Nothing can grow forever and nothing can certainly grow fast forever. China’s heydays of exponential growth are already gone and this decade will be full of daunting challenges. There are myriad structural components that will hamper China’s growth and possibly induce financial crises. Here are the top three obstacles:
Decelerating GDP Growth
China had phenomenal GDP growths of about 10% for thirty years. However, the Chinese economy has matured in many ways — wages have peaked, construction has flattened, and productivity growth has maxed out. China has already built most of the homes, skyscrapers, highways, high-speed rails, subways, bridges etc. Every Chinese home has smartphones, household appliances etc. Manufacturing wages grew 10x in the last two decades and now corporations are trying to cut wages. Hi-tech workers are already tired of the 996 work hours (9am to 9pm, 6 days a week) and cannot work any harder.
Looking at China’s GDP growth in 5-year intervals, one can see the secular decline in GDP growth rate:
In this decade, economists estimate that the average annual GDP growth will be 4-5%, assuming there is no serious financial crisis.
Why would there be a financial crisis? China has the same problem that plagues other countries: Debt.
Soaring and Unsustainable Debt
For a communist/socialist country, China has been debt-binging a lot, especially since the 2008 financial crisis. While China did invest a lot of that money wisely on infrastructure and technology, the overall debt has skyrocketed for the government, households, and corporations. The total debt-to-GDP is now 300% and that doesn’t include shadow banking, which adds another 60-90%. Here is the debt chart without the shadow banking: (Source: CNBC)
China’s total debt has grown stunning 160% in the last eight years — from $16 trillion to $42 trillion — while the GDP grew only 73%. In other words, debt has grown twice as fast as GDP. Here’s the breakdown, which shows how corporate debts have more than doubled and household debts have more than tripled.
More debt for households obviously means less money available for spending/consumption. (Household consumption accounts for about 40% of China’s GDP).
Now, Chinese corporations are facing whopping $2 trillion of bond payments/redemption over the next three years.
Corporate defaults have skyrocketed. Giant conglomerates like HNA Group and Anbang Insurance have gone bankrupt recently. The latter was worth $300 billion three years ago and was liquidated for just $5 billion this year. These companies were trotting around the globe few years and buying everything from Waldorf Astoria hotel and Beverly Hills properties to fancy soccer teams in Europe.
China’s real estate accounts for almost 30% of GDP. However after three decades of insane growth, the sector is sputtering. Evergrande is now the world’s most indebted real estate company and is begging for a bailout. Same story with Suning, China’s largest brick-and-mortar company.
Once upon a time, the Chinese government would bail out all the state-owned enterprises (SOEs). Now, SOEs are struggling under $4 trillion of debt and account for half of all corporate defaults. Giants like Huarong and semiconductor darlings like Tsinghua Unigroup are facing bankruptcy.
China has survived thirty years of capitalism without a major financial crisis through careful management and government bailouts. But now the system is too complex and too big to be saved by the bureaucrats.
While financial problems can be postponed by printing money, there are no solutions for demographic problems.
- Retired and senior citizens’ populations are increasing rapidly (In China, men retire at 60 and women retire at 55 or 50, depending on the job). There are already about 300 million retired people in China. This phenomenon, combined with increasing life expectancy, threatens to bankrupt the pension fund by 2035.
- The labor force peaked four years ago and is shrinking by about 7 million people every year.
- Chinese couples neither want to nor afford to have more than one child. And young women are laughing at the CCP’s new three-child policy. Moreover, young people are delaying marriages, and divorce rates are rising too. For millions of men, marriage is not even an option because of the unbalanced gender ratio (110 men to 100 women in the age group of 20-30).
- Migrant workers do all the difficult and essential work in factories, construction, package/food delivery etc. that drive China’s economy. And the migrant population is getting old as well, which means not enough workers to the jobs that are the cornerstone for the country’s growth. (These migrants — people who moved from villages to cities — are legally treated as second-class citizens and exploited ruthlessly. But that’s another blog).
This one chart below summarizes the situation in China — declining growth and rising debt. China’s annual GDP growth rate fell by more than half since 2006, while the household debt-to-GDP grew staggering sixfold during the same period:
China must adjust to the new normal and also implement several tough reforms. China must get rid of discrimination against migrants, carefully deflate the real estate and debt bubbles, reduce the cost of raising children, and reform the 150,000 unproductive state-owned enterprises (SOEs). Finally, China should tone down its aggressive foreign policy, focus on “peaceful rise,” and seek compromises with the U.S., Europe, and neighbors. Geopolitical conflicts in the midst of a slowing economy is a recipe for disaster and revolution.