China: reflation play spells trouble for rest of the world
Marshall Auerback here. You saw Ed’s last post on China, quoting from Peter Tasker, one of the top analysts in Japan when I lived there. I take Peter’s insights very seriously. His analysis implies something a lot moreregarding currencies, trade and credit.
China’s bank credit expansion is so great that even if nominal GDP is up five to ten percent, the credit to GDP ratio will rise by about thirty percentage points. It took Japan ten years to take it up by fifty or sixty percentage points, and it has already been high in China before this credit boom. How high, no one knows because there is no good data on debt outside the banking system. But there is such debt. The debts of households and firms outside the banking system could be thirty percent of GDP. The total ratio now could be 185%. This is the same as Japan at the peak and close to the US now.
This could keep China going for quite some time, but the consequences for Japan could be disastrous. Indeed, for most of Asia, which could precipitate another crisis for them down the road.
One relatively unexplored aspect of the emerging Asia crisis of 1997 was what pushed these countries heavily into current account deficits. But between 1992-94, China devalued the RMB by close to 60% (she was already running a current account surplus when she did it the second time), which created huge competitive pressures for the other countries and pushed them rapidly into deficit. This time, China is devaluing along with the US dollar and reflating a credit bubble — not to encourage domestic demand, but to create a renewed export juggernaut, at a time of weak external demand. This could really be problematic for the rest of the world.
I wonder how long before the protectionist pressures emerge?