Is China different? Or must its borrowing binge, like most others, end in tears? This is now a hotly debated topic. On one side are those who predict a Chinese “Minsky moment” – a point in the credit cycle at which, as Hyman Minsky foretold, panic grips the financial system. On the other side are those who insist that China’s debt mountain poses no threat to the planned growth of the economy: the authorities say it will be above 7 per cent and above 7 per cent it will be. Which side is right? “Neither” is my answer. China will not have a financial meltdown. But the end of its credit addiction will result in lower growth, properly measured.
Three facts about recent economic developments seem to be quite clear.
First, if you take the official statistics at face value, China’s net exports shrank from 8.8 per cent of gross domestic product in 2007 to 2.6 per cent in 2011. This was offset by a jump in the share of investment over the same period, from 42 per cent of GDP – already extremely high – to 48 per cent. There are reasons to doubt reported levels of investment, but it is less reasonable to question its abrupt rise.