China’s economy: In for a bumpy ride

The most recent IMF World Economic Outlook projects that growth in China is expected to slow to 6.3 percent in 2016 and 6.0 percent in 2017, well below the 10 percent pace China had averaged since 1980. And even a six percent annual growth is still “abnormal,” warns Larry Summers of Harvard University, “China’s economic growth is likely to be lower still in future.”

George Soros echoes Summers’ warning. What is happening in China “eerily resembles what happened during the financial crisis in the U.S. in 2007-08,” cautioned Soros at the 2016 World Economic Forum in Davos, “a hard landing in China is practically unavoidable.”

“China’s long spell of breakneck growth already stands out,” according to London-based Economist, “in almost every other remotely comparable episode, very fast growth ended in a sharp slowdown. Slowdowns often occur despite seemingly sound prospects: both Brazil in 1980 and Japan in 1991 looked like juggernauts, yet they managed scarcely any growth at all in real GDP per person over the following 20 years. The surest of historical rules of thumb implies that twenty years from now, China’s economy will probably still be smaller than America’s.”

China bulls disagree. China, says Jack Ma, Alibaba executive chairman and the richest man in China, will continue to grow at a rate “enviable to other major economies for another twenty years.” The richest-ever Chinese techie dismissed fears that China would follow Japan’s route to stagnation, saying the country still had huge potential waiting to be tapped. “The traditional industries are struggling, but we also see growth in domestic consumption, the services industry and the hi-tech sector, we still have a lot of room for growth,” Ma told South China Morning Post, Hong Kong’s most influential English language daily newspapers and recently acquired by Alibaba for about $100 million.

“China is still on pace to become the world’s biggest economy,” announced China Daily in Beijing, “China’s economy will continue to grow strongly, it will remain the fastest growing major economy in the world, and it will outperform on the upside Western pessimists predictions.”

Conflicting views abound about the future of Chinese economy. As Allen Cheng of Institutional Investor puts it, “Investors cannot help but notice two kinds of news coming out of China these days. One tells a story of near-panic-driven stock market declines, a falling currency, high and rising debt levels, and a rapid slowdown in growth-all adding up to evidence of a hard landing for the world’s second-largest economy. The other type of news portrays a confident, rising superpower that is setting up institutions to rival the World Bank and the IMF, a country whose companies are embarking on a record-breaking spree of offshore acquisitions while its wealthy elite drive up property prices from Manhattan to Mayfair.”

China is presenting a bipolar portrayal to the world. The question is: which one is more accurate?

China’s economy is in for a tough situation. For one thing, the risk of a “Japanification” of the Chinese economy is growing. Japanification is a term used by economists that refers to the transformation of an economy into one that follows the steps of Japan. Japan’s impressive growth in the second half of the 20th century ended abruptly in the late 1980s, as a result of a speculative asset price bubble of massive scale. Likewise, massive overinvestments in real estate and continuous stock price manipulation together have created a dangerous asset price bubble inside China today.

Another equally challenging, but less noticed, issue in the Chinese economy is what the Economist described as the Great Hole of China: China’s debt. Between 2007 and 2014, China’s total debt soared from 158 percent to 282 percent of GDP-by comparison, U.S. debt-to-GDP peaked at 170 percent during the Great Recession. More that half of that debt is owed by government-owned corporations (GOCs). To extend endless credit to inefficient or even falling Chinese GOCs is creating, in the Economist’s words, “a slow-burn debt crisis” in China. “Japan,” according to the Economist, “provides a depressing precedent. It failed to clean up after its asset bubble burst in the early 1990s, preferring to pretend that firms could pay their debts. The result was zombie firms, ghostly banks and years of stagnation and deflation.”

At same point, Beijing will have to start to deal with China’s massive asset price bubble and excessive debts as well. Even mighty China cannot postpone the inevitable forever.

Xiaoxiong Yi is the director of Marietta College’s China Program.