Since 2008, China’s boom was fueled by $20 trillion in borrowing and in turn fueled the world’s recovery. Today, China’s bust means a dramatic decline in demand for exports to China. If China doesn’t come back on line, where is that demand going to come from?
At the port of Long Beach, a near record percentage of containers go back to China empty these days. Commodity exporters, most notably Brazil, have seen a decline in excess of 35% exports to Asia, both Europe’s export engine, Germany, and the US’s export of finished goods and consulting fee income to China in 2015 are down significantly, weighing on industrial companies.
It is now apparent China’s building boom was financed with $trillions of debt that created an unprecedented demand for iron ore, coal, oil, lumber and grains. Commodity producing countries like Brazil, Canada, Australia and Russia boomed as a result. Since 2014 however, things have cooled in China and has resulted in a bust in commodity producing countries.
Only now has it become widely appreciated how dependent on leverage China’s rapid growth was. In only six years, the Chinese increased their total outstanding debt by about 400%. That is how China’s ghost cities were paid for. But how will the ghost cities repay their debt? That is something the Chinese never discuss and is at the root of the uncertainty about China’s return to growth.
One example of how problematic the bad investment in ghost cities was in the way they were financed. Emerging middle aged, middle class investors valued apartments as rock solid investments that they believed would provide above average returns. Developers sold these projects with income return projections that were very nice. Chinese demand for speculative real estate investments lead to over building and $trillions in suspect debt. It has been estimated that nearly 65 million Chinese apartments are currently empty. Today, small investors are stuck holding grimly on to their money losing empty apartments. They have to continue to simply pay the mortgages hoping for a turn around or that their son will use the apartment as proof of means to woo a wife. The consumption and investment capacity of these middle class investors is now heavily constrained by the burden of supporting their mistake.
For countries like Brazil, Venezuela and South Africa where debt, horrid politics and the crash in the profitability of their exports are all converging, the deepening recessions are increasingly leading them towards default on perhaps $trillions in debt and much of it is priced in ever more expensive dollars. The loss of a Chinese scale demand is the fulcrum of the growing crises in many emerging and developed exporting economies.
China’s boom was also a primary fuel for the US recovery that started over six years ago. The economy’s leading growth industries were meeting rising Chinese demand. As a result investment in manufacturing and energy, created 30% of the good jobs during the recovery. Both industries were the biggest beneficiaries of China’s burgeoning demand and now are seeing the most damage from the Chinese bust.
2016 is the year that global economic activity and demand must restart or a credit bust will begin to spread across commodity dependent emerging market economies. Where and how growth returns is not at all certain at this time, but given China’s huge debts and malinvestments in properties, it doesn’t seem likely they will lead the next upturn.
There are candidates to help lead a growth cycle and they are also in Asia. Let’s see if Indonesia, Malaysia and India can help turn this around.