A rather startling op-ed appeared in the South China Morning Post on Sunday suggesting that the entire Chinese economy is just one giant Ponzi scheme that will inevitably collapse. Maybe not today, maybe not tomorrow, but–as Humphrey Bogart might once have said–soon, although not before the 19th National Congress of the Communist Party of China, slated for October sometime. , but Jake Van Der Kamp’s is among the harshest, freighted as it is with inevitability and having the appearance of almost mathematical elegance and simplicity.
The only thing keeping the Chinese economy going, apparently, is the determination to keep the Chinese economy going. Every new steel mill creates more demand for steel, to expand port facilities and build ships to carry iron ore to make more steel for steel mills, ports and ships. And more steel, obviously. The updrafts of hot credit needed to pay for all this expanding, self-replicating economic activity have created the most enormous economic storm clouds just waiting to unleash an unprecedented correction on an unsuspecting population.
On the other hand…
The other version of events is altogether different. China has weathered a slight downturn, overcome an enormous case of capital flight and, although the capital market is in lockdown, nevertheless has cash to burn for all sorts of politically ambitious–for which read economically outlandish–projects. The new high-speed rail in Laos for example, has commenced construction estimated at around $6 billion or half Laotian GDP. The Belt and Road initiative is all many can talk about internationally despite being little more than a well-organized aspiration, some maps and a lot of big round numbers.
Overseas acquisitions have been squeezed a bit, but where strategic interests are paramount, there appears to be an open cheque book. Bhutan was reportedly offered $10 billion just to tone down its criticism of China’s Doklam incursion, which is curious given that China claims it as undisputed Chinese territory. Whatever view you take on the merits of their case however, $10 billion is not a small amount of money. Particularly for a country that ought to be, and indeed claims to be, deleveraging.
Most commentators so far seem content to stick to their guns, while investors are doubling down, Crispin Odey and Kyle Bass being the biggest and most consistent China bears. The real difficulty most face though is that the evidence supports both cases to some extent. Bulls focus on growth and political stability, suggesting that whatever you think, the government has many levers, and still healthy forex reserves with which to cushion any instability. Bears tend to focus on the obvious problems that keep building up, the lack of any meaningful progress towards reform, the enormous and extraordinarily rapid build up in overall debt, and the increasing divergence between what the government say they need to do, and what they actually then do.
For example, in 2013 I noticed a tendency to group mid term reform and macroeconomic objectives into two categories; “about five years” and “between ten and fifteen years,” referring to the approximate timescale in which they would likely be achieved. The exchange rate, it was commonly believed, would be liberalised and float free in “about five years.” Capital markets would open up in “about five years” but be fully open in “between ten and fifteen years.” The reason why these rather vague timescales would be bandied about is simply that everyone at the time believed these objectives would be reached at some point, but that it was hard to pin down the exact steps by which they would be achieved.
Since that time, while people still talk about the future in rather general, aspirational terms, the currency is much further away from liberalization than it seemed in 2013, and capital markets are firmly shut. But instead of analysts raising some general doubts, it is quite common to encounter rather weary defences of what the Chinese government have done. Stability is now lauded as a great advantage China has over other economies. They were right, it is argued, to close down capital outflows, and the success of their strategy on the exchange rate shows the underlying strength of China’s model, as if preventing the exchange rate from falling has suddenly become as important as permitting real price discovery.
Similarly, it has been a standard refrain for decades that China would eventually open up, that their habit of controlling the internet would slowly wither, and in any case, Chinese people had access to all the information they really wanted and the government didn’t care about a few foreigners using VPNs. Well, it appears that they do after all.
Also on Forbes: What Does China’s VPN Ban Really Mean?
So while Jake Van Der Kamp repeats his long held view that China’s economy has gone badly wrong, and others rehearse the same old arguments about whether China’s never ending growth will keep humiliating the unbelievers, it is worth remembering that for a Ponzi scheme to work, a key ingredient is a population willing always to reassure itself that everything will work out in the end, despite mounting evidence to the contrary. How many times, for example, should a China watcher suggest that some reform or other should take place, before the absence of it actually taking place brings about a hesitation of overall expectation? Quite a few, it would seem, as we read rumors of another billionaire prevented from leaving the country, and yet another story about vast, hidden debts.
Sitting through Typhoon Hato last week reminded me how peaceful the eye of a storm could be.