Winnipeg Free Press - PRINT EDITION

When China's bubble pops

  • Print

TOKYO -- It took China to prove Friedrich Nietzsche wrong. What didn't kill the Communist Party hasn't made it stronger. It's only making the inevitable crash bigger, more spectacular and needlessly dangerous.

China's debt reckoning is coming. Maybe not this quarter or this year, but Chinese President Xi Jinping's unbridled effort to keep growth from falling below the official 7.5 per cent target is cementing China's fate. China is investing just as much as it did in 2008 and 2009, when authorities were desperately trying to avert a slowdown.

Just as debt troubles in Japan, Europe and the United States ended badly, so will China's.

Why, then, with so many clear examples of financial excess leading to ruin, is Xi continuing down this road? Blame it on the ghosts of Tiananmen Square.

In the aftermath of the crackdown on student protesters on June 4, 1989, China's leaders made a bargain with their people: We will make you richer, as long as you no longer dissent. After the crash of Lehman Brothers, the regime had to go to extraordinary lengths to keep up its end of the bargain, pumping up what was already the world's highest investment rate. In doing so, China itself became a Lehman economy -- powered by shadowy funding sources, off-balance-sheet investing and unconvincing claims that all remained well.

For awhile this rampant investment growth seemed to make China stronger; now that strategy is its main vulnerability. Yet Xi and Premier Li Keqiang apparently can't bring themselves to roll back those policies and rebalance the economy away from exports and toward more consumption. They know that if they do so, growth will slow a lot, challenging the post-Tiananmen compact -- and in the Internet age, no less. As anger grows over any slowdown, Chinese censors won't be able to delete text messages and microblog entries fast enough.

It's often said when the U.S. sneezes, the entire world catches a cold. But the eventual popping of China's $23-trillion credit bubble could send many nations to the emergency room. Any crash would make deflation China's biggest export.

China's brawn is widely misunderstood. Take Donald Trump's recent musings to Fox News about China's rising economic dominance and the tragedy of the U.S. borrowing from Beijing to service a debt "no one ever dreamt possible." You would think a man with Trump's track record of bankruptcies would understand losses from debt don't disappear. When a company, or nation, rolls over unpaid debts without resolving them, profits -- or gross domestic product -- are overstated, as China's is today.

Where are the big defaults? Clearly they're being papered over, which only encourages more risky lending. Bad debts are at a five-year high. At the end of 2013, China's 10 largest lenders reported overdue loans had increased 21 per cent from a year earlier. That's hardly catastrophic for a nation with about $4 trillion of foreign currency reserves. But the real problem is this: Most of the real debt accumulation is in areas the outside world can't track. In many cases, that goes for authorities in Beijing, too.

The last four years, says Michael Pettis, a finance professor at Peking University, saw epic increases in borrowing outside the regulatory framework. When the People's Bank of China manages the economy, it's mostly concerned with yuan-based loans. But the vast majority of debt has been built up using letters of credit, bankers' acceptances and, most importantly, off-balance-sheet tools like so-called wealth-management products in the informal banking arena.

This latter feature of China's colossal shadow-banking system is comparable to the special-investment vehicles that undid Lehman and other Wall Street titans. It's also true that loans made at the top of a business or lending cycle are the ones you most regret. Early on, you build airports, bridges, roads and giant sports arenas. After that, misallocated investment becomes a bubble all its own that exacerbates national debt.

Local-government debt risks are bad enough. Investors such as Patrick Chovanec of Silvercrest Asset Management are right when they warn China's property bust is the real time bomb. If the main asset underpinning everything from local-government finances to state-owned-enterprises goes bad, watch out. Just ask students of Japan's crash in 1990, Wall Street's in 2008 and Europe's thereafter.

Credit expansion can't outpace GDP growth forever, not even in China. As Xi flexes his muscles around the world and ramps up military spending, he would do well to reflect on this irony: The very thing from which his party has derived its strength and legitimacy in the 25 years since Tiananmen -- a booming economy -- is fast becoming its biggest weakness.

William Pesek is a Bloomberg View columnist based in Tokyo who writes on economics, markets and politics throughout the Asia-Pacific region.


Republished from the Winnipeg Free Press print edition June 7, 2014 A17

Fact Check

Fact Check

Have you found an error, or know of something we’ve missed in one of our stories?
Please use the form below and let us know.

* Required
  • Please post the headline of the story or the title of the video with the error.

  • Please post exactly what was wrong with the story.

  • Please indicate your source for the correct information.

  • Yes


  • This will only be used to contact you if we have a question about your submission, it will not be used to identify you or be published.

  • Cancel

Having problems with the form?

Contact Us Directly
  • Print

You can comment on most stories on You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

You can comment on most stories on You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

Have Your Say

New to commenting? Check out our Frequently Asked Questions.

Have Your Say

Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?

Have Your Say

Comments are open to Winnipeg Free Press Subscribers only. why?

The Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.


Make text: Larger | Smaller


NDP MLAs pitch their ‘Pledge of Solidarity’ in attempt to heal caucus

View more like this

Photo Store Gallery

  • Down the Hatch- A pelican swallows a fresh fish that it caught on the Red River near Lockport, Manitoba. Wednesday morning- May 01, 2013   (JOE BRYKSA / WINNIPEG FREE PRESS)
  • Goslings enjoy Fridays warm weather to soak up some sun and gobble some grass on Heckla Ave in Winnipeg Friday afternoon- See Bryksa’s 30 DAY goose challenge - May 18, 2012   (JOE BRYKSA / WINNIPEG FREE PRESS)

View More Gallery Photos


Should NDP MLAs sign the "pledge of solidarity"?

View Results

View Related Story

Ads by Google