I am not an expert in China, but this is something I have been reading about myself. I will give my view on this…it might not be the right one, but I will try…
Structure Of The Chinese Economy
The Chinese economy of the past was built on two platforms - manufacturing and infrastructure building. While the fundamentals of the manufacturing are clear (west outsource everything to China), the role of infrastructure is perhaps less so.
China has been building roads, houses, bridges and other forms of infrastructure to build for its “bright future”. According to my understanding, these projects worked in the following cycle:
developers needed money -> banks lent money -> buildings were built fuelling economy (workers etc)
Many of these projects made little profit. Even though these projects were not efficient, local governors (whose performance is based on economic performance of regions) pushed for more funding and this credit cycle kept going.
This has lead up a build of debt which will never be repaid, because it was used for projects which weren’t profitable. Instead of addressing this problem, china has simply kicked the bucket down the road and increased the debt.
Today, the chinese government is extremely worried about the debt, but at this stage it has spiralled out of control. The credit taps have been turned and now its too late.
This cycle of using debt to take on unprofitable projects is unsustainable. And when people refer to China as a Ponzi scheme, this is what they are referring to…
Comparison To Other Pre-Crisis Countries
If you compare the China’s debt to ther countries before the recession, the results do not look great.
Before 2008, Spain’s private debt had reached roughly 200% of GDP and in the US it was less - 160%.
China’s level of private debt dwarfs these figures, with a private debt reaching 220% - a pretty grim number. Australia and Canada have very similar levels of debt. See below:
While the numbers do not look great, no one will be able to answer for sure when China’s bubble will burst, if at all.
But there is no doubt that something has to be done to save Asia’s biggest economy…