EAST AND WEST

The Chinese economy’s current deceleration is attributed to the ramifications of a debt supercycle, as noted by economist Kenneth Rogoff. While some attribute the slump to declining global demand, it’s essential to recognize that the entwined borrowing practices of the Chinese government and the property sector have significantly hindered growth.

The global economic landscape experienced a seismic shift with the 2008 financial crisis in the United States, setting off a debt supercycle that rippled across Europe in 2010 and eventually engulfed numerous low and lower-middle-income nations. Could the mounting financial troubles faced by Country Garden, the colossal Chinese real estate developer grappling with substantial losses, be an indicator of the next phase of this cyclical pattern?

The answer to this query remains uncertain. Despite China’s impressive track record in managing economic crises, the complexities arising from a notable growth slowdown, compounded by towering debt levels—particularly within local governments and the property domain—are unparalleled.

The origins of China’s ongoing predicaments can be traced back to its massive post-2008 investment stimulus. A significant portion of this stimulus fueled a surge in real estate construction. After years of rapid construction of housing and office spaces, the property sector, which contributes to 23% of the nation’s GDP (26% when factoring in imports), is now yielding diminishing returns. This development is unsurprising, given that China’s housing stock and infrastructure rival those of advanced economies, while per capita income remains comparatively modest.

In a seemingly slow-paced race, the US has surged forward with technological innovation powered by artificial intelligence, promising higher long-term economic growth. As noted by esteemed economist Greg Ip of The Wall Street Journal, the notion of “secular stagnation”—a theory positing that a perpetual deficiency in global demand and consequential innovation would suppress growth and real interest rates—has largely dissipated from discussions.

In a similar vein, economist Jeffrey Frankel reflects on the transformation of this narrative. Over the past decade, the consensus among academics and policymakers was that ultra-low interest rates were entrenched due to feeble growth fundamentals—a belief that still holds sway today. However, a reevaluation is required. Distinguished economist Robert J Gordon, in his work “The Rise and Fall of American Growth,” presents compelling arguments for the decline of innovation and the end of growth, asserting that post-1970s inventions lack the economic significance of earlier breakthroughs like the steam engine or electricity.

During a 2012 debate at the University of Oxford on “innovation or stagnation,” billionaire investor Peter Thiel and former world chess champion Garry Kasparov put forth similar arguments. Meanwhile, Rogoff highlighted chess advances as a precursor to the AI age. However, his primary concern centers on the potential for AI’s rapid ascent to outpace humanity’s control.

While arguments for secular stagnation due to declining demand carry weight, demographic shifts are challenged by economists Charles Goodhart and Manoj Pradhan, who point to the swiftly expanding elderly population as a counterpoint. Furthermore, the collapse of real interest rates following the 2008 crisis cannot be solely attributed to long-term trends; the crisis itself played a significant role. Just as interest rates plummeted to zero during the Great Depression and remained there, the situation can evolve.

The debt supercycle, possibly prolonged by the COVID-19 pandemic, offers a plausible explanation for the extended duration of economic turmoil. As China faces economic challenges, it underscores the importance of understanding this cyclical narrative as the most viable explanation for what the future might hold.