China’s debt unnerves IMF, but the alternative is worse


China’s budget and trade scolds should pause for reflection.

Debt racked up by China’s government, companies and households will likely balloon to almost 300 per cent of gross domestic product (GDP) by early next decade, the International Monetary Fund (IMF) projected in its annual review of the country’s economy.

Big, for sure, and a risk to global financial stability. But anything less would be a risk as well. What would China’s economy – and the world’s – look like without this level of stimulus?

Global growth since the 2007-2009 crisis would be slower and more dependent on the United States, which is struggling to escape the world of 2 per cent growth. If that isn’t significant enough, American companies would have likely had fewer buyers for services such as banking and software.

For all the wailing about the US merchandise trade deficit, China itself has a small but growing services deficit with the rest of the world. The IMF acknowledged this point. It said GDP, adjusted for inflation, would probably have grown only about 5.5 per cent annually over the past four years, instead of 7.25 per cent.

At some point, China will further cool its engines and accept slowing growth. IMF directors “noted that economic activity had recently firmed and saw this as an opportunity to accelerate needed reforms and focus more on the quality and sustainability of growth”.

In the meantime, China’s relatively strong growth has benefits far from Beijing. China is shifting away from an export- and investment-dependent economy. Some tables accompanying the IMF report show the trade surplus receding to 3 per cent of GDP in 2022 from 4.4 per cent last year. China’s deficit in services is going in the opposite direction, widening to 2.5 per cent from 2.2 per cent in the same period.

The current account surplus is on course to almost disappear. It will shrink to just 0.4 per cent of GDP in 2022.

This is not the Chinese economy your grandfather warned you about. Are exports important? Sure. Is some stuff still cheaper when it is made in China? Yes. Not everything. Not like it was when then Chinese leader Deng Xiaoping began opening up the country decades ago.

What has been lost in the American conversation about our largest trading partner is that there are rust belts in China, just as there are in the Midwest. You can see a big one outside Beijing, where steel is no longer big business.

The future belongs to Chinese consumers. Starbucks may be more indicative of where the economy is going than most other Western businesses. Betting on an emerging urban middle class, Starbucks bought out its East China joint venture partner for US$1.3 billion (S$1.8 billion), the biggest deal for the company.

Where a textile mill once operated, an international company may now be serving lattes or screening Disney movies. As wrenching as that has been for local communities, the world economy is stronger for it. It’s not possible without the debt China is racking up.

By Daniel Moss



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