China’s debt surge shows what’s working for the global economy and what could go badly wrong.
Without the country’s massive stimulus in 2008, one of the catalysts of the credit binge that’s lately causing so much angst, the world would have taken much longer to recover from the financial crisis. And it’s likely that the revival we’re now witnessing would have been weaker, with less scope for future acceleration.
Growth in the world’s major economies has been the subject of a lot of criticism as it is; imagine how much worse it could have been. Now, that maligned recovery is in its eighth year and, according to the International Monetary Fund, is looking like it’s on a firmer footing.
China’s debt binge is an important reason why. Pump priming has not only kept China growing in the 6.5 percent to 7 percent range, it’s kept a floor under the global economy while the U.S. seems stuck around 2 percent. The IMF moved up its forecast for China this year, citing “continued fiscal support.” Next year also earned an upgrade, mostly reflecting “an expectation that authorities will delay the needed fiscal adjustment.”
But the IMF also cites China’s debt as a major threat: Failure to tackle the problem is one of the biggest risks to the outlook over the medium term. An inability to get to grips could result in a sharp slowdown that would ricochet throughout the world.
So there you have it. The stimulus and fiscal expansion that’s kept China’s economy chugging away despite the doomsayers is cause for both thanks and concern. You can’t chastise a country for high levels of debt without acknowledging its role in supporting the global economy.
It’s also worth noting that the China bears who have been criticizing the debt binge have been mostly wide of the mark. It feels like we’ve swung from unbridled optimism about China’s growth to excessive pessimism. In 2015 and 2016, market gyrations were going to bring the place undone. Then the numbers were “fake” or “made up.” You didn’t hear so much of that when gross domestic product was clocking gains of as much as 15 percent.
There was even whining when services began accounting for more than half of China’s GDP. It’s only a shift that had been advocated by pretty much every economic communique and finance minister in the world. But, no, more important was whether GDP growth was 6.5 percent or 6.7 percent, versus economists’ forecasts of, say, 6.6 percent.
Given China’s record at muddling through it might be worth projecting growth at about the current pace. Sometimes it may be closer to 7 percent, other times closer to 6.5 percent, but in the ball park. Coupled with the continued march of the services sector and household consumption, that’s not a bad brew: See Starbucks Corp.’s beefed-up expansion plans unveiled last week.
And Chinese officials appear well aware of the dangers. They’ve lately been invoking“gray rhinos”: very conceivable, high-impact threats that people should plainly see coming but often fail to prepare for. Wang Zhijun, a finance official, enumerated a few of them last week, including property bubbles, shadow banking, heavily indebted state-owned enterprises and illegal fund raising.
If China does keep muddling through — and the U.S., Europe and Japan broadly stay on their current growth trajectory — it’s a fair bet that the global expansion will continue at between 3 percent and 4 percent a year. On the face of it, that range doesn’t seem so hot. But it’s consistent with the average since 1980 and, looking back, there were some pretty good years in there.
Bigger question: Can we get back to the scorching rates of 5 percent-plus the world witnessed in the few years before the 2008 cataclysm? Do we even want to, knowing what followed?
China’s debt expansion — and efforts to control it — might well hold the key. In either direction. We may again be grateful to China.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.