By some measures already the world’s biggest economy, China is seeking energetically to flex its muscles abroad by launching grand projects such as the One Belt One Road investment programme and by establishing the Asia Infrastructure Investment Bank. However, though its influence is growing in much of Asia, China’s capacity to wield clout at the global level is often overestimated. Furthermore, it is pursuing costly- and possibly risky – international initiatives at a time when its domestic economy looks increasingly fragile and vulnerable to shocks, and amid warnings that it faces a looming financial crisis. It is beset by slowing growth and other serious problems, notably rapidly rising debt and a rapidly ageing population, to many of which its leaders appear to have no clear solutions. Meanwhile, plans to rebalance its economy and promote much-needed structural reforms have lost momentum. Unless China acts more decisively to overcome those obstacles, they may constrain both its future development and its global economic ambitions.
Towering debt mountain
The anonymous official’s biggest concern, like that of many international investors, is China’s towering debt mountain, currently between 250 and 300 per cent of GDP. Its most troubling aspect is not just its size, which is comparable to that in some advanced economies; it is the alarming speed at which it has risen – trebling since 2007 – and continues still to rise, as ever more money is pumped in in an effort to keep growth up and unemployment down. China’s chronic addiction to debt has led the Bank for International Settlements, the “central bankers’ bank”, to warn Beijing that it risks a banking and financial crisis in the next three years. Meanwhile, the country’s once robust fiscal condition is deteriorating: the International Monetary Fund calculates that its overall budget deficit, officially targeted at 3 per cent of GDP this year, has actually widened to more than three times that level.
Despite official efforts to restrict its growth, credit is still expanding twice as fast as GDP, as monetary policy veers erratically between bouts of “stop” and longer bursts of “go”. Much of the money is going, not into productive investment, but into asset bubbles, into rolling over existing loans to technically insolvent borrowers and into the coffers of state owned enterprises. Yet China’s most dynamic wealth and job creators, its private companies, still struggle to raise finance. Their confidence in the economic outlook also appears to be flagging, to judge by the sharp slowdown over the past year in their capital investments, which actually fell in July.
Meanwhile, the economy remains burdened with vast excess capacity, particularly in coal and steel, while zombie companies are kept alive on artificial life support. Here, too, official efforts to impose cutbacks have had to contend with concerns about the potential political cost of depressing the economy and raising the unemployment rate. Beijing recently ordered the coal industry to reverse course by expanding production, apparently out of concern that reductions in output had led to steep price rises. Furthermore, “streamlining” of the bloated SOE sector has in practice often consisted of forced mergers between troubled state-owned companies, in the apparent belief that combining them would by some alchemy transform them into dynamic industrial champions.
Nor is much progress being made towards another key government goal: rebalancing the economy by replacing investment with consumption as the main growth driver. Indeed, China has actually been going backwards. Final household consumption, at 39 per cent of GDP, is not just extraordinarily low by international standards; it is well below its 47 per cent share in 2000. Though services now contribute more in nominal terms to growth and output than do manufacturing and construction, that is largely attributable to a sharp slowdown in fixed asset investment and rapid expansion of financial and property-related services, both fuelled by the bubble economy.