The latest numbers released by China’s statistics bureau fueled widespread concerns about the outlook of the global economy, as the Asian superpower reported its slowest growth rate since 1990. The figures showed a 6.6% growth for 2018, confirming the view that the growth engine of the world economy is running out of steam.
China’s weakening growth has been widely attributed to the country’s trade frictions with the United States. To some extent this accurate, as the dispute has burdened both countries with billions of dollars from tariffs and retaliatory counter-tariffs.
However, the trade war is only one among many problems that the country is struggling with. Even if a trade deal is finally struck with the US, relief will most likely only be temporary. The reasons behind the growth slowdown run much deeper and paint a truly worrying picture of the future. And while the cracks are just beginning to show now, their origins actually lie all the way back in 2008.
In the aftermath of the financial crisis, China appeared to be one of the precious few to make it out unscathed. While its Western peers plunged into chaos and despair, its own economy continued to hum along, almost as if nothing had really changed. However, this escape came at an extremely high cost. China has amassed an unprecedented amount of debt. Already by mid-2018, total debt-to-GDP had exploded to over 250%, a dramatic surge from 140% only a decade earlier. Today, according to Goldman Sachs numbers, it stands at over 300%, making the government’s efforts to engineer a “soft landing” look like wishful thinking.
As the Chinese government tried to deleverage and to rein in some of its past excesses, the extent of the damage began to come to light. The country is riddled with loss-making factories, with excess production capacity, insolvent “zombie” companies, all parts of a wasteful economy created by debt, corruption and extreme centralization of power in the hands of the Chinese Communist Party. After years of corporate spending sprees and acquisitions with borrowed money, in 2018, the rate of corporate debt defaults set new records.
Its banking sector is crippled as well, with nonperforming loans reaching their highest level in a decade at the end of last year. As official figures out of China are largely unreliable, independent analysis and estimates conducted by Autonomous Research put the actual losses Chinese banks are set to suffer through bad loans at $8.5 trillion.