Logan Wright, who is responsible for China's economic and financial markets at the Rhodium Group in the United States, said that due to low investment efficiency and the accumulation of trillions of dollars in bad debts, China has been unable to stimulate domestic demand among households and companies. Economic growth is completely dependent on exports, and the emerging strategic industries it promotes cannot solve the problem of persistent imbalances in investment and consumption in the economy. The main challenge facing the Beijing authorities is: if domestic demand cannot be stimulated, trade tensions will be inevitable.
White will publish his latest book "Broken China" in late September. In a recent interview with Voice of America, he said that the book is a diagnosis and explanation of China's economy, especially the significant slowdown in economic growth since the collapse of the real estate market five years ago.
White pointed out that China is an investment-driven economy, and the root of its economic problems is the expansion of the financial industry that began in the 2000s. At that time, the banking industry gathered capital and guided savers' funds to support various infrastructure and factories, and to increase manufacturing capacity with the assistance of foreign capital. However, the benefits of investment in these infrastructures subsequently declined and they were unable to bring about new economic activities, but instead led to a surge in bank credit.
According to statistics, during the period after the global financial crisis from 2008 to 2016, China accounted for approximately one-third of the world's new bank credit, and the proportion of credit in GDP (gross domestic product) almost doubled. The surge in credit in such a short period of time is unprecedented. White said that many of the consequences China is facing now are due to the fact that many loans issued in the past are now due for repayment.
Under fiscal constraints, China hopes to tax household consumption, but encounters difficulties and dares not reform state-owned and local government enterprises. Faced with this dilemma, the Beijing authorities have doubled down on investment-driven growth, focusing on advanced manufacturing. However, the problem with emerging strategic industries such as advanced manufacturing, artificial intelligence, and robotics is that they are capital-intensive industries rather than labor-intensive industries, and they provide few employment opportunities.
If the imbalance between investment and consumption in China's economy continues, everything produced in China will eventually go overseas rather than domestically, which will exacerbate trade tensions between China and the rest of the world. This is precisely because if China cannot stimulate domestic demand, it must continue to rely on exports to maintain growth.
But this capital-intensive, advanced manufacturing-led growth strategy will ultimately lead to deflation rather than sustainable growth, and deflation will inhibit investment not only in China but also in other parts of the world. Therefore, to break away from this growth model, Beijing needs to change the way its fiscal and financial systems allocate and allocate capital, but these reforms are very difficult.
