George Soros observed that the situation in China "eerily resembles what happened during the financial crisis in the U.S. in 2007-08, which was similarly fueled by credit growth," American media reported April 20. China is fighting to dispel uncertainty over its economy as a slowdown and ballooning debt spur foreign investors to warn of the sort of recession seen in Japan's lost decade and in the U.S. after the global financial crisis.
The famed investor had weighed in on China in January, asserting that "a hard landing is practically unavoidable." His comment drew sharp retorts from Chinese media.
Beijing is using every means at its disposal to inject money into the economy. Social financing, or lending by banks and other institutions to companies and households, swelled by 2.34 trillion yuan ($361 billion) in March, triple the previous month's growth, data released April 15 by the People's Bank of China shows. While the government's efforts paid off, with economic indicators showing improvement in March, Soros called the rise in debt a warning sign.
Both Japan's economic bubble in the 1980s and the U.S. housing bubble in the 2000s were accompanied by surging debt. The balance sheet adjustments required after they burst led to protracted economic slumps.
As for China, nonfinancial companies there had $17.44 trillion in debt on their books at the end of last September, according to the Bank for International Settlements -- quadruple the figure at the end of 2008. The country accounted for nearly 90% of the total global increase over that period.
"Even though China's annual [nominal gross domestic product] is growing just 6%, outstanding loans are rising 15% a year," said Kengo Yoshida, a strategist at Mizuho Securities (Asia). Based on Japan's experience, the credit bubble will burst in about three years, he said.
China and Japan share concerning population trends, which Wells Fargo explored in a March report titled "Does China Face a Japanese-Like 'Lost Decade'?" The authors, including global economist Jay Bryson, noted that Japan's working-age population topped out in 1995. China's working-age population has peaked and will drop off sharply starting in 2030, they said. The report warned that the country will face a prolonged slowdown if it cannot compensate for population loss through productivity growth.
Chinese authorities have reiterated that the economy can weather downward pressure. But markets are skeptical, partly because the country has not yet come out with a comprehensive solution to the debt problem.
Premier Li Keqiang has proposed having banks swap bad corporate debt for equity. But some argue that this plan would create a moral hazard among borrowers if poorly executed. It could also prolong the lives of inefficient "zombie" companies, running counter to structural reform.
"In the next three to five years, China's economy will face stiff challenges," Jack Ma Yun, executive chairman of Chinese e-commerce behemoth Alibaba Group Holding, recently told a Hong Kong newspaper.
"The traditional industries are struggling, but we also see growth in domestic consumption, the services industry and the high-tech sector," he noted, advising against panic. These factors will promote economic recovery, keeping a chronic slump at bay, he argued.
Ma's optimism should be taken with a grain of salt given his coziness with the ruling Communist Party. But his point that "the most important thing is entrepreneurship" should be heeded. Technological innovation can drive economic growth even amid a population decline. Undertaking drastic reform while unleashing the ingenuity of the public may be the quickest way to avoid stagnation.
KEIICHIRO MORIYASU, NQN staff writer