Global Economic Crisis

While much of the discourse on public debt and deficits among economists and media pundits has been related to  the Eurozone Crisis, especially regarding Greece, or major developed economies such as the United States and Japan, much less has been heard about China’s fiscal status. Yet, one of the most rapidly growing factors of public debt is occurring right now, in China, largely under the radar of the so-called fiscal prophets of doom.

At present, according to always questionable  official statistics from Beijing, China’s total public debt represents 58 percent of the nation’s GDP. This is significantly lower than is the case with Japan and the United States. However, it is the rate of growth of that debt, particularly in connection with Chinese local governing authorities, that may begin to sound alarm bells. It appears that following the global economic and financial crisis of 2008, cities across China embarked on a massive borrowing and spending binge in a super-charged Keynesian effort to sustain China’s traditional  high annual rate of economic growth.

China’s  National Audit Office (NAO), following directives from the national authorities in  Beijing, undertook an extensive accounting and auditing of the books of all of  the nation’s local spending authorities. What they discovered was that in only three years, China’s local public debt grew by a staggering 70 percent, reaching a total of 17.7 trillion yuan, equivalent to nearly three trillion U.S. dollars. Another statistic is sounding alarm bells in China; up to 80 percent of all bank lending in China during the period following the onset of the global economic crisis was to local governments.

The vast spending spree by city governments across China has erected vast quantities of housing stock and commercial edifices that are unoccupied and infrastructure projects that are underutilized. Some economists, particularly outside of China, may defend this massive and largely uncontrolled public debt expansion as enlightened public policy, aimed at preventing high rates of unemployment in China. However, China’s national leadership is clearly worried about this stunning rate of growth in public debt at the local level, far outstripping real economic growth rates.  Beijing knows that seeding official GDP growth rates with an  unrestrained tidal wave of red ink is not a sustainable economic path to pursue. The dilemma for Beijing’s economic policymakers is this; now that they know  they have a serious problem of exploding public debt, what options are open to them that impose the least degradation to their cherished high rate of annual GDP growth? Their ultimate answer will inevitably have profound implications for the entire global economy.

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As a percentage of GDP, China’s economic stimulus program of 2009 was the largest in the world, and second place to the U.S. in monetary terms. Ironically, the supposedly communist economy of the People’s Republic of China became the last best hope of world capitalism, in the wake of the global financial and economic crisis that began in 2008. Now, it appears, things may be unwinding in a bad way for Beijing.

Copying its capitalist rivals, Beijing’s hybrid government/private economy poured massive amounts of cash into creating new asset bubbles, particularly in real estate. China built shopping malls with no customers, cities with no inhabitants and roads with no traffic. Extravagantly redundant infrastructure was constructed with stimulus money, goosing China’s GDP with annual double digit growth rates. This model was clearly unsustainable; China’s leaders were hoping to buy time so that the nation’s major export markets in Europe and the U.S. would recover with their own stimulus programs, and resume  their buying spree of cheap Chinese goods.

“Kick the can down the road” became the official credo of economic policymakers responding to the global economic crisis. As with other economies pursuing this shortsighted policy prescription, China failed to address the fundamentals of its economic challenge. The proportion of domestic consumption as a share of  GDP in China is less than half the ratio of its customers in the developed world. With its economic ascendancy dependant on overseas customers, the stagnation and contraction of the economies of those customers leaves a void that Beijing cannot cover by building the economic version of sand castles.

With the Eurozone tottering on the edge of the abyss, the U.K. mired in recession and the U.S. growth rate so anemic, even with trillion dollar plus annual deficits, that it is now at stall speed, it appears that the policymakers in Beijing may have lost their stimulus spending bet.  Domestically, the Chinese PMI  (Purchasing Managers Index)  has slumped to the lowest level in eight months. Other indicators, even amid the opaqueness of China’s official economic data, point increasingly towards a hard economic landing  for the world’s second largest economy. The consequences will be dire, not only for  China, but also for the global economy as a whole.

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There is another inference to draw from Premier Wen’s presentation on the economic problems confronting Beijing. While not belittling the acute and dangerous challenges that the Global Economic Crisis poses for China, the nation’s leadership seems to have taken a long view that suggests the following: by playing her cards carefully, China may be able to exploit the Global Economic Crisis in such a manner that she will emerge as the dominant economic power in the world.

With the United States reduced to literally begging China to buy her Treasuries, a vital imperative necessary to finance Washington’s stratospheric deficits, it may be that China is already positioned for global economic dominance, so long as she succeeds in maintaining her social cohesion during the difficult years that lie ahead.

Talks on mutual economic issues involving the United States and the Peoples Republic of China are now taking place in China amid the worsening global economic and financial crisis. The series of talks will occur over a two-day period. According to Chinese officials, the global economic crisis will dominate the discussions.

On the U.S. agenda is an attempt to resolve a dispute about the value of the yuan, the Chinese currency. These meetings are occurring under the auspices of the China-US Strategic Economic Dialogue, established in 2006 by the two major trading partners. The purpose of the dialogue is to iron out economic issues and disputes involving China and the United States. in his

Chinese Vice-Premier Wang Qishan, who is attending the meetings, the talks for China, told the Chinese and American participants that, “Making joint efforts to tackle the current global economic crisis is the most urgent task before us.”

What began as a global financial crisis has truly become a virulent global economic crisis. The credit crunch that has clogged the arteries of the world financial system has now caused an economic meltdown of global proportions. No economy, big or small, developed or undeveloped is being spread.

The danger confronting policy makers and citizens as the international community and individual sovereign nations are passing through uncharted but stormy waters. Parallels are already being drawn to the Great Depression of the 1930s. More dire, several very learned financial experts and economists have warned that what the world confronts is a mega-economic crisis that may even dwarf the Great Depression.

Recently, even China’s high growth rate has receded. It was hoped at one time that the Chinese economy could rescue the planet from a worldwide recession. scenario is no longer operative. The Eurozone, the U.K. and the U.S. are now experiencing negative growth in their GDP. A terrifying global economic crisis is about to inflict staggering pain throughout the globalized, interconnected planet.