China's economy-driven threat to stability

Edward Tsang 2015.08.25; revised 2015.08.26

China is quickly running out of medicine to treat its economic stagnation crisis, which could threaten the country's stability.

Stability is the goal

The Chinese market has crashed again on Monday 24 August 2015, which affected global market. This crash could unsettle the Chinese society. In response, China cut its interest rate on 25 August 2015.

What Beijing cares most is stability

To the Chinese government, nothing is more important than stability of the country. To maintain stability, China cannot afford to see high unemployment. To support employment, China needs economic growth. China has tried everything to support economic growth. It is run out of means to stimulate the market. Beijing is like a doctor running out of antibiotics to treat the economic stagnation.

China's means to boost economic growth

Export:
China's cheap export has helped global economic recovery. But there is a limit in how much China can sustain its growth through export. When China's GDP was US$100 billion, it needed to increase their GDP by US$10 billion to grow by 10%. They could achieve that by increased export. When China's GDP was US$1 trillion, it needed to increase their GDP by US$100. Now China's GDP is US$8 trillion, the second biggest economy in the world, a growth of 7% would mean an increase of GDP by US$560 billion. Export cannot possibly support their growth, because US$560 billion is a large percentage of the GDP for most of China's trade partners .
Stock market:
Beijing wanted to boost the stock market. Apart from turning debt into equity, it may be used to boost the internal market. Unfortunately, given the size of the market, the strong herding behaviour by the investors and the complexity, it is very difficult for Beijing to "plan" the Chinese stock market, even though it has a lot of control over the (mostly state-owned) companies.
Devaluation of the Renminbi:
On 11 August 2015, China devaluated Renminbi to three-year low. The hope is to boost economic growth. Will it work? Yes, it will stimulate export a bit. But it will never give it a sustained growth. To protect their export, other countries could devalue their currencies too. If that happens, then we shall see a currency war.
Printing money:
The Chinese government has injected a lot of cash into the economy. There is a limit in how much money the China government can create without causing noticeable effects in the society. If money is created to stimulate the economy by 7%, we are talking about something in the region of US$560 (as explained above). This could easily lead to inflation, which could unsettle the society.
Borrowing:
Chinese Government debt to GDP ratio has grown to 41% in 2014. It is not very big, compared to Germany (75%), UK (89%), France (95%), Singapore (99%), USA (103%), Ireland (110%), Greece (177%), but it is huge in absolute terms. Besides, China does not have the creditability that these countries have, apart from Greece (which is in serious trouble, but the Greece economy is small in absolute terms and has the EU to bail them out).
However, China's Total Financing is huge and hard to estimate -- it includes funds raised by non-state entities, such as corporate bonds, trust loans, individuals, commercial cupons, foreign debts. China's GDP is around US$10 trillion. But its total debt amounts to US$28 tillion! That’s the country’s total government, corporate and household debt load as of mid-2014, according to McKinsey & Co.
Cutting interest rate:
China has cut its interest rate by 0.25% today. This has the effect of boosting the stock market and reducing the pressure on Renminbi. With the rate standing at 4.6%, there is still some room to manoeuvre.

New "antibiotics" needed

Like a doctor, the Chinese government is quickly running out of antibiotics to treat it economic stagnation crisis. It is not clear to me what other tools Beijing could employ to boost economic growth.

Perhaps solution should come in other forms: Economic growth is not the only way to secure high employment (in fact, perpetual growth is impossible). A less planned economy might help. A more open society, where people feel that they have some control over their future, might help. I'm sure Beijing has considered all of these possibilities.

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