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
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