Will China Face A Sovereign Debt Crisis?


I say no. China is a giant country with nuclear weapons. But apparently some analysts don’t see it that way:

“Last year, 55 percent of GDP was contributed by infrastructure investment — in other words bank lending,” said Carl Waters, an American investment banker until recently based in China and co-author of “Red Capitalism.” “If you keeping making bad loans that don’t pay back, you’re going to run out of money sooner or later.” […]

“China is already rapidly becoming significantly leveraged,” said Waters. “If you look at what happened in Greece or Ireland or Portugal when a country is leveraged, it has to borrow more and more to meet its interest obligations. That makes it less and less possible to invest in projects that will grow your GDP.”

Analogies between the situation facing Greece, Ireland, and Portugal and the situation facing China strike me as totally confused. One thing that can happen to a country (call it Iceland) is that foreigners might become willing to lend lots of Euros to your businessmen. Those businessmen might then invest those Euros in funding business activity that leads to a lot of economic growth. But then people lose faith in the future of your growth, especially once they recognize how much of it is based on inflows of foreign capital that are based on assumptions of high future growth. Then they stop lending you the money, and you have a crisis on your hands. Icelandic people owe more Euros to foreigners than they have. The result is some form of default, followed by a collapse in the value of your currency, a big shock to real living standards, and then you rebuild. If your country is Ireland or Portugal or Greece, you can add to the list of problems that your currency can’t collapse because you’re using the Euro. You might also be bound up in a set of political arrangement with Germany and France that allow them to coerce you into not defaulting.

China, whether or not you think it’s economy is heading for a crash, has none of those characteristics. China has not seen large net inflows of foreign capital. Indeed, China has a giant stockpile of foreign reserves. China does not have an overvalued currency, it has an undervalued one. And if you look at issues ranging from currency valuation to the Dalai Lama it’s perfectly clear that nobody can coerce the Chinese government into doing anything it doesn’t want to do.

China’s actual economic problems are, if you ask me, fairly banal and interesting primarily because of the scale of the country. A lot of places experience rapid growth and then fall into a “middle income trap” once the thing they’ve gotten really good at, low wage export-oriented manufacturing growth, stops working as a source of future growth. The PRC leadership is well aware of this problem and is trying to avoid it, but it’s not clear that they’ll succeed. And since over a billion people live in China, it’s a really big deal. But it is what it is. China is growing very fast. It might stop growing very fast. But it’s not going to have a Greek-style crisis because China is nothing like Greece.