China has an unprecedented mountain of private debt that is threatening the country’s economy in a major way. Economists now agree that China’s debt addiction will probably not end well, raising questions of how a potential spillover could affect other nations.
Since 2008, private debt growth in China has increased by the equivalent of 19 trillion dollars, said U.S. economist Richard Vague in The Real News video featured further below.
All major economic crises have been caused by very rapid increases in private debt, Vague explained, adding that China’s debt addiction will have the same outcome.
“In the U.S., it was housing; we just built way too many houses and we made way too many mortgages at unrealistic valuations, and it all came tumbling down,” said Vague, in reference to the financial crisis of 2008.
“All that private debt [in China] has ended up in ghost cites and the overproduction of commodities. They have just overproduced on an unprecedented scale, and they kinda have to slow down; there has to be a reversal in the next few years to compensate for that,” Vague said.
Japan overdid things during the 1980s and early 1990s as well, he said, while giving other examples.
“You almost always end up with a financial reversal, financial calamity, or even a financial crisis,” he said.
See more from Vague in this video from The Real News:
China’s debt binge is the largest ever seen in a major economy.
The extent of the problem is evident in relation to its credit-to-GDP figures. It now takes four dollars of debt to create a dollar of GDP growth in China, said Ruchir Sharma, a global financial strategist with Morgan Stanley, according to Big Think.
“In the first quarter [of 2016], that number was as high as six to one. At the peak of the U.S. housing bubble in 2008, it was taking three dollars of debt to create a dollar of GDP growth in the United States,” Sharma said.
“So that’s how addicted to debt China has become, and why I remain so worried about China’s economic prospects going forward,” he said.
Sharmin Mossavar-Rahmani, Goldman Sachs Private Wealth Management chief, told CNBC that Chinese credit-to-GDP numbers were tremendously high.
“We use the term that China could ‘submerge’ under the burden of its own debt,” Mossavar-Rahmani said.
Among China’s other challenges is a potential trade war with the U.S. under a new presidency and how money keeps flowing out of the country. More than $1.2 trillion has left the country since China’s shock devaluation of the yuan in August, 2015, according to Bloomberg in the below video:
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