August 2, 2015
The Chinese Bubble Is Only the Beginning
Over the past few weeks many folks have asked me, “What is happening in China?” I’m not up on the newest C-pop music star, but I can shed some light on what is happening to China’s stock market, and why it signals some long-term concerns for the country.
The Chinese stock market has been pummeled in recent weeks, seeing declines that have occurred in the US only in the Great Depression. To understand why this may be happening, we must go back in time a bit.
Following the Chinese Cultural Revolution, the Chinese Communist Party leadership came to the sad realization that the Marxist utopia remained a distant dream, so a second Great Push of workers from farms to factories occurred. This was among the greatest shifts of human beings in the world. From 1980 until today, China saw its urban population swell from 32 percent to 53 percent of its population, or some 370 million people. In 35 years Chinese cities swelled by more than the entire population of Canada and the United States.
Not surprisingly, the Chinese economy also grew during this time. But economic growth in a region can come from three different sources. An economy can grow because the technology available advances in quality, because workers and equipment are better matched to one another, because there are more workers and capital. Undoubtedly all of these things have happened in China, but growth has been dominated by moving workers from farms to factories. Even in China, that is not a sustainable strategy.
In 1980 a majority of workers living on Chinese farms lived at near-subsistence levels; think small farms in America, circa 1700. The urbanization, both forced and voluntary, has been a great economic boon, moving perhaps 150 million Chinese from the economy of 1700 to the economy of 1900 in just half a lifetime. But that is where China is stuck. The standard of living, or GDP per capita, is roughly that of the US in 1905. And that brings us to the present troubles.
In order to get more capital investment, modernize cities and stimulate the economy, China has created a huge financial bubble. It may well be the largest in history. As a share of GDP, China’s total debt is two and a half times larger than ours and 50 percent higher than that of Greece. This debt combined with vast, credit-fueled real estate construction means that China now has all the hallmarks of a bubble, but it is in housing, debt and public infrastructure.
Unlike Greece, China can monetize its debt by printing money. This will spread the pain to everyone who holds that currency. However, China does not possess the magical sauce that will enable its economy to grow sustainably. It remains a centrally planned, Marxist economy. The only historical precedent for their economy is long-term stagnation. That won’t happen for a long, long while, but the stock market turbulence of today is merely a hint of future difficulties.
About the Author
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