In my opinion, this is one of the most important articles on the year, so far.
By Charles Hugh Smith – Saturday, October 30, 2021
The line of dominoes that is already toppling extends around the entire global economy and financial system. Plan accordingly.
That China faces structural problems is well-recognized. The list of articles in the August issue of Foreign Affairs dedicated to China reflects this:
Xi’s Gamble: the Race to Consolidate Power and Stave Off Disaster
China’s Economic Reckoning: The Price of Failed Reforms
The Robber Barons of Beijing: Can China Survive its Gilded Age?
Life of the Party: How Secure Is the CCP? (Chinese Communist Party)
These are thorny, difficult issues: a demographic cliff resulting from the one-child policy, soaring wealth-income inequality, pervasive corruption, public health issues (diabesity, etc.), environmental damage and a slowing economy.
What the conventional analysts do not fully grasp, in my view, are 1) the existential threat to the CCP and China’s economy posed by its unprecedented, metastasizing credit-asset bubble and 2) its incipient energy crisis.
As I explained in a recent blog post, What’s Really Going On in China?, the CCP and the government informally institutionalized moral hazard (the disconnection of risk and consequence) as a core economic policy.
Every financial loss, no matter how risky or debt-ridden, was covered by the state (via bail-out, refinancing debt, new loans, etc.) as a “cost of rapid development,” a reflection of the view that some inefficiency and waste was inevitable in the rapid development of industry, housing, infrastructure and a consumer economy.
What China’s leaders did not fully understand was this implicit guarantee of bail-outs–the equivalent of “The Fed has our backs”–incentivized debt-funded speculation as the lowest-risk, highest-return “investment,” especially when compared to low-profit, risky investments in low-margin export industries. (Recall the average profit margins of Chinese exporting enterprises is 1% to 3%.)
This is the hidden driver of China’s sagging productivity and economy: debt in all sectors is skyrocketing to fund speculation, not productivity.
Read it all HERE