China and the credit crunch/FRFI 235 Oct/Nov 2013

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Fight Racism! Fight Imperialism! 235 October/November 2013

On 28 July China’s National Audit Office announced that it had been instructed by the government to count how much money was owed by all levels of government from the village up to the central authorities. A senior Chinese auditor told the Financial Times that local government debt was 'out of control and could spark a bigger financial crisis than the US housing market crash’ (29 July 2013). China’s economic growth is more dependent on the expansion of credit than at any time since the 1949 revolution. Debt has increased dramatically since the 2008 global financial crisis, it is growing faster than national income (Gross Domestic Product – GDP) and a day of reckoning draws close.

For three decades China has averaged annual GDP growth of over 10%. For 2013 the government target for growth is 7.5% and it expects to see this achieved. However, if debt grows faster than income, the ability to repay it diminishes and further borrowing may be required. When the 2008 financial crisis erupted the Chinese government launched a $653bn stimulus programme to compensate for any fall in export earnings. This additional money fuelled an expansion in lending. China’s GDP is a little over $8 trillion but its combined central and local government and consumer debt are estimated to be 200% of GDP. As economic growth slowed this summer, with export revenues falling, the government reacted with another mini-stimulus, spending an additional $167bn on railways and increasing credit.

China started privatising housing in 1998; previously it was all state owned. Housing has become a target for speculation fuelled by expanding credit, much as it has in Britain and the US. To stimulate growth local government officials appropriated land cheaply from farmers and then sold it at mark-up prices to property developers, who in turn built high rise apartment buildings. Local governments would use the land they bought as collateral for loans which could be used to buy more land to be sold to private developers and for infrastructure projects to support the new buildings. The result has been a surplus of housing, slowing land sales, diminishing local government income and increasing inability to repay loans. Banks have reduced lending and infrastructure projects are closed.

However, in the big cities property speculation has continued. Here housing prices have risen nearly 20% in the year to August and the number of house sales increased 23% in the first eight months of 2013. Buildings remain empty as they are bought for speculative purposes and not for living in.

While property speculation has increased Chinese debts, business and household borrowing rose from 117% of GDP in 2008 to 170% at the end of 2012. The equivalent proportion for the US was 157%. Principal and interest repayments on business and household loans may absorb a third of GDP in the next decade, further slowing economic growth.

Any slowing down in China’s economic growth will have a significant impact on many of the world’s economies (see FRFI 232, April/May 2013). Some 40% of the world’s economic growth since the 2008 financial crisis has come from China. China consumes over 40% of the world’s copper, aluminium, crude steel, nickel and zinc. As China’s growth slowed, copper, iron ore and coal prices fell 30-50% from their 2011 peak to August 2013. By 2011 China had become the main export market for Brazil, Chile and Peru and second for Venezuela, Cuba and Argentina. Sales to China account for about 35% of European carmakers’ profits. Between the first quarter of 2012 and that of 2013 German shipments to China fell by 7%, a loss equivalent to 0.5% of Germany’s GDP.

Credit cannot be expanded indefinitely; ultimately debts have to be repaid or the credit dries up. China’s day of reckoning may not be far off; as one Chinese commentator told the Financial Times (28 August 2013), ‘Winter is approaching. You can still take your coat off and pretend it’s warm, but actually it is beginning to bite.’

Trevor Rayne