I've sometimes been accused of being slightly morose, with a cynical take on the world, but I prefer to think of it as seeing the world as it really is, and being better prepared than if I were to wander around wearing rose-tinted spectacles. So when I recently noticed an increase in reports about China's growing economic troubles, my ears pricked up. I've long been a sceptic about the sustainability of China's meteoric growth, even after having been to the country and seen for myself the jaw-dropping construction projects and scale of building work that seemingly never stops. Flying from skyscraper-studded Shanghai, below, (where I have travelled on a 400km/hr maglev train to the airport) back into low-rise London felt to me like passing from the 23rd to the 15th century.
However, there is development and there is development. China has made a very good living for the last 20 or 30 years, since late-lamented leader Deng Xiaoping let loose the full forces of Chinese-style capitalism, using very low-paid workers to make goods that were exported around the world in exchange for hard currency. This has led China to have one of the largest balance-of-trade surpluses in the world, averaging around US$58bn per month between 1983 and 2014 and totalling US$320bn in January 2014 alone.1 China's current foreign reserves are an astonishing US$3.3 trillion, the largest in the world and far larger yet than the second largest, Japan's, at around US$1tr.2 Although private enterprise has been allowed to flourish, the state sector in China is still huge, with many industries dominated by state-owned enterprises, and making up around 40% of the total economy.3 The state therefore has its hand on the throttle of the economy and can cause the whole machine to run at full speed or at idle. As we all know, the machine has been running at full throttle for years, averaging GDP growth of above 10% for most of the years between 1980 and 2010. However, this has come with a huge over-investment in industrial capacity, such that the central government is now busily closing and demolishing swathes of older and inefficient industries. At the same time, however, the construction industry has run red hot, with the result of hundreds of thousands or millions of apartments and other homes standing empty (reminiscent, in fact, of the height of the sub-prime fiasco in the US). One of the problems now facing China is that the loans that were made to build these assets are now non-performing, and will eventually have to be written off in part or in whole.4 The amount of loans made - by both state-sanctioned banks and the 'shadow' banking sector is thought to be in the order of US$14 - 15tr. If the number of loans going bad and being written off spikes for any reason, then we could see a knock-on effect similar to that seen in the US after the failure of Lehman Brothers.
Presuming that it would take the Chinese state some time to restore financial order, what would be the effects on the wider world if China's economy were to stumble? If Chinese steel production were to be hit, then global iron ore prices would slump, since China is the preeminent buyer of iron ore and many other metals: mining stocks worldwide would slide (offering a buying opportunity to any brave and long-sighted optimist). Chinese building materials producers - including gypsum wallboard - would find that their buyers have gone on an 'extended holiday' and would have to mothball many of their existing facilities and to cancel or at least postpone any plans for expansion. We've seen this happening in much of Europe and in the US over the last six years, so we know that it can and indeed has to happen. The banks will inevitably be restructured and will have to be bailed-out, perhaps using some of those foreign reserves, and perhaps this will be a catalyst for some further scaling-back of state involvement in a number of industries, with some facilities even being sold off to make ends meet (in the same way that Greece is selling some of its islands). Perhaps these factory sell-offs might allow some of the international gypsum producers a further toe-hold in the Chinese market, if they wanted to risk it.
1 http://www.tradingeconomics.com/china/balance-of-trade
2 http://en.wikipedia.org/wiki/Foreign_exchange_reserves_of_the_People's_Republic_of_China
3 http://blogs.worldbank.org/eastasiapacific/state-owned-enterprises-in-china-how-big-are-they
4 http://www.bloomberg.com/news/2014-02-14/china-banks-bad-loans-rise-to-highest-since-financial-crisis.html
