All economic data are best viewed as a peculiarly boring genre of science fiction, but Chinese data are even more fictional than most. Add a secretive government, a controlled press, and the sheer size of the country, and it’s harder to figure out what’s really happening in China than it is in any other major economy.
Yet the signs are now unmistakable: China is in big trouble...
It’s all very peculiar by our standards, but it worked for several decades. Now, however, China has hit the “Lewis point”, to put it crudely, it’s running out of surplus peasants.
That should be a good thing. Wages are rising; finally, ordinary Chinese are starting to share in the fruits of growth. But it also means that the Chinese economy is suddenly faced with the need for drastic “rebalancing”, the jargon phrase of the moment. Investment is now running into sharply diminishing returns and is going to drop drastically no matter what the government does; consumer spending must rise dramatically to take its place. The question is whether this can happen fast enough to avoid a nasty slump.
And the answer, increasingly, seems to be no. The need for rebalancing has been obvious for years, but China just kept putting off the necessary changes, instead boosting the economy by keeping the currency undervalued and flooding it with cheap credit. [Since someone is going to raise this issue: no, this bears very little resemblance to the Federal Reserve’s policies here.] These measures postponed the day of reckoning, but also ensured that this day would be even harder when it finally came. And now it has arrived.