Be prepared: China’s bubble will soon burst

Opinion

Hey there, time traveller!
This article was published 17/07/2016 (3342 days ago), so information in it may no longer be current.

There’s something going on across the Pacific. The world’s second-largest economy is a bloated, gorged, debt-riddled dragon ready to burst at the seams.

It’s going to crash, hard, and some economists are saying it will rival the Great Depression. In a recent interview with MarketWatch, renowned economist Andy Xie — formerly of the World Bank and Morgan Stanley, who now works independently — said this won’t be like the 1997 Asian currency crisis or the 2008 U.S. subprime-mortgage fallout. It will be bigger and much more pronounced, Xie said.

On the heels of the Brexit crisis, this obviously isn’t good news, but at least this crash isn’t going to blindside the majority of the planet like the mortgage crisis and make a select few short sellers very, very rich. We’re going to see this one coming because it’s been stacking up for years.

Xie joined the ranks of Gorge Soros in sounding every alarm bell he could get his hands on. Soros, a noted investor who is one of the world’s 30 richest people, has a history of selling short and turning out correct. What Soros and Xie are saying is China’s unprecedented growth has been propped up by bad credit, loose spending and bloated real estate and stock markets, just to name a few of the country’s economic problems. It has a laundry list of social ills — from an aging population to an abundance of men (one-child policy) and a mass population migration to its cities as its farmland dries up, partially because of the government steamrolling agricultural land to build hotels and other useless infrastructure.

It’s also cooking its own GDP growth numbers in a bid to sustain a perception of expansion that has been unsustainable for years. Further, recent reports have pointed to another bubble within the country: China is pumping money into research and development and building office towers, expecting entrepreneurs. However, nobody’s coming to set up shop and open business. Sound familiar? China has been doing the same thing with its real estate market, building ghost cities and counting the construction toward GDP. Its middle class bought a record amount of property, and when that started to sour, the government forced them to switch to the stock market, which has been on a roller-coaster ride ever since.

High government debt, economic inefficiencies, commodity bubbles from steel and iron ore to zombie investors and shadow banking practices. Here in Vancouver, we’re seeing it right before our eyes: an out-of-control property market the government has only recently decided to acknowledge is almost completely inflated by an outflow of Chinese money. Mainlanders have taken cash out of the country at unprecedented rates, as high as $46 billion a month in the past half-year alone.

As a Winnipegger, should you be worried? Well, yes. China’s top two trading partners are the European Union — already on one leg after Brexit — and the U.S., which has seen modest growth lately, a lone bright spot in a weary post-2008 world. Canada, deeply tied to the its neighbour’s fortunes, will go as our American counterparts do, and our own third-largest trading partner is the Red Dragon. It remains to be seen how deep this wound will stretch and how big the blast radius will be, but chances are this will not be a hiccup or temporary shock wave. The real hurt is going to come in national economies that are already suffering, such as Japan, South Korea, India, Russia and Brazil. Places already looking like houses of cards, places where economic forecasting has been a sore point for quite some time.

So when is this crash going to come? Here’s the really scary part: nobody knows. It could start this year, or it could take years. The longer the Communist party continues to prop its economy up and remain clandestine with its own internal figures, the larger its bubble will blow, the more advanced its crash will be and the lower the likelihood any inkling of a soft landing will remain. Chinese leadership has shown little in terms of progressive measures when it comes to reform. Their answer has been more debt, more government spending and more infrastructure expenditures to spur jobs and growth. This doesn’t even account for the fact the country has long been known for having rampant corruption and graft running through virtually every sector of its society.

Imagine a dog, caged and fed a very small, internally regulated portion of food for many years. This was China up until 1978. Then, through a series of market deregulations such as opening the country to foreign investment, that dog was allowed to eat more and more. But unlike a democratic nation where the boom-bust-bailout economy goes through relatively small cycles, that dog kept getting its stomach filled. Someone came in and started stitching on more space for the dog to put food into and told it to continue eating. Call it nationalistic pride for being late to the economic party, call it stupidly naive. Whatever you call it, China has been doing it for years.

Since initial deregulation in the 1980s and ’90s, all the way to 2005, China’s GDP headed to the private sector in a mass exodus and now accounts for at least 70 per cent. The country has been gorging since 1978, posting GDP growth as high as 9.5 per cent on a yearly basis. It continues to eat and continues to grow, but there’s no nutritional value to the meal it’s serving itself — it’s bad debt, it’s freewheeling credit, it’s unsustainable and it’s incredibly scary.

Could Xie and Soros be wrong? Sure. Could China manufacture one of the greatest, most remarkable soft landings in the history of mankind? Yes, anything is possible. But in 2016, realism rules, and reality is king.

Instability is the new stability, and if I were a betting man, I’d be putting money on black, as far away from red as humanly possible.

Patrick Blennerhassett is a Vancouver-based writer and journalist. His latest book is A Forgotten Legend: Balbir Singh Sr., Triple Olympic Gold & Modi’s New India.