The Debt Supercycle Comes to China

CAMBRIDGE – The 2008 financial crisis in the United States kicked off a debt supercycle, which spread to Europe in 2010 and has recently engulfed many of the world’s low-income and lower-middle-income countries. Could the debt woes of Country Garden, the behemoth Chinese real-estate developer now facing billions of dollars in losses, augur the cycle’s next turn?

The answer remains unclear. While the Chinese authorities have a remarkable track record when it comes to containing economic crises, the challenges posed by a significant growth slowdown, combined with high debt levels – especially for local governments and the property sector – are unprecedented.

China’s current problems can be traced back to its massive post-2008 investment stimulus, a significant portion of which fueled the real-estate construction boom. After years of building housing and offices at breakneck speed, the bloated property sector – which accounts for 23% of the country’s GDP (26% counting imports) – is now yielding diminishing returns. This comes as little surprise, as China’s housing stock and infrastructure rival that of many advanced economies while its per capita income remains comparatively low.

At the same time, in what had once seemed like a race between a tortoise and a hare, the US is speeding toward artificial-intelligence-powered technological innovation and higher long-term economic growth. As highly respected Wall Street Journal economics commentator Greg Ip recently put it, “No one talks about secular stagnation now,” referring to a theory that a chronic deficiency in global demand and economically important innovation will hold down growth and real interest rates long into the future.

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