Debt Can't Save China Anymore

John Mauldin profile picture
John Mauldin
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Summary

  • After the 2008 financial crisis, China launched a stimulus program of mind-boggling proportions.
  • The stimulus was essentially built on debt from the nonfinancial sector, aka shadow banking.
  • All this debt will have to be paid off, which is why a trade war is so threatening to China.
  • Worse, debt is no longer having the desired effect on China.
  • So, in the next downturn, slowdown, or whatever you call it, Beijing may not be able to borrow its way out of the hole.

The 2008 financial crisis hit China hard, as it did everyone else.

Not every country responded like China did, though. Most couldn’t do what China did because they lacked either financial resources or political ability.

China had both. And so it launched a stimulus program of mind-boggling proportions.

China’s Stimulus Is Built on Shadow Banking

Beijing compelled local governments and state-owned enterprises to take on massive debt for giant infrastructure projects. Yes, they simply built ghost cities.

The intention was to put people to work and bolster public confidence.

It’s no surprise that China has doubled its debt relative to GDP since 2000. And the bulk of that was after 2009:

But it’s how they grew that debt I find amazing. Half of the total debt is from the non-financial (i.e., shadow banks) sector.

And remember that the Chinese economy is managed from the top down. So the Chinese government is very aware of how its shadow banking system operates.

This Debt Has to Be Paid Off—Sooner or Later

All of this debt has a carrying cost. Even in a top-down economy. Yes, much of it is internal. But China also has a big amount of dollar-denominated debt.

Here’s economist Christopher Balding with the numbers:

According to official data, short-term debt accounted for 62 percent of the total [of almost $2 trillion in debt] as of September, meaning that $1.2 trillion will have to be rolled over this year. Just as worrying is the speed of increase: Total external debt has increased 14 percent in the past year and 35 percent since the beginning of 2017.

External debt is no longer a trivial slice of China’s foreign-exchange reserves, which stood at just over $3 trillion at the end of November, little changed from two years earlier. Short-term foreign debt increased to 39 percent of

This article was written by

John Mauldin profile picture
12.5K Followers
I am a financial writer, publisher, and New York Times bestselling-author. Each week, nearly a million readers around the world receive my Thoughts From the Frontline free investment newsletter. My most recent book is Code Red: How to Protect Your Savings from the Coming Crisis. I appear regularly on CNBC and Bloomberg TV. I’m also Chairman of Mauldin Economics, a research group that provides monthly analysis and recommendations to thousands of readers around the world. I was previously CEO of the American Bureau of Economic Research. Today I am President of the investment advisory firm Millennium Wave Advisors, LLC. I am also president and registered principal of Millennium Wave Securities, LLC a FINRA and SIPC registered broker dealer. When I’m not traveling to speak at conferences and events, I live in Dallas, TX. I’m also the proud father of seven children.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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