In the past five years, as Western economies languished, China has kept up its strong rate of economic growth, helping to power demand for commodities and pull along much of the emerging world.
So it’s real economic growth of 7.7 per cent last year, the slowest since 1999, came as a shock.
Earlier this year, further signs of China’s economic slowdown sent shudders through financial markets. Investors now list China’s slowdown as one of their chief concerns going forward.
'The world is not ready for this. China is 10 per cent of global GDP. If you take Chinese growth rates down from 7-7.5% even to 4.5%, let alone 2.5%, which is possible, that’s going to have a major impact on the entire world' - Economist and invest Jim Rickards
China set its annual growth target Wednesday at 7.5 per cent, as the Chinese economy enters a transition period.
Jim Rickards, an American economist and investor, believes China will never return to the 9.9 per cent growth rate it has had over the past 30 years.
“When you’re starting from a very low base, you can grow very rapidly with very little input,” he said in an interview with CBC’s The Lang & O’ Leary Exchange.
The economic miracle was powered by rural peasants migrating to the cities, forming households and producing cheap consumer goods for the West. But now fewer people are moving into cities, many Chinese are already approaching the middle-class and there are cheaper countries to manufacture goods.
“Beyond that China has mismanaged its economy. It has a lot of structural problems that could cause much more rapid collapse in the growth,” said Rickards, author of the soon-to-be released book The Death of Money.
He points to China’s “ghost cities” in which apartment buildings, hotels and shopping malls go up on vacant land, with no one to live there.
Too dependent on investment
China has become so dependent on investment to power its economy that it is going ahead with such projects although the capital is ultimately wasted, he said.
"That does create jobs and growth in the short run, but if you can’t use it, you’ve wasted it," Rickards said.
China’s leadership, worried about a downturn in exports, wants domestic consumption to take on an increasingly important role in the economy. There is talk of floating the yuan and letting market forces shape its state-owned companies.
But as the country outgrows the planned economy, there are signs it is having trouble managing credit and that it's banks may be in trouble.
One of the problems are “wealth management products” which the banks have set up as Ponzi schemes, offering high rates of return, but financing them not through investment but through the funds of new investors, Rickards said.
“How long could that go on. It will go on until something happens. There’s a failure, a fraud, something will cause a panic and everyone is going to run down and try to cash them in,” he said.
“They’ve set themselves up through wasted infrastructure investment, opaque financial product and ponzi financing – they’ve set themselves up for a collapse,” he added.
If China experiences a softer landing, it will have to be happy with growth of closer to four per cent, Rickards estimated. But if it faces a crash, or a bank default, growth may decline to two per cent.
“The world is not ready for this. China is 10 per cent of global GDP. If you take Chinese growth rates down from 7-7.5 per cent even to 4.5 per cent, let alone 2.5 per cent, which is possible, that’s going to have a major impact on the entire world,” he said.