4 March, 2024

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China’s Economy – Nothing Is Going Right!

By Hema Senanayake

Hema Senanayake

It has been reported recently that nothing’s going right for China‘s economy at the moment. In China, prices are falling than rising. That is deflation is taking place. People are not buying, and entrepreneurs want to sell what they produce even by reducing prices. Chinese central bank cut interest rates to reverse the situation propping up demand and growth. In a normal situation this is not a big problem. That is deflation itself is not a big problem. But China reported another problem, a “debt disease” previously. This means that there is an accumulation of relatively huge debt in the non-financial corporation sector and in household sector together. In brief, in China there are two economic maladies at the moment; those are “debt-disease” coming first and subsequent deflation. If debt-disease and deflation stand-alone separately there will be a smaller problematic wave in the economy. But if the deflation is caused by debt-disease it usually creates a bigger wave like severe recession or even great depression, if not contained proactively. Therefore, in this brief essay I will explain two economic theories which will help to understand the said crisis.

Debt-disease came first. In China, it is not about public debt which means government debt. But it is about private sector credit which includes non-financial corporations and households. China had been doing excessively well in past couple of decades posting doble digit GDP growth. But recent economic theory intimates that it could see troubles mainly a debt-disease when the economy is approaching its maturity, having near full employment and reduce GDP growth to lower single digits. The theory explains as follows.

“After a period of economic activity, it does not need necessarily be a period of economic growth, if private consumers are not in significant debt, then the government could be filling something defined as “Economic System Gap” from a large amount of debt – and if both private consumer and the  government are not in significant debt, then the “Economic System Gap” is being filled either by credit issued to nonfinancial businesses or by margin debt which means that there should be a debt bubble in nonfinancial business sector or debt bubble in the stock market with heavy indebtedness of holders of stocks and derivatives or in both sectors. If none of the above is happening, then it must be an (immature) economy that is expanding by reinvesting the expanded capital and producer credit and mostly producing goods and services that do not satisfy the demand of immediate consumption. In all former scenarios except the last, the economic system may crash soon due to “over-indebtedness”, if systemic partial debt-deflation is not undertaken by design. In the latter case, the economy will fall into any one of the former scenarios as it grows. This is the general behavior of contemporary capitalist economic system.”

Now apply this theory to China. Chinese consumers and the government are not in significant debt. And previously nonfinancial businesses were having less debt. If this was the situation, then it should be a immature economy expanding by reinvesting the expanded capital and producer credit and mostly producing goods and services that do not satisfy the demand of immediate consumption. During this period, China had double digit GDP growth. Then recently it falls into a kind of mature economy, having near full employment and reducing GDP growth, while usable inventions and innovations are slowing down. Under this scenario, the economy should be in significant debt according to the theory. So, in China still consumers and the government are not in significant debt, but nonfinancial businesses debt has grown to over 158% of GDP where in Australia the same figure is around 62% according to 2022 data of Bank of International Settlement. This means that in a way China is currently having a debt-disease. If this is a stand-alone problem, it could trigger only a smaller disturbance in the economy. But it is not so. It seems, Chinese debt-disease has caused another malaise that is a “deflation.” 

Then another piece of theory of Irving Fisher explains as follows.

“When over-indebtedness stands alone, that is, does not lead to a fall of prices, in other words, when its tendency to do so is counteracted by inflationary forces (whether by accident or design), the resulting cycle will be far milder and far more regular. Likewise, when a deflation occurs from other than debt causes and without great volume of debt, the resulting evils are much less. It is the combination of both – the debt disease coming first, then precipitating the dollar disease – which works the greatest havoc.” (Fisher, 1933). In this quote, the dollar disease means deflation or fall of prices.

The above two pieces of economic theory explain the current Chinese economic crisis, and sincerely hope that Chinese authorities would act proactively before two malaises work greatest havoc and save the global economy.

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Latest comments

  • 11
    0

    HS, you mean China is going to be the next USA or is it, other way about ?????? Anyway, you seems to be in for a treat. You say China”s non financial and household sector is in debt and not the govt. Whereas in the U.S , it’s the govt in debt. Not surprisingly recent J.P.Morgan report indicates, post Covid , U.S public seem to have more money in their current / savings accounts (may be less spending ). Rest , I will leave it to our experts.

  • 3
    0

    China’s Economy – Nothing Is Going Right!

    Indian is working on agriculture and exporting them, and IT Intelligent this what the world is focusing and that why the are booming instead If everyone is thinking alike, then somebody isn’t thinking. Indian is thinkin a different, robots as replacements for humans — think of them as things that will help make us better at tackling many of the problems we face. Presently world is after this.

  • 6
    11

    If the narrative is to be believed, one wonders why the US is spending so much effort to wreck a falling economy.

    • 11
      2

      You are left much behind with your communist theories. You woke up only very recently, after Putin was stuck knee deep in the war with a puny country, Ukraine. Draw as many maps you like but in politics don’t let all dogs out at the same time, because it would become impossible to defend them as only humor. While you were in deep sleep & hooting about China and drawing maps, we many times tried to wake you up. Still there may be a or two tickets left in the party President Biden organizing to celebrate the victory. Tap & see if you too can get a sip of fine Napa Valley Cabernet Sauvignon, just for a change & to take rest from Deva’s medicines.

      • 4
        10

        Try talking of something that you even slightly understand.
        But that will be hard, as you will be left with nothing to talk about.
        So you will keep jabbering to no end.

  • 8
    2

    Because of the everlasting, never curable Sinhala Buddhists’ Aappa Diplomacy, racketeering, bribe seeking, corruption, money Laundering, heavy pinned to Kerala Ganja smuggling the failed Langkang Rupee’s 2500 years old face of Buddha is being slowly replaced surgically with 100 years new Mohandas Karamchand Gandhi!
    Whatever it is, it only another Indian face.

  • 4
    8

    We must not wish too much for the economy of China to go down. If it does, then the global economy will go down with it. Look around your homes and count the things you have that are made in China, even the clothes you wear. You bought such things because their quality was comparable to the best from anywhere, yet they were priced so you could afford them. Without China, you will be paying multiple times more for essential everyday goods, even if we can overlook heavy machinery and cars and trains and such critical modern-day items. With China down, your banian and sarong may come from the UK or US, but you wouldn’t be able to afford it.

    • 8
      2

      What stupidity is this? Come on!
      The Thalikody snatcher is selling me back the thing he stole from me. Are you asking me if I ever had a glittering thing to sell like him; Could I ever be as proud as him? Do you understand that my present here is about the justice for my stolen property? Is that going in the mind that Sinhala Buddhist were guided to loot, rob, and burn Tamils’ property but not have the guts to talk about (Intellectually and Physical stamina) Hangbangtota Port? I can’t believe that much of a shortfall of intellectuality can be in one’s trait while he/she is convulsing to preach to others. Furthermore, Langkang buggers not just allow one to make one’s Thalikodies, they do not do it, but wait for China to come and give it to them. Please explain to me how you find it wrong that people call for justice from bullies? Why are you convoluting the talk saying that everybody else is just jealous of others like the Sinhala Buddhists? Please take a different path from preaching Bald Head Ethics. The fundamental defect in Sinhala Buddhists and the law and order failing within them is because they expect a group of free lunch eaters to set the law to the county’s wealth building. That society cannot have a foundation to do honest work for food.

    • 3
      13

      Sarath
      There is a lot of wishful thinking of the ruling elite of the west finding expression in their media.
      The imperialist West undermined its own economy by going for cheaper goods produced by cheap skilled labour.
      As for shunting out China, US is alone except for a few weak clients.
      The more the West curses China and even Russia, the more the attraction to them.
      China has all along scored in Africa and Latin America by treating trade partners as equals– something that the colonial mindset will not allow. It is now gaining a foothold in the Middle East by promoting peace instead of war as done by the US.
      What China will end up as is for the future, but right now China is playing its cards well.

    • 9
      2

      “With China down, your banian and sarong may come from the UK or US, but you wouldn’t be able to afford it.”
      Too much cheap price made us to spend more than that was required by us which is one of the reason for the current economic crisis. Sri Lanka also fallinto the debt trap of China and most of the external and internal debt and investment on unproductive investments happened after 2010 which lead to economic crisis.
      Yes China had a comparative advantage interms of cheap labour because of its population but it is not helped majority of its population’s economic status. Because of China’s cheap labour, most of the small nations like Sri lanka lost their chance to develop and to depend on others.

      • 4
        7

        Ajith

        I will only address this single statement of yours: “but it is (sic) not helped majority of its population’s economic status.” Your reference is to China.

        Reuters tells us that in 2019, prior to global travel restriction, 155 million Chinese travelled abroad, spending $254.6 billion.

        In that year, the Chinese were the biggest tourism spenders in Lanka.

        If you live like a frog in the well and don’t know what’s happening in the world, then you will write uninformed nonsense.

        Do read a bit before you put pen to paper.

        • 3
          5

          Sarath
          “Do read a bit before you put pen to paper.”
          Advise I gave him many months ago.
          Water on a duck’s back.
          But he is no exception, There is much company.

          • 3
            1

            I understand Gota also got your advise to import cheap Chinese Organic ferilizer (which is not worth even a penny) which brought bangruptcy to this country and ran away by country to country begging.

        • 5
          1

          China’s Gini coefficient has grown sharply to 46.6 (0.466) points in 2021, which is above the warning level set by the United Nations of 40 (0.4).
          This indicates a growing inequality in China, which can have serious social, economic, and political implications.
          China’s Gini Coefficient Index is 61.5, indicating a high level of inequality in the country’s income distribution.
          This is an important statistic as it provides insight into the economic disparities that exist in China.
          GITNUXMARKETDATA
          China’s Income Distribution 2023: A Look at the Latest Statistics

        • 6
          1

          Sarath,
          “In that year, the Chinese were the biggest tourism spenders in Lanka.”
          As an expert of intenational matters specially on Economics I thought you are going to come up with evidence based analysis to show that the Income distribution of China to say the gap between poor and rich are narrowed but you just copied a report from Sri Lanka – China president. You also say that China is the biggest tourism spender in Sri Lanka throughout the years but you are not telling the truth. I hope you will open the eyes of not only me but also the other readers.

          Can you tell us the net revenue from Chinese tourism in 2022? India is always in the top and now the five top tourist arrival are from India,Russia, UK, Germany and France. I am sure the Tamil Diaspora are included in the UK, Germany and France.

          • 2
            6

            Ajith
            When intellect is deficient, you can always look around and find an outfit from which to quote to justify your misguided and confused opinions. Ajith finds the “Gini Coefficient” and must think he is outstandingly clever. He is unaware China is one-fifth the global population with only 7% of the world’s arable land. The majority of its people live in rural areas. It was a poor country 30 years ago. Today it is overtaking the US and most Western/rich countries, former colonisers who robbed poorer countries, or promoted slavery to amass wealth. So using a single yardstick to measure countries with different and variable characteristics is something only the uninformed will do. Some of Ajith’s heroes – US, Canada, Australia, New Zealand – settled inhabited lands, then systematically murdered the original inhabitants. They got kicked out of many other lands they tried to overhaul. No, I am no “expert on international matters specially on economics”, as Ajith says. I have no educational degrees, just a humble man. I merely read and inform myself. And as for the many questions he seeks answers from me, just look around and read I say. Everything is in the public domain.

            • 2
              4

              Ajith 2
              Today these hypocritical Western countries preach democracy, human rights, access to markets, free trade, only when it suits them. If you don’t agree, then you will get bombed as in Viet Nam, Iraq, Libya. Afghanistan. Japan got is so well and truly that it threw up its hands and gave up its independence and joined them, an Asian country that is now White.

              The hypocritical countries I speak of are the US, Canada, Australia, New Zealand and a handful of countries in Europe, who together, refer to themselves as the “World”. So in the media you will constantly ready about the “World’s rules-based order” in other words, follow what we say, or else.

            • 3
              2

              Why going here and there instead of writing about the subject you started?

              • 2
                1

                Ajith

                “Here and there going” so as to educate the uninformed. We must read what Sarath is saying and learn from the facts he presents. Then we will not write foolish statements. I am only trying to help.

    • 4
      0

      Hello Sarath,
      I never realised what a good sense of humour you had. I came to Sri Lanka in 2021 to live after 10 years in the Middle East. Together with my Sri Lanka wife, we built a house in a small village between Gampola and Kandy. I personally went to purchase all of the materials and fittings that you need for a house. I am sure that the Chinese are quite capable of manufacturing quality products, however not for Sri Lanka. From Electric Bulbs to Float Valves (for Water Tanks) and many other products, it is impossible here to buy anything other than the useless Chinese Coonoo that has a monopoly in Central Province. If it lasts longer than the usual 3 month guarantee period you are lucky. Our local builders were great and tried very hard to point me to reputable traders. Despite the difficulties and many returns to the local Hardware shops we finished the house and, apart from some minor fittings failures, the builders (and me) were very proud of their efforts.
      To be continued

      • 4
        0

        Continued
        My wife has a small Grocery and Clothes Shop in the village and I can assure you that Sri Lankan clothes are better quality that the Chinese ones. Her son is an Export Manager for a large Apparel business and most of their trade is with the USA. Their Quality Standards are very high – I wish I could say the same for the Chinese imports to Sri Lanka. My nephew and his daughter recently visited and couldn’t believe how high the prices were compared with the UK. I had to explain to them that the Rupee had more than halved in value against the Dollar and UK Pound. Despite the difficulties in buying petrol with a QR code we managed to visit a few of the places that they wanted to see.
        On a slightly different subject – I could buy a NEW (not a 2 or 3 year old refurbished vehicle) Suzuki Grand Vitara 4 wheel drive in Qatar for less than a 10 year old second hand car in Sri Lanka. Could someone explain why?
        Best Regards

        • 1
          3

          LankaScot

          Your praises on my humour are noted, although sometimes I am surprised on how little it takes to amuse some. On the other hand, you seem derisive that shoppers prefer Chinese goods to items your wife’s small grocery and clothes shop in the village stocks. I am saddened by her inability to compete. My advice is to stock better quality at cheaper prices, or find different merchandise to sell. Her Export Manager son may be able to help with higher US quality standards. If you had looked around when building your home, you would have found that China exports a full range when it comes to quality and such matters. The lowest will be the cheapest. And the highest, used in most developed countries, including the US, will be the costliest. All depends on what you are willing to pay. Glad you finished your home though. Best of luck with your search for a second-hand car.

  • 3
    4

    Thanks for the theories HS. Very educational to me and the rest of the masses.

    Oh gosh…..this is the result of trying to implement the American Capitalist System. America itself, handles all these types of things through war and control of other countries’ economies.

    See what happened to Japan, causing them to jump into WW2. After succumbing to the American system of trade and armament building up in the 1800’s to early 1900’s, courtesy the American armament trade, they too got greatly affected by the American Great Depression. Trying to create new trading patterns with the rest of Asia caused the ire and control by the Americans. Hence Pearl Harbor bombing by the Japanese and the suffering of Asia for over 5 years.

  • 1
    7

    The problem : Original American Capitalist System (that Japan subscribed to), was an Immature Economy that expanded by reinvesting the expanded capital and producer credit, by mostly produced goods and services that did not satisfy the demand of immediate consumption. After all, America did not have any other recourse but to produce and factory produce all kinds of items so their many immigrants from Europe and other place could trade between themselves and the rest of the world – their natural farmland and forestry destroyed by the immigrant invaders. Now, in these modern and more Contemporary Capitalistic Systems need to Evolve! Democratic Socialized Capitalism will work wonders.

    • 2
      4

      Now, in these modern times, this so-called Contemporary Capitalistic System needs to Evolve!

    • 5
      3

      rtf
      Your comments do amuse more than amaze.

      • 0
        4

        SJ,
        Why? Noooo….don’t tell me: You’re of the billionaire set! Very sad to see what’s happening to our countrymen.

        • 4
          1

          rtf
          You never fail my expectations

          • 0
            1

            And you, mine. Pay your taxes instead of sitting smug!

  • 2
    4

    As for the Motherland, we will retain our own Great Depression at a far worse escalating scale long before China and America fall into that trap again.
    _
    Our essential consumable products that our people survive on, are sold for profit to other lands to secure the Lankan Billionaire accounts. Our sustaining Provident funds are taken by the financial sector to also sustain the non-producing Lankan Billionaire set. Anything they could build up (probably not), is a long time in coming. (Latest immediate industry: Beauty contest for young and old Rich women in-country and offshore……aka money-laundering industry….i.e. Lankan money of the hardworking-suffering-working-class placed in the off-shore American beauty pageant industry ; any money trickled back to sustain the local regional beauty pageants). Alas!

    • 6
      2

      Grandma Fernando de Silva,
      This sounds as good as Thero De Silva’s products. But not spiced with enough “Left, Right, center, front, back up down, ….. Please take care of that too in the next one.

      • 2
        5

        Too real for you to comprehend, isn’t it

  • 2
    3

    Mr. Hema Senanayake
    I don’t think there is anything wrong with China’s economy. According to a long-term projection made by Goldman Sachs, in 2050, the world’s fifteen largest economies will be;
    1. China
    2. United States
    3. India
    4. Indonesia
    5. Germany
    6. Japan
    7. United Kingdom
    8. Brazil
    9. France
    10. Russia
    11. Mexico
    12. Egypt
    13. Saudi Arabia
    14. Canada
    15. Nigeria
    In fact, it is estimated that China will overtake the US around 2035!.
    .
    In 2022, the world’s fifteen largest economies were;
    1. United States
    2. China
    3. Japan
    4. Germany
    5. India
    6. United Kingdom
    7. France
    8. Canada
    9. Russia
    10. Italy
    11. Brazil
    12. South Korea
    13. Australia
    14. Mexico
    15. Spain
    (Source: visualcapitalist.com)

  • 3
    2

    C
    Did Goldman Sachs allow for the unwise moves by the US and EU against Russia that have hurt EU countries very badly?
    The size of an economy is not the same as the health of the economy.

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