China’s quick-fix economy is hooked on state stimulus
A surge in debt has been triggered by ‘overinvestment, overcapacity, and overproduction’
China’s economy is like a fentanyl junkie hooked on “overinvestment, overcapacity, and overproduction.” Ballooning public debt now “equals 100%” of gross domestic product or GDP, which is lower than levels in the United States.
But it is still “massive compared to countries with similar per capita incomes” to the world’s second-largest economy.
Deflation has also become a colossal problem as stagnant wages squeeze domestic spending after the property meltdown in 2020. Even though radical change is needed, President Xi Jinping’s administration is not for turning.
“China [is struggling] to break its addiction to manufacturing. Local governments are steering investment into new factories, adding to overcapacity and eroding profit margins [even further],” the Financial Times reported today.
Behind the numbers:
- Earlier this month, we reported that local governments had racked up as much as US$11 trillion in hidden debt.
- “Now it threatens [China’s] future,” The Wall Street Journal pointed out amid a vicious cycle of trade wars.
China’s industrial capacity is simply too much to absorb.
Alicia García Herrero, a senior fellow at the Brussels-based think tank Bruegel
Delve deeper: “Despite the rest of the world importing from it, China’s industrial capacity is simply too much to absorb,” Alicia García Herrero, a senior fellow at the Brussels-based think tank Bruegel, wrote in a June report.
Between the lines: Against this backdrop, Beijing is determined to keep unemployment in check by “accepting far-reaching economic distortions.” Currently, the jobless rate is running at 5.2%, according to official, doctored data.
Big picture: Still, China’s economy remains trapped in a stubborn deflationary spiral, which is compressing industrial profits. Data released at the weekend by the National Bureau of Statistics showed a 4.3% year-on-year decline in June.
China Factor comment: A mega-shock to the economy is looming unless Beijing weans itself off quick-fix solutions, such as “overinvestment, overcapacity, and overproduction.” The tremors will be felt across the globe.