Over recent months, the mainstream media has been overtaken by fears of a debt crisis in the developing world. The rapid interest-rate rises implemented by Western central banks have refreshed memories of the Eighties, when a similar tightening cycle precipitated a fiscal collapse and ushered in what came to be known as a “lost decade” for many countries. In that vein, a recent UNCTAD report noted the great increase in debt that occurred in emerging markets during the pandemic, and warned that a similar cycle could be brewing.
Perhaps. But too great a focus on the developing world is obscuring a very real and impending debt crisis elsewhere. Because even though the report noted that 30% of global debt is owed by emerging markets (and has risen sharply), that figure is misleading. Nearly half that debt it is owed by one country: China.
If you take the Middle Kingdom out of the mix, the developing world is actually in reasonably good shape. China, by contrast, has followed a trajectory more like that of a Western country. Its debt soared after the 2008 financial crisis, and then some more after the pandemic. Private debt, which is much less of a feature in developing countries, has similarly risen to record levels, bringing China’s total debt stock to nearly three times the size of the economy, in line with Western competitors. Well before reaching those levels, a typical emerging market would have run into a fiscal crisis. The classic example is Argentina, a country whose official debt burden may rival China’s but whose private debt is negligible. It is now mired in an intractable economic stagnation — one that Javier Milei’s wheeze of abolishing the country’s central bank will not ameliorate.
The fundamental difference, however, is that other emerging markets don’t have anything like the pools of capital available in China. Being the world’s second-biggest economy with an extraordinarily high savings rate of nearly 50%, there is an immense bedrock of loanable funds to play with. Even though China’s financial markets are gradually globalising, only around 3% of its government bonds are owned by foreigners, compared to about a quarter of the US Treasury market and nearly a third of UK gilts.
This gives the Chinese government considerable leeway to borrow since it is less exposed to the “kindness of strangers” that imposes such narrow guardrails on most countries — and not just in the developing world, as Liz Truss discovered to her grief last year. But on the other hand, such an abundance of loanable money has fostered a carefree spending pattern that would get punished by credit markets elsewhere. China has repeatedly pumped money into its economy to stimulate growth, mainly with infrastructure and property-building programmes, the scale of which has no precedent. In 2019 alone, for instance, China installed more high-speed rail capacity than Europe had in the previous decade.
Each of these stimulus packages produced the intended jolt to the economy. But every sugar rush eventually wears off, after which the economy is left saddled with excess capacity. Not all those train lines become profitable; not all those buildings get occupied; not all the steel produced by those expanded plants gets bought. As a result, after peaking just before the 2008 global financial crisis, the country’s growth rate has been trending downwards, much as has been the case in developed economies.
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Subscribe“First off, raising wages would also reduce the international competitiveness of Chinese firms.”
Is that actually true? The Chinese leadership clearly don’t think so. The sole objective of Chinese industrial strategy is to become the dominant and indispensable supplier in as many product categories as possible. When China is both dominant and indispensable, China will have tremendous pricing power.
In the first stage of this strategy, low prices by low wages are necessary to get a foot in the door of each product segment. In the second stage, cheap debt pays for a vast expansion of production to drive down unit costs, flood the market, destroy big volume competitors, and damage the margins of remaining competitors who later will struggle to invest in new plant and R&D. In the third stage, more cheap debt and newly gained global supply chain integration allows Chinese companies to start offering niche, high value products and R&D services, knocking out the last big foreign competitors. In the fourth stage, China’s newfound soft power and economic power is used to entrench Chinese market dominance and comparative advantage by funding / sponsoring any and all new barriers to new market entrants and competition. Finally, the last stage sees China exploit its dominant, entrenched market position to raise prices and wages.
For an example of how this works, take steel. Steel is perhaps the hardest market to capture because of its size, because steel is fungible, because it is over supplied, and because state support in India, Russia and elsewhere makes for formidable competition.
China began by making some steel very cheaply. Then China became the largest steel supplier and the West lost most of its steel industry. Today China offers speciality steels supported by its own R&D, and the USA and Europe are seeing even more steel making capacity shut down. Western firms no longer have the capital to build new plants anywhere. Assisting the closure of Western steel plants, China has bought many of the West’s remaining plants and has sponsored a global net zero campaign targeting steel production, the result of which is the West paying to close its own few remaining blast furnaces and the opening of some electric arc furnaces that can’t make high quality steel, making us dependent on China. Through all the closures, Western skills and training infrastructure have been lost. The end point is politically, legally, educationally and economically it is now impossible to build brand new high quality steel making plants in the West. For the first time in 5 decades, global steel producers have long-term pricing power, but China has won the lion’s share of the market and many of its BRICS competitors are reliant on rapidly aging plants.
Be it steel, chemicals, electronics, cars, batteries, solar, etc., the same strategy is being used to destroy competitors. China is chalking up huge amounts of debt doing this, but the goal is obvious. None of these industries will ever return in volume to the West, and will never be established anywhere else, no matter what happens to producer prices. There simply isn’t the capital or skilled labour available for a new round of industrialisation in other parts of the world to undercut China. In the game of global industrial musical chairs, the music has stopped and China is sitting pretty.
A lot of what you say maybe valid- except that there is tremendous opacity about the CCP led Chinese economy. I don’t know if many are aware that Jack Ma has been relegated to textile products.
Your optimistic assessment of China appears to me to be hinged on the irrational exuberance often posited by Wall Street analysts due perhaps to the investments made in the Chinese economy.
What this article brings out is correct in that there is an opportunity for manufacturing to revive and strengthen in right earnest in non Chinese destinations.
But there also needs to be political will to do so.
And for that there needs to be uniformity in approach on the part of the West, instead of taking ideological approaches in foreign policy as they seem to be doing right now with regard to other BRICS states like India and Saudi Arabia.
Sounds like NC could be a CCP ‘stooge’.
A sensible comment, but I think you go too far at the end: “None of these industries will ever return in volume to the West, and will never be established anywhere else, no matter what happens to producer prices.”
Skills have been lost, but steel-making theory is still well understood in the West.
These industries can be revived, but it will take abandonment of Net Zero nonsense and a period of protectionism (ideally coordinated).
I’m a big believer in free trade, but free trade with unfree countries like China is a mistake.
Cars haven’t been lost from the West and could be retained for a long, long time because design and appeal is important, as well as functionality.
Steel, once it is lost, won’t come back in the same way because the upfront capital cost of building an iron&steel works is too high. I am here separating iron and steel. We are supposed to be re-equipping Port Talbot as an electric arc steelmaker, using a lot of electricity but needing iron as an input. The iron comes from scrap and scrap will become an important commodity – as it already is.
Back to cars. I realise that cars can be designed anywhere. Anyway, the availability of spares and repair know-how has meant that foreign car firms have set up manufacturing all over Europe, Nissan and Toyota being good UK examples. These companies are slowly morphing into British companies in the eyes of politicians. A while ago there was a survey in the UK asking people to name the top British companies and almost everyone came up with Ford.
Would Kia be allowed to manufacture in the UK?
All scrap steel is already recycled. By building an electric arc furnace you are competing for scrap steel, which now mainly comes from Asia and is more expensive than coke and iron ore.
An electric arc furnace cannot produce the high quality steel needed for modern manufacturing, including car making. The only steel useful for advanced manufacturing like car making is steel made either by oxygen reduction in blast furnaces or by direct reduction technology that doesn’t yet exist (and isn’t what we’re getting)!
Worse still, the UK and Europe have the highest electricity prices in the developed world. An electric arc furnace built here will never be competitive.
We are literally handing £500m to a Chinese steel company to destroy our ability to make the high quality steel needed for our advanced manufacturing. This point was utterly lost on the civil servants of the Department of BEIS, none of whom had any engineering background but had just been on a net zero junket part sponsored by China’s transition finance scheme.
Yes I realise this. But although Asia is the biggest exporter, Asia is not quite the same as China.
What steel is not produced in electric arc furnaces and how important is it? For example, is Port Talbot now a supplier to Trostre; if so, will this continue.
I simply do not believe this “capital cost is too high” argument. Let’s have some numbers and sanity check this. And compare to how much we spent in the past decade or more on QE and Covid. None of which produced any new capital, industrial capacity or infrastructure. We had the money. We chose to use it differently (and rather unwisely in the view of some of us).
We could have completely rebuilt our domestic nuclear power industry and had a fleet of new nuclear power stations if we’d taken different decisions in 2008. We chose not to. We decided to keep pumping up house prices and asset values instead.
I can’t really help the discussion, being a mere scientist. Agreed on nuclear, which has now with hindsight become a no- brainer. We are also pouring money into offshore wind turbines which is a disaster for the next generation – when the system can’ t be maintained.
I guess that my idea of capital cost might be based on our pathetic history in investment.
“We had the money”. Well not exactly. We created biblical quantities of it out of thin air to fund these hare-brained schemes. I agree that we could have made better use of it, but we would still be in the same debt quandary as China without the buffer of a 50% savings rate.
We could also have been sitting on a sovereign wealth fund the size of Norway’s had we made better use of our North Sea oil bonanza.
All these ‘could haves’ require at a minimum some competence in long-term financial planning and a government willing to sell the idea of ‘jam tomorrow’ to the electorate. That’s where an authoritarian government helps (think Singapore, not China).
Yes, that’s true, but we could still have used the magic money from thin air to build useful stuff that might produce a future return.
Agree that we largely wasted the profits from the North Sea oil. For around 20 years we had a 10% boost to our economy from the oil. We have almost nothing to show for it. And now, most people want to just close it all down and import the oil instead …
No no no. The upfront capital costs are only ‘too high’ when considered from a business / investment perspective. This is the mindset that has got us where we are.
When something is of strategic value the quantified costs are largely irrelevant because the intagible long term gains from the perspective of the state massively outweigh the narrow costs as perceived from the perspective of a business/investor.
Indeed even the definition of ‘costs’ is often mistaken. Is something really a cost from the perspective of government if it’s bought from within your own economy?
The Chinese realised this a long time ago and we need to wake up to the same reality. All that is required is the will to drop these sacred cows. We need to stop judging everything like businessmen and simply grow some balls to do what we know needs to be done to create value.
Yes. Mercantilism might work for a while, but the keys to long term prosperity, abundant food and cheap energy, don’t change. The US will be in pole position for the foreseeable future despite the corruption and incompetence of its toxic elites.
We can’t find good candidates for engineering apprenticeships and engineering roles in industries we do still have, let alone industries we may or may not want to restart. Who would spend 4 to 7 years training in readiness for an industry that may or may not be here?
Take nuclear: take away the concrete pouring and what you’ve got left at Hinkley is a foreign reactor built using foreign expertise with whole-life technical support provided by the foreign supplier. This in a country that was a world leader in nuclear engineering in my lifetime. The UK, a large net debtor nation, hasn’t even got the capital to fund it and so was reliant on eyewateringly expensive foreign loans that more than doubled the cost of it.
Agree with the sentiment if not every single detail. Indeed, my late father worked in the UK nuclear industry in the early 1960s when we were world leaders. We threw it all away. For nothing.
We could easily fund our own nuclear program is we chose to (see my other comment here). I recall the ludicrous memory of Gordon Brown begging the Chinese to invest in UK nuclear. He had the money all along. He was just wasting it on other “investments”. It wasn’t only Gordon Brown – all politicians and civil servants have been equally useless here. As have the media.
We need to explain to young people that learning engineering is more than about learning specific skills – it’s about learning the practical approach to designing, making and maintaining things and is something you can use in many industries and activities. Very little of what I learnt at university in electronics is still applicable now. But the basic engineering and scientific discipline is invaluable. That’s why engineering graduates are [sadly] in such high demand in finance these days. WE’re losing too many good graduates to finance/services.
The idea that universities should deliver ready-trained staff to industry is just so wrong. Industry these days doesn’t invest in training as it used to up to the 1980s. I was lucky (though I didn’t realise it at the time) – I did a sandwich degree which included lots of practical industrial training (often alongside apprentices).
Hasn’t this all changed with the simply ‘wonderful’ HS2?
Totally agree I am a senior STEM advisor and have about 50 engineering/science companies in the south east of the UK desperate for people to do these apprenticeships and young students don’t get it, they are drifting into finance and other areas, not sure how they get their information about careers?These students could work anywhere in the world afterwards for UK companies.
Well said.
It is not true that the West could not re-establish domestic steel industries. Nor that other developing countries may in time emerge as large steel producers. Your analysis completely ignores the concept of competitive advantage. There are more productive and profitable industries than steel production.
Also the fact that China relies heavily on imported Australian iron ore. If there’s a monopoly supplier here it’s arguably as much Australia and the giant mining companies as China.
Also the fact that there has been a massive one-off peak in steel demand due to the fact that construction has accounted for 30% of the Chinese economy for two decades. They are rapidly running out of things to construct that produce any economic return – and appear to be building for the sake of building in many cases for want of anything better to do. Building needless buildings – and building debt.
I really don’t think that China is in the rosy economic situation you imagine. You can only fake economic growth for so long before the bills fall due. We’re seeing it here in the UK. China will feel it too soon enough.
Think Indonesia supplies more steel producing coal to China now !!
It is financial profiteers in the West after a quick profit that is the route of the problem. If you sat them down in front of a committee about their actions they would squirm big time, and fundamentally it is an unacceptable face of capitalism. Just take the Tobacco lobby, Sugar lobby and more recently the Oil, Gas and Coal lobby involved in all government’s in the world. COP 28 is a joke when China, USA , India are basically not interested.
“Financial profiteers” are a non-existent group. Consumers chose cheaper products and those cheaper products came from China, that’s all that happened.
Ah, you refer to the big bad fossil fuel companies who dig the stuff out of the Earth for absolutely no reason?.
No, fossil fuels are utterly indispensable for the world’s prosperity, and even to stop mass starvation, and will be for many decades.
The huge disjuncture – and organised dishonesty – between the absurd shenanigans at successive COP conferences and reality is one of the most depressing – actually disgraceful – aspects of our governing institutions. The cat was let of the bag by that UAE minister.
Precisely. And trade regulators in the EU are looking in the wrong places – at US companies, for example – fighting the competition battles of old while doing precisely nothing about state actors. Mind you both the French and the Germans have been guilty of similar state support of favoured sectors in the past.
So who are the creditors who own most of the world’s debt? Greeting from the USA where our debt exceeds our GDP.
It matters less in an economy like the US which has control of its currency and is capable of self-sufficiency. It’s European countries like France, whose debt also exceeds GDP, which depends heavily on imports and which has no control over it’s currency, that are most vulnerable.
“The legitimacy of the ruling Communist Party rests substantially on its ability to deliver better lives for its citizens.”
I do not understand why commentators keep talking about “legitimacy” and some “compact” between the CCP and the population. Why would the Party care? After any dissent, track where the protesters were, using their phones, and then jail and torture them. Just like after the White Paper protests.
The only risk in a dictatorship is between leaders and the clique that supports it. The risk is the leadership can’t give the cronies the riches they want.
There are many forms of dissent, and while police-state tactics can punish open dissidents, they cannot encourage sacrifice, or create wealth. People’s incentive -once damaged- is hard to recover. And all the upper cadres have their own -potentially restive- constituencies.
Look into how the Chinese change dynasties. You may see why they’d care.
Is that President Xi about to launch into another Red whine?
Winey the Pooh?
I thought they’d lent substantial sums to countries all over the world as part of the Belt and Road plan – Africa, South America and the West Indies, to name a few.
In Barbados, among other things, they’ve wrecked the formerly rather romantic Sam Lord’s Castle with a souless and ugly modern development. I am not sure how Barbados will repay this investment so presumably China will take it in lieu.
The rumour is that Mia Motley, PM of Barbados, sacked HM the Queen to prevent any possible checks and balances against the Chinese involvement.
One aspect missing from this analysis is piracy. The Chinese growth rate was so high because it imported Western technology, sometimes bought freely but often extorted in exchange for access to China or simply stolen. Xi Jinpiang’s greatest mistake was to threaten Taiwan because it opened the eyes of the West to the true nature of the CCP. The transfer of technology will be cut off and China will stagnate, unless Chinese scientists can innovate.
“Xi Jinping is known to have an aversion to the Western-style welfare state, which he believes fosters a fecklessness that would sap China’s strength.”
Western welfare states being basically Ponzi schemes dependent on rising populations, adopting a similar structure in China would only hasten its collapse.
Insofar as boosting China’s economy is concerned, there’s likely little that can be done to offset the effects of its one-child policy, which is the underlying issue to many of its problems. Maybe China should join the West’s race for immigrants to defuse its ticking population time bomb? But who would want to go there?
Some bits of China are rather nice. I’ve migrated there (however got thrown out due to Covid restrictions last time I did.)
The ideal migrants would be younger and good at acquiring language skills, since that’s one huge hurdle.
The other huge hurdle is becoming fluent and being able to hear what the Chinese really think of them.
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China’s problem is that it started putting its money into the military and bullying its neighbors. It is giving every indication of preparing for a war of world conquest. It has terrified its customers, and these customers are trying to reshore supply chains in an effort to be able to defend themselves in the war that they expect China to start.