As the world’s most populous nation, largest exporter of goods and with an economy producing just shy of 20% of global GDP at PPP, China matters greatly to the rest of the world. In the first series of the Fathom: In Conversation podcast, ‘The rise of China’, Fathom’s economists use their expertise in macroeconomics, geopolitics and financial markets to examine China’s past, present and potential future.
Last week’s News in Charts outlined the first four episodes covering China’s transformation from a feudal society into an economic powerhouse, while providing exclusive insights into tactics it may be deploying in an attempt to move up the global value chain.
In Episode 5 (The global financial crisis: Made in China) Andrew Harris and Fathom’s CEO Erik Britton discuss the ‘is and ought’ of net trade and the role China played in the lead up to the global financial crisis of 2008–09.
China had watched closely as many neighbouring countries borrowed significant sums of money from foreign investors to aid growth, resulting in the Asian financial crisis of 1997–99. Having seen the bursting of this bubble, China decided to pursue a different growth model and instead became a net lender to the rest of the world.
China offered loans with extremely low interest rates which were willingly received by advanced economies; this cheap flow of funds contributed to a major credit boom and then subsequently an even bigger crash in 2008.
In episode 6 (Digging your way out of a hole) Andrew Harris and Laura Eaton discuss how, although China managed to emerge from the global financial crisis relatively unscathed, policymakers have dug a very difficult hole for themselves with the tactics they used to prop up growth.
When the global economy slowed, China offset the demand shortfall with a hefty stimulus package. This caused huge amounts of excess capacity in certain sectors, such as real estate where investment surged, creating a mass of housing mothballed into the construction phase or sitting dormant. In order to maintain house prices, the time taken to complete construction increased considerably, delaying the release of properties onto the market. Fathom estimates that there are now 50 million houses either vacant or still under construction in China — more than double the number of homes that exist in the whole of the UK.
As banks continue to provide finance for these unproductive projects, non-performing loans are on the rise. While official statistics put China’s non-performing loan rate at around 7% as a share of GDP, Fathom estimates this to be much higher at 28–38%. Such levels are ultimately unsustainable and unless policymakers deal with the ticking time bomb of non-performing loans, the risk of a banking crisis will remain elevated
Problems are not just limited to the real estate sector; while China’s official urban unemployment rate has remained flat at roughly 4% for over a decade, Fathom’s underemployment indicator — which highlights the number of workers either unemployed or engaged in unproductive activities — has swelled to 14% since 2008.
Episode 7 (Does China challenge US hegemony) takes a step back to address concerns among many western countries, in particular the US, about China’s position in the global economy.
In this episode Andrew Harris, Kevin Loane and Florian Baier explore whether China is a credible economic and political threat to the US, while identifying some of the tools China deploys in order to uphold its position.
Prime among these is China’s Belt and Road Initiative, which plans to develop trade and transport infrastructure all over the world. With around half the countries in the world signed up and an estimated $400 billion already invested, there are growing concerns over China’s intentions, especially regarding the outcome if target countries cannot afford loan repayments. Fathom draws on similarities with the rise of the British Empire; the UK became the world’s largest manufacturing economy after the industrial revolution and would invest heavily in other countries in order to extract the resources required for production.
In terms of current trade tensions, Fathom’s view is that this is the beginning of a sustained period of geo-strategic rivalry with the US, with no clear end in sight. Tariffs are seen as a tactic to try and force China to change its behaviour, but Fathom questions labelling this a trade war, paraphrasing Ellis Carver from The Wire in reference to the War on Drugs: “You can’t call this…a war. Wars end”.
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 Purchasing power parity is often preferable to market exchange rates since it removes the impact of short-term fluctuations in a currency’s value. However, there are of course difficulties associated with calculating PPP exchange rates given that they are not observed in practice. When compared at market exchange rates, China’s share of global output is nearer 15%.
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