Forget the chatter around the economic risk posed by Brexit, for a more dangerous spectre looms: China’s massive debt pile and the potential for a painful slowdown in the Asian powerhouse.
Former chief economist of the International Monetary Fund, Ken Rogoff, said yesterday that a slowdown in China is the greatest threat to the global economy. Rogoff, now at Harvard, warned a hard landing for China could not be ruled out as its growth slows at a much faster rate than the official figures indicate.
Beijing has turned to massive lending to boost economic growth, bringing total net debt to over $25 trillion by some estimates.
It has been spending on a scale never seen before. In the last five years alone 30 new airports and 26,000 miles of motorway have appeared, along with vast new cities – many of which remain deserted. The problem is that credit-fuelled growth like this has never lasted forever. Worryingly, Chinese bad loans are believed to be nudging $2 trillion already.
Last week, the Bank of International Settlements (BIS), the so-called “central bank of central banks”, said China’s credit-to-GDP gap hit 30.1 in the first quarter of 2016. The BIS considers a gap of 10 to be a sign of potential danger.
Overinvestment, an overvalued yuan and weak global growth have hit the Chinese economy hard according to Diana Choyleva, chief economist of Enodo Economics, with growth thought to have slowed to 6.7 per cent in the second quarter (even according to the official figures). To put that into context, the country’s annual growth rate averaged 9.82 per cent from 1989 until 2016.
Beijing must rebalance China’s economy towards consumer spending, Choyleva believes, but it cannot do that without accepting economic pain in the next couple of years. A successful rebalancing would entail a weaker yuan, but the rest of the world is not ready for that.
So the spectre of a Great Chinese Crash hovers over the global economy. If the debt bubble bursts, the UK will not be immune. British banks have $530bn worth of lending and business in China, including Hong Kong.
Previous chancellor George Osborne embraced the Chinese with open arms and the current prime minister has approved their investment in Hinkley Point. But before we strengthen ties further, we must consider what China’s potential fall will mean for us at home. Their pain would be our pain, too.