Abacus | China is heading into an economic perfect storm

On a grander scale, wealthy countries such as the United States, China, Japan, Germany and Britain have central banks that can continuously print money to lend to governments which then distribute it to keep their economies going, creating liquidity and ensuring conditions remain perfect for corporate loans to be raised. This perpetual motion machine seems the perfect solution, doesn’t it? Borrow, spend, borrow, spend, repeat ad nauseam and the plates miraculously keep spinning. 

Over the last year, more free money and easy loans have been given out than during any other time I can remember – substantially due to economic stimulus measures flooding pandemic-stricken economies with cash, boosting demand for commodities, equities, and revving up speculation. 

A thought that has alarmed me recently, though, is that these fiscal measures may now be coming home to roost. From my perch here in Hong Kong, I can observe the effect of this across our northern border, but there’s a good chance mainland China is simply ahead of the curve, and that the perfect storm of debt defaults, rising prices and falling revenues will roll through the region and in time will hit the shores of the US and Europe as well.

According to reports in the financial press, China’s domestic debt has ballooned and can no longer be sustainably refinanced, resulting in an alarming increase in defaults on local loans. So far this year, the rate of domestic corporate defaults is double that during the Chinese stock market crash of 2015.