In the week ending 22 June, Chinese banks suddenly faced a cash-crunch. Interest rates on the short-term borrowing from each other which banks habitually use to sustain their stocks of cash soared.
The central bank, which would normally deal with this by making cash available, remained stony-faced.
Since then, the central bank has eased its attitude a bit, but China’s government and central bank are still signalling a drive to deflate the bubble of cheap credit on which China’s economy has fed. The “purchasing managers’ index”, the most-used indicator of trends in manufacturing production, points to decline.
Local governments in China have long financed construction by setting up autonomous, off-the-books companies that can borrow freely. In 2008 the Chinese government responded to the global credit crunch by ultra-Keynesian policies, releasing a flood of new credit. Total debt in the Chinese economy has risen from 150 per cent in 2008 to more than 200 per cent.
Since 2009 something like 20,000 “wealth management vehicles” have been set up, in addition to the local governments’ arm’s-length companies, to repackage dodgy loans. This credit bubble functions as an “endemic, institutionalised form of corruption” (Ryan Perkins, The Atlantic, 28 June 2013).
The counterpart is many almost-empty buildings; little-used roads, bridges, airports, and rail lines; and chronic overcapacity in many industries.
The Chinese government is anxious to keep the plate up in the air, still spinning. Paradoxically, its despotic regime makes it more brittle, and more cautious about imposing slump conditions on the population, than parliamentary democracies which have many fallbacks and safety-valves when people get angry at a government.
However, evidently now the government has decided it must do something to deflate the credit bubble. Whether it can do that without bursting it is an open question.
A perceptive article in the Financial Times by banker Ruchir Sharma comments: “This age is chaotic only in comparison to the brief ‘Goldilocks’ era that began in 2003. Before that year, the emerging world’s share of global economic output had been stagnant for half a century and in decline for a decade...
“After the US Federal Reserve and other central banks cut interest rates sharply to engineer a recovery from the technology bust [in 2000-1] much of the resulting easy money flowed into the emerging world, doubling the average annual gross domestic product growth rate to about 7.5 per cent from 3.6 per cent in the previous two decades.
“The annual GDP growth rate of emerging nations fell back to 3.7 per cent in the first quarter, and the normal cycle is back... The largest, China... kept growing [in 2008] with huge infusions of state spending and credit. Now... China’s slowdown could end in a stall”.
In past decades, China has developed the world’s biggest-ever working class, working in some of the biggest-ever factories in some of the biggest-ever cities. There is already a constant ferment of illegal wildcat strikes.
The Chinese workers’ response to a Chinese economic crash will shape the future of the world.