Sheldon Filger-blogger for GlobalEconomicCrisis.com
The Center For Economics and Business Research (CEBR), a UK based consultancy firm, has issued a new forecast that projects China’s GDP will surpass that of the United States by 2028, making China the largest economy in the world. This projection is five years earlier than an earlier forecast, pointing to an accelerating decline in U.S. economic strength relative to that of the People’s Republic of China.
According to the CEBR, the primary driver in the imminent surpassing of America’s GDP by China is the impact of Covid-19. The coronavirus pandemic has impacted the U.S. more than any other national economy, creating massive financial losses, major economic dislocation and political instability that also retards future economic growth. In contrast, though the pandemic originated in the Chinese city of Wuhan, the draconian measures adopted by Beijing led in the long-term to less economic damage. The relatively low rate of Covid infections in China over the past several months has enabled America’s primary economic competitor to return to growth, while the United States in mired in a patchwork of intermittent and inconsistent lockdowns, while infection rates and mortality are at a peak.
The fact that China is now projected to have the largest GDP in the world by 2028 will have significant geopolitical consequences, as well as determine which country will have the most impact on the global economy. Thus far, there are no signs that political leaders in either the U.S., Europe or Russia have fully comprehend the seismic shift in economic power that is occurring virtually in real time, largely enabled by a global pandemic that ironically originated in China.
Amid growing indications that China’s rapidly expanding public and private debt foreshadows a major economic and financial upheaval in the future, the latest official GDP quarterly data is stimulating divergent views from analysts. According to Beijing, GDP grew by a “better than expected” 7.4 percent in Q1 of 2014. However, this is a further indicator that official growth in China is slowing, as Q4 of 2013 revealed GDP growth of 7.7 percent.
Two things to keep in mind; China’s statistics, as in many other economies, are opaque, perhaps much more so with Beijing. Additionally, the Chinese economy functions with far different dynamics than is the case with a Western advanced economy. Official GDP growth reflects massive infrastructure spending funded by credit expansion, alongside export-based manufacturing growth, with consumer spending a low component of economic activity in comparison with Western countries.
What does seem clear is that the economy’s double digit growth rates of the past are over, the trend in GDP growth is a slowdown, supposedly engineered by Beijing to lay the foundation for more sustainable growth in the future. However, declining GDP growth rates combined with increasing signs of a looming debt crisis add further doubts about the future health of the world’s second largest economy
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According to a survey recently conducted by Reuters of 945 Chinese companies outside of the banking and financial services sector, corporate debt in China increased by 260 percent over a 5-year period. This rate of increase within the corporate sector that is occurring in China is unprecedented; no other nation’s example demonstrates such a cascade of corporate debt among any other major economy over a similar period of time.
At present, corporate debt in China outside financial services has reached the staggering level of 12 trillion dollars. This is equal to 120 percent of China’s GDP, and about 15 percent of global GDP. This is a startling figure of corporate leverage in China, and comes on top of the rapid rise in local government debt in China, which I discussed in a previous blog post. There are implications of a worldwide character for this massive accumulation of private and public debt in China, which cannot have its impact in the entire global economy.
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Official figures from Beijing indicate that the Chinese economy grew by 7.5 percent in Q2 of 2013. In a developed economy, that would be considered stellar growth. In China, however, where economic dynamics (and economic data transparency) functions acutely different from a typical advanced economy, this number is alarming. It represents a sharp contraction in growth, far removed from the sweet days prior to the onset of the global economic crisis, when annual growth rates routinely exceeded 10 percent.
China’s economic model was based on export led growth, facilitated by low labor costs. As recession-plagued Europe, in particular, can no longer sustain a growth in exports from China, fiscal and monetary stimulus is substituting in an effort to extract some level of expansion in China’s economy. What is in fact occurring is the proliferation of massive bubbles, particularly in real estate. Much of the GDP growth in China is based on industrial, commercial and especially residential real estate construction funded by easy credit. The number of unoccupied homes and office complexes is rising, leaving China’s economy vulnerable to massive bubble implosions on the level that afflicted the U.S. property market in 2007.
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