China is loaded, but it looks like it’s been seriously maxing out on credit. What’s going on and what does it mean?
A million millionaires. More billionaires than America. A booming economy. Yep, China is loaded. But there’s a problem – it looks like a lot of the wealth was built on debt. Around 25 trillion dollars of it!
The Chinese economy has been (although it’s slowed down a bit recently). The value of all the goods and services it produced last year (its GDP) grew by about 7% – something other countries can only dream about.
And consider all those ‘Made in China’ stickers! In May this year, China exported much more than it imported (its trade surplus), to the tune of $50 billion! Compare that to the poor old UK (the world’s fifth largest economy), with a deficit of more than $4 billion.
That means a lot more people getting to drink champagne every night and dress head to toe in Prada, Gucci and Christian Dior. The 1% is making its presence felt, which perhaps explains why shows like Ultra Rich Asian Girls are going down a storm in China.
But is it all real? Well, maybe not.
It seems that the only way China has produced so much, so quickly, is by lots of its companies taking on debt, then buying loads of stuff, building loads of stuff, and producing loads of stuff, which makes growth figures shoot up.
It’s kind of like maxing out the credit card and then saying, “Woo-hoo, I’m loaded.” Then you’ve got a ton of stuff (like vast cities that no one lives in, or a load of steel that you can’t use), but there’s a massive amount of money to pay back.
And now the International Monetary Fund (IMF) – the nagging parent of the global economy – is getting worried about it.
How did this happen?
Well, China is different from most other countries, because many of its biggest companies are still owned by the state (yep, they’re called State Owned Enterprises, or SOEs).
Some people argue that these companies aren’t always the most productive, and that in this instance they’ve been used to fuel the huge boost in growth. The thing is, with such a large amount of debt-based money available, it’s difficult for any economy to use it productively - there’s only so much you need at any one time, and only so much that can be profitable.
That’s why you see massive cities being built, but no one actually living in them (they’re called ‘ghost cities’) - because you’ve supplied a need that doesn’t exist.
This means that corporate debt in China is now around one and half times the value of its GDP. And these SOEs account for just over half of that, which is why they’re sometimes called ‘zombie companies’. They’re not really producing as much as they could, and, some say, exist really just to pay back their debts.
Trouble is, as time goes by these companies may become unable to pay all this money back. And when they’re not getting paid back, banks and lenders tend to stop lending as much, which results in a general slowdown in economic growth. Welcome to ‘vicious circle’ time.
And what does it all mean?
Well, as is so often the case, economists disagree on this, so the jury’s still out.
Some think that because the world’s economies are all much more closely connected these days, that the potential debt problem in China could creep through into other economies and damage them. Worse case scenario: a significant financial crisis, a bit like in 2008.
Others say that the Chinese economy is very different to, say, the US economy, and not as closely tied to other economies. Also, that economics tends to serve politics (everything is run by the state) in China, not the other way round (more the Western way, where the market tends to dominate), which may mean less instability than we saw in the 2008, and so less widespread effects.
What it will certainly mean for China is slower overall growth and much less cash to splash around - because so much of it is going on repaying the debt. People are already buying fewer Prada handbags. The Italian fashion company recently reported a decline in its sales, and other figures show the whole luxury market in China is slowing down.
Seems like the Ultra Rich Asian Girls may need a rebrand: the Fairly Rich Asian Girls sounds pretty good.