2023-08-22 10:57:13
FILE PHOTO: Workers walk past a construction site for residential buildings by real estate developer Country Garden in Kunming, China, in September 2019. The country is facing a dire real estate situation that could lead to an acute economic crisis (Archyde.com)
The economic travails of the post-pandemic years have given rise to intense intellectual and political debates. What almost everyone agrees, however, is that the post-pandemic crisis bears little resemblance to the global financial crisis of 2008.
So, indeed, China – the world’s largest or second-largest economy, depending on how you measure it – appears to be teetering on the brink of a crisis that looks a lot like the one the rest of the world suffered in 2008.
I am not confident enough in my understanding of China to judge whether it will manage to contain its Minsky moment, the point at which everyone suddenly realizes that unsustainable debt is, in fact, unsustainable. In fact, I’m not sure anyone – including Chinese officials – knows the answer to that question.
But I think we can answer a more conditional question: if China suffers a crisis like the one in 2008, will it spread in a major way to the rest of the world, particularly the United States? The answer is clearly negative. As big as the Chinese economy is, the United States has remarkably little financial or trade exposure to China’s woes.
Before we get there, let’s talk about why the China of 2023 resembles the North Atlantic economies, both the US and Europe, in 2008.
The 2008 crisis was triggered by the bursting of a huge transatlantic housing bubble. The effects of the bursting of the bubble were magnified by the financial turmoil, especially the collapse of “shadow banks”, institutions that acted like banks, created the risk of what amounted to a run on bank deposits, but lacked largely from regulation and the safety net of conventional banks.
Now comes China, with a real estate sector even more bloated than those of Western nations before 2008. China also has a large and highly troubled shadow banking sector. And it has some unique problems, notably the huge debts of local governments.
The good news is that China is not like Argentina or Greece, nations that owed large sums to foreign creditors. The debt in question is, in essence, money China owes itself. And, in principle, it should be possible for the national government to resolve the crisis through a combination of bailouts for debtors and haircuts for creditors.
But is the Chinese government competent enough to manage the kind of financial restructuring its economy needs? Do officials have enough determination or intellectual clarity to do what needs to be done?
I am especially concerned about this last point. China needs to replace unsustainable real estate investment with higher consumer demand. But some reports suggest that top officials remain wary of “waste” in consumer spending and resist the idea of ”empowering individuals to make more decisions about how to spend their money.” And it’s not reassuring that Chinese officials are responding to the potential crisis by pressuring banks to lend more, basically continuing down the path that has gotten China to where it is.
China may suffer a crisis. If so, how will it affect us?
The answer, as far as I know, is that the US exposure to a potential Chinese crisis is surprisingly small.
How much has the United States invested in China? Direct investment—investment that implies control—in China and Hong Kong is about $215 billion. Portfolio investment -basically stocks and bonds- is just over 300,000 million dollars. So we’re talking about $515 billion in total.
That may not sound like a small number, but for an economy as large as ours, it is. Here’s a comparison. Right now, there are many concerns about the US commercial real estate sector, especially office buildings, which are likely to face a permanent reduction in demand due to the increase in remote work. Well, US office buildings are worth about $2.6 trillion, or about five times our total investment in China.
Why has a huge economy attracted so little US investment? Basically, I would say, because given the arbitrariness of Chinese politics, many potential investors fear that the nation is a kind of Cockroach Motel: you can get in, but you may not get out.
And China as a market? China is a huge player in world trade, but it doesn’t buy much from the United States: only about $150 billion in 2022, less than 1% of our gross domestic product. So a drop in China would not have much of a direct effect on demand for US goods. The effect would be greater for countries that sell more to China, including Germany and Japan, and there would be some rebound effect in the United States through sales to these countries. But the overall effect would still be small.
A Chinese economic crisis might even have a small positive effect in the United States, because it would reduce demand for raw materials, especially oil, and possibly reduce inflation as a result.
None of this means we should rejoice in the possibility of a Chinese crash or wallow in another nation’s troubles. Even for purely selfish reasons, we should be concerned about what the Chinese regime can do to distract its citizens from internal problems.
But in economic terms, it looks like a potential crisis within China, not a 2008-style global event.
* This article originally appeared in The New York Times.
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