US President-elect Joe Biden will struggle with his Chinese policies. A reset in relations between Washington and Beijing is on the cards, and Australia may well be alone again.
The vacation period is a good time to catch up on sleep and reading. One of the most important books of the previous year, which inexplicably received little attention, is that of Tom Orlik. China: the bubble that never jumps. As for the writings on China, this should have been the book of the year.
It is a book that has been waiting for a long time to be written. Orlik was the veteran Beijing-based Chinese Bloomberg analyst. His 2011 book, Understanding China’s economic indicators, was an essential guide to the country’s statistics. Few commentators understand the numbers as well as Orlik.
Since the late 1970s, when China’s reform and openness policies triggered five decades of almost uninterrupted rapid economic growth and changed the world along the way, a constant theme has been that it will all end in tears.
Admittedly, Beijing has given the Cassandras a lot of material to work with.
Expert commentators always predicted – and still are – that China’s growth “bubble” would burst imminently. Admittedly, Beijing has given the Cassandras plenty of materials to work with, including its rapidly rising debt levels.
In 2019, China’s total debt was estimated at around 300% of GDP, more than the debt-to-GDP ratio of the United States and other developed economies. While China’s per capita income hovers around emerging economy levels, its debt is more than double the emerging economy average. As Orlik observes, this is a major drawback for China.
China’s debt-to-GDP ratio has also increased rapidly. Over the past decade, it has almost doubled – compared, for example, to Greece, before the onset of its financial crisis, where it grew by 75% from 2001 to 2010. The IMF found that no economy where the debt was over 100 percent and it had grown as fast as China had escaped a financial crisis.
Orlik argues, however, that China has always confused pessimists. He says, “to read the history of modern China is to read the history of collapse theories.” The post-Tiananmen crisis, the Asian financial crisis, the refinancing of the banking system in the early 2000s, the global financial crisis, the Shanghai stock market debacle in 2015, the ghost towns, the inability to rebalance towards consumption, the local government debt and shadow banking, and income inequalities between rural and urban areas were all going to destroy the house of cards.
But the bubble never appears. As Orlik concludes, “The theories of collapse have been many and varied. So far, they have one thing in common: they were all wrong ”.
Chinese ‘expert’ Gordon Chang was wrong when he titled his 2001 book China’s impending collapse. A number of financial market analysts and public commentators fell in the same way as the lemmings. Orlik convincingly shows why so many people have been hurting China’s economy for so long.
Today we are gripped by what Orlik skillfully calls “sinophrenia” – China is at the same time on the verge of collapsing and taking over the world. Australia is now in the grip of sinophrenia. This undermines decision-making on trade and public policy.
After my 35 years of analyzing, commenting, advising, and trading with China, it’s hard not to give Chinese policymakers the benefit of the doubt. One day, the bubble may burst. Economist Rudiger Dornbusch said crises take longer than you might imagine, but when they do, they happen faster than you might imagine.
If the Chinese bubble bursts, it will cause enormous damage not only to China’s 1.4 billion people, but to the global economy. The IMF recently estimated that among developed countries, Australia would suffer the most in terms of loss of economic well-being.
This is my last monthly column after contributing to The Australian Financial Reviewopinion pages from the past seven years. The forum is now well populated with many excellent commentators. It has become the premier place for short articles on foreign and strategic policy, inevitably heavily focused on China, that opinion leaders read – and by which they are influenced.