For a long time now, economists and financial analysts alike have pointed to China’s explosive growth as one of the most rapid and noteworthy periods of economic expansion in human history. But in a recent weekly newsletter from John Mauldin, I think he makes a fairly strong case that, contrary to being a world financial leader, China may soon be more of a drag on the global economy.
Mauldin talks in some detail about how and why he has been suggesting since last year that China may be the “biggest macro problem in the world today”, and that the Chinese bubble may burst sooner rather than later. The information he lays out is both compelling and somewhat alarming. According to reports, China has only consumed (after export) 65% of the cement it has produced in the last five years, it now outputs more steel than the next seven largest producers combined—only deepening the reality of the country’s housing and construction bubble.
While, on paper, the Chinese construction and real estate markets are still booming, there are legitimate questions as to whether or not that will be sustainable—and for how long. The price-to-rent ratio in China is spiking, and the country’s debt-to-GDP ratio has been climbing steeply for years. Even worse, if China is indeed in the midst of an infrastructure credit bubble, Chinese banking sector exposure and liability will not necessarily be immediately evident, because the debt is largely held in Local Investment Companies (LICs).
With production slowing, debt soaring, and significant structural problems going unaddressed, China might just be a ticking time bomb. They are currently in the late stages of their expansion/growth/inflation cycle, which is a dangerous place to be, and the subsequent downslope could be as extraordinary as the initial growth. Rather than being the roaring engine of global growth it has been for many years now, China may quickly pivot into becoming perhaps its biggest risk. I don’t need to tell you that if that happens, the impact on American markets would be profoundly damaging.