Tuesday, June 7, 2016

WILL CHINA'S DEBT CRISIS CAUSE A WORLD ECONOMIC RECESSION SOON?


The media, analysts, fund managers and assorted pundits have been increasingly strident about China's huge debt overhang amounting to trillions of dollars; warning that it will trigger a financial and economic crisis not only for China but the world soon. We have seen the effects of the current China slowdown on everything from demand for iron ore to demand for luxury goods, as China's economy forms a larger and larger part of the world economy. The current economic slowdown in China is the result not only of the ongoing Chinese government;s economic structural reforms but also of years of monetary quantitative easing (QE); beginning with the mega economic stimulus of late 2008 which pumped US$600 billion into the economy. This cheap money fuelled the economy, resulting in an overheated real estate sector, over-investment in manufacturing, wasteful projects, underutilised infrastructure. China's demand for commodities such as oil, coal, iron, steel and agricultural commodities triggered an upsurge in the economy of countries that supplied these products.
The current situation is too long to explain but can be summarised by the headline of an article in today's Straits Times " After the Miracle, the Curse of Debt".
Is Doomsday for the world economy coming this year? Economists and analysts are notorious for making wrong forecasts. In this FB post, just for the fun of it I counted the number of articles per month yielded by a Google search of "China Debt Bubble" and "China Debt Crisis". Going by the consensus and Delphi oracle method of statistical forecasting, if anything at all, this chart constructed by me increases the probability of the event mentioned in this post coming true sooner than later.
*** June is an extrapolated figure based on number of posts till 8 June.

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