January 20, 2019

The Biggest Threat to the World Economy

“You shouldn’t worry too much about the big U.S. stock market sell-off. You should worry about China’s instead.

Indeed, while it might not have gotten as much attention, China’s benchmark stock index was, with its 25 percent drop, the world’s worst-performing in 2018. Part of this was because of the fear that President Trump’s nascent trade war might turn into something even more serious, but only a part. More significant than what Washington was doing, you see, was what Beijing was. That’s because, in what has seemingly become an every-other-year tradition in recent years, China’s government has stepped on the economic brakes pretty hard in an attempt to put an end to what looks like some bubbly behavior.

The important thing to understand here is that, in the depths of the Great Recession, Beijing unleashed a stimulus the likes of which the world hadn’t seen since World War II. It amounted to some 19 percent of its gross domestic product, according to Columbia University historian Adam Tooze. By point of comparison, President Barack Obama’s stimulus was only about 5 or 6 percent of U.S. GDP. Aside from its size, what made China’s stimulus unique was the way it was administered. The central government didn’t borrow a lot of money itself to use on infrastructure, but rather pushed local governments and state-owned companies to do so. The result was a web of debt that’s been even harder to clean up than it might have been because of all the money that unregulated lenders — so-called shadow banks — were frantically handing out above and beyond what Beijing had been hoping for.”

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