The problem is a credit problem. And it's not an economic growth problem because China has the same anecdote every time things appear low, they accelerate more investment spending or green light projects that have been yellow lighted. For example, after the People's Bank put a little scare into the market in june, by letting overnight rates rise to put some discipline in their so-called shadow banking market, in July and August all kinds of projects were green lighted again at the local area and we saw resumption of rapid credit growth.
In fact, in their zeal to never miss a GDP forecast, they're doing a lot of foolish things economically, like building fifty international airports when they need only five. The rows and rows and rows of condos being built and unsold, as they decide to build more.
Remember, in China GDP is counted on production not final sales. So you build something and it sits unsold, it counts as GDP growth, and that's an important point. The other thing I would point out, and what Fitch warned about again today (see my previous post), is the massive credit growth that is coupled with this gdp growth. We estimate that for the last five years, China's new debt has grown about 35% of GDP each and every year. And I keep pointing out to people that if your GDP is growing 10% nominally, 7.5% real, 2.5% inflation, and credit growth is 25 points higher than that, or 35%, that basically using that old rule of 72 we all learned in high school math, you're going to double something as a percent every three to four years. So every three to four years at the current rate, China is doubling its debt relative to its GDP. It's already about 200 plus percent right now, so another three or four years we'll be worse than Greece. These are staggering kinds of numbers. And at some point that has to end.
Related articles: Doubts Rise as China Touts Upturn (WSJ)