Much of Chinese "investments" have low or no return: the high-speed rails, the ghost cities, certain exports, national security, etc. Tens of trillions US$ have been moved out of China by individuals. Wealth remaining in China is tied up in assets that could collapse in value overnight, such as shares and properties. Like a Ponzi system, growth is the only way to keep the current economy going. Unfortunately, given its current size, there is not much room for the Chinese economy to grow. The China-US trade war does not help. Is economic collapse around the corner?
Chinese goods are well known for the value for money. Chinese sells many household goods to the West cheaply. This is because the exports are keen to change their Chinese RMB (which is spent in local production) to foreign currencies (through exports). Their objective is to maximize cash (in foreign currency) on hand, not to maximize profit.
Some Chinese "investments" have low or no returns. For instance, the high-speed rails have few passengers. The ghost cities have no residents. The government spends hundreds of billions in national security; for example, it is not cheap to build and run re-education centres (which the West see as prisons) to house a million Muslims in Xinjiang. Surveillance systems, such as CCTVs and facial recognition systems, requires heavy investments but do not generate direct returns.
Tens of trillions US$ have been moved out of China by individuals. Some of the money went to Hong Kong, holding US$ trillions worth of assets in the house and share markets. The Chinese middle class tends to send their offspring (known as the Fuerdai) abroad, where they help to move money out of China. Capital flight from China is estimated to be in tens of US$ trillions.
Most of the wealth remaining in China is tied up in assets such as shares, properties and loans. The value of these assets depends on confidence. When confidence goes, the value of these assets could evaporate. A Bloomberg report suggests that in March 2019, Chinas has over US$300 billion of toxic loans outstanding. Once businesses start to fail, cascading failures will be difficult to stop. The US subprime crisis from 2007 was a good example.
Like a Ponzi system, growth is the only way to keep the current economy going. Growth provides confidence, which is needed to sustain the property and stock markets. However, given its size, there is not much room for the Chinese economy to grow -- simple arithmetics, really. The China-US trade war certainly doesn't help. Is economic collapse around the corner?
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The author studies the above topic as a scholar. The discussion above is not politically motivated. Neither is any value judgements intended.
