Anyone doubting that China is well on its way to a Japanese-style lost economic decade has apparently missed the bursting
of its massive housing and credit market bubble and the souring of U.S. and European trade relations with that country.
And if China, the world’s second largest economy, were to fall, it would constitute a major headwind for world economic recovery.
The seeds of China’s current economic malaise were sown over the last 15 years by the pursuit of highly unbalanced economic policies. Overemphasis on investment as the means of driving economic growth has resulted in a situation where Chinese investment accounts for more than 40 percent of that country’s overall economy — around twice the ratio in the U.S. That has, in turn, resulted in a large degree of Chinese manufacturing overcapacity, as Treasury Secretary Janet Yellen recently pointed out when warning China not to try exporting that overcapacity to the U.S.
Another indication of economic imbalance has been China’s housing and credit market bubble. According to Harvard’s Kenneth Rogoff, fueled by ample credit, the Chinese housing market grew to around 30 percent of its overall economy. That is about 50 percent higher than in advanced industrialized countries. Meanwhile, the Bank for International Settlements estimates that Chinese credit increased by 100 percent of GDP since 2008. That rate of credit growth was larger than that experienced before Japan’s lost economic decade in the 1980s. It is also larger than that experienced before the bursting of the U.S. housing and credit market bubble in 2008.