce and further confirm the reality of China’s ongoing growth phenomenon.
Foreign investment in China has now topped $1 trillion since the nation first opened to overseas investors in 1978. That’s one trillion votes of confidence from abroad in just over three decades.
Of course, China’s fabled store of foreign reserves has now risen above $2.4 trillion. These are historically unprecedented amounts, providing an enormous safety cushion and confidence boost for China’s rapidly expanding economy.
The many commentators who spend their days focusing on the apparent flaws in China’s economy should try to keep these immense numbers in mind and, more importantly, in perspective when they write critiques of the Chinese capitalist explosion.
Disclosure: no positions