The economic crisis no one is talking about

Whether Greece will leave the euro or if Spanish banks will need a bailout causes worry within the Asean region. However, considering that the entire Greek economy is roughly equivalent to the economy of Bangkok, its impact through trade or financial channels is unlikely to be a significant drag on Asean countries. A much larger and more immediate concern is the perilous economic state of China.

Chinese imports from Thailand represent nearly 10 per cent of Thai GDP, with a boost from net exports to growth equal to about 4 per cent of GDP.  China is an important trading partner for Thailand and could exert a serious drag on Thai growth if its economy falters. Despite the eternal optimism of China bulls, there are worrying signs that the Chinese economy is rapidly deteriorating.

While the official Chinese data claim that economic growth is moving along at a healthy 7.6 per cent, when we look past the numbers that officials refer to as “manmade”, the statistics reveal a frightening scene. Insisting they are on track to realise GDP growth of 8 per cent this year, Japanese exports to China have dropped by 12 per cent and cargo traffic by key measures through Hong Kong declined 10 per cent over the past year. Industrial production numbers are low and dropping, while official capacity utilisation is 60 per cent. Unofficially, industries and companies are plagued by capacity utilisation rates of much less. Estimates of Chinese GDP using factors like electricity consumption, industrial production, or manufacturing find that China might be growing. Might.

Chinese finances are no better for governments or households. Despite the stereotype of the Chinese saver, in reality there is an enormous amount of hidden debt. For instance, the China Railway Ministry alone owes debts equal to roughly 5 per cent of Chinese GDP, with low ridership rates on their high-speed rail lines, which utilised much of the borrowed capital.  

Land sales, which have provided local governments as much as 50 per cent of their revenue, are falling as the real estate bubble bursts. Even using more restrictive definitions of government debt when studying a communist country, China is carrying debt of more than 80 per cent of GDP, or more than many European countries. If we use a less restrictive definition of public debt, Chinese debt exceeds 150 per cent of GDP, well above Greek levels.

The rumoured frugal Chinese saver is in similarly bad shape. There is a real estate bubble of enormous proportions currently in China. To put the magnitude of the bubble in context, according to the China Daily, the average price per square foot for an apartment in Beijing is about US$300. With an average monthly wage of $425, an average Beijinger can’t buy much of anything. Whereas the global long-term home price to income ratio is about 5 and peaked in the American bubble at 10, apartments in many Chinese cities cost 50 times the average income. To make matters worse, an enormous number of apartments in Beijing and many other Chinese cities are unoccupied. 

This bubble in investment was driven by an enormous binge of spending and debt after the 2008 financial crisis. In 2009, lending tripled from the previous year. Let me repeat that: from 2008 to 2009, lending tripled in China. On top of the explosion in debt, money grew at four times the rate of economic growth. 

All this money sloshing around the economy had to find a home. It found it in empty apartments, machines that don’t produce anything, and airports that nobody flies to. Literally, salt miners got into real estate development. 

While most Thai concern focuses on the European debt crisis, it would be wise to pay attention to the financial crisis that no one is talking about. Closer to home with a bigger impact on Thai trade and finances, the Chinese economy should be a cause concern. If Thai exports to China decline or the excess Chinese capacity results in pricing wars with Thai firms, this could place significant downward pressure on the Thai economy.

The wonder of the Chinese is economy is less about omniscient planners but more about debt and loose money fuelling an unsustainable growth in asset prices. Unfortunately, everyone knows how this story ends. 

 

Christopher Balding lectures at HSBC Business School, Peking University Graduate School. christopherbalding.com.