Not to revisit Minsky too much, but the crux of the idea is that debt saturation is finite as it can never be uniformly or dynamically efficient. The Chinese seem very much intent on “proving” that idea (as if it needed even more empirical confirmation). Last year Chinese authorities, through various channels, wanted the world to know without a doubt that they were serious about gaining control over the credit system. That was comforting in its own way, particularly given the unbelievable scale.
As with any such task, practical application is far different than theoretical planning for it. They have tried several times to restrict “money” growth, only to bail out at the last minute. Now in 2014 there are defaults in Wealth Management Products bumping against default whispers in corporate bonds, and even in the sacrosanct local government sectors (most tied to real estate and ghost cities).
In what appears as a pullback in the will to impose financial control, the narratives from China are becoming increasingly mixed. The Wall Street Journal today posited,
For years, China kept a growth target of about 7.5% but actually grew far faster; in the last two years the economy has barely cleared that figure, and many economists have said it would have a tougher time meeting the goal this year as its economy matures and global demand for its exports comes under pressure.
I have grave doubts about the Chinese economy’s maturation explaining even a small portion of this “slowdown”, but at least there was an acknowledgement of the trade component. If you really want to see the big picture clearly here, and it is often difficult given the myriad challenges in not only data but complexity, it really is a factor of an export economy struggling with end markets that have never regained their prior peak form. China was growing at 14+% in 2007 because both the US and Europe were in the midst (the death throes, really) of financial imbalances driving “demand.”
That was a structural issue, and the Chinese economy suffers as structurally the US and Europe participate at far lower rates in the global trade chain. The Wall Street Journal article mentioned above claims that China has been the global growth engine, but that is only due to its “stimulus” efforts to counteract the new global trade structure. Such stimulus, it should be added, was never intended permanent – a foreign equivalent of “extend and pretend.” In other words, the Chinese meant to generate as much growth as possible via artificial means to bridge the gap until the expected “cycle” re-emerged. It never has.
The fact that credit growth exploded in 2012 and 2013 relates to that very fact. Cause and effect here are that global trade fell off sharply during those years (contrary to conventional narratives), thus Chinese appeals to debt were heightened. As global trade declined further, and quite dramatically, in 2012, Chinese credit production rose some 70% that year. Again, cause and effect – businesses that see a sharp drop in revenue will borrow to maintain themselves, particularly when debt is cheap and plentiful (and lenders are under government mandates).
That is the primary problem now, as shown in the growing inefficiency of Chinese debt.
There is a growing disconnect between the Chinese economy, as measured by GDP, and credit growth. In both 2012 and 2013, GDP growth measured 7.7% both years. That was the slowest pace since 1999 – the fact that it was repeated across two years should be far more concerning in the context of that credit growth. Bloomberg estimates that each additional $1 of credit generated $0.83 of GDP in 2007. By 2012, that rate had dropped to $0.29. By the first quarter of 2013, it had fallen again to $0.17. All of this stimulus, driven by “money” growth, is exhibiting a marginal utility stall.
New credit is not generating as much GDP because it is increasingly being used simply to maintain current levels of production. Companies are filling revenue holes with new borrowings, thus GDP slips and credit becomes increasingly inefficient. That is suggestive of the Minsky moment, as it exists potentially inside a larger Minsky-like process.
Where this gets most dangerous is when defaults begin to pile up, as companies cannot continue to borrow without a dramatic recovery of revenue. Thus they become trapped in their own debt. As the trap broadens, it eventually becomes systemic – which is exactly the game the PBOC is trying to play here. They want to deflate as much as they can without triggering the avalanche.
But there is another point to be made, particularly about global trade and the global economy. The Chinese debt situation is a symptom, as I said above, of a persistently weak global environment. If there were real recoveries in the US and Europe, this debt escalation would have been far different (it may still have occurred, but its scale would have been much reduced). That China is now “talking down” even target growth rates for 2014 should be an ominous sign on both sides of the Pacific, especially as that includes potentially “loosening” credit conditions yet again. It is a massive and prime proxy of the failure of mainstream economic measures all over the world.
At some point in the not-too-distant future, the word “contagion” will begin its revival, and we can then look forward to yet another episode in the unending string.
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