Why has it taken so long for a China crash to arrive?

This is an underdiscussed question, and it is the topic of my latest Bloomberg column.  Here is one part of the argument:

Unlike the U.S., China is full of large, state-owned enterprises. That gives the Chinese government the ability to manipulate a large stock of asset wealth. The U.S. government is more dependent on flows of revenue from taxation and the private sector.

When bad economic news arrives, the Chinese government can instruct the companies it owns to spend wealth to keep workers employed. Think of this as using the companies to conduct fiscal policy rather than laying off workers, building another bridge or erecting another steel plant. Whereas Western economies take an immediate hit to income in bad times, the Chinese have been converting this into a hit to wealth, insulating themselves from major downturns.

That can be useful, but it also can be abused. Indeed, China has ended up with too few bankruptcies and significant excess capacity and lots of low-performing firms.

One problem comes when the stocks of corporate wealth are nearly exhausted, or perhaps sooner when managers of state-owned companies rebel against this policy and demand alternatives. Another problem is that too many low-productivity firms survive. So when the dramatic Chinese recession finally does come, it will be without the protective buffers of wealth that the U.S. had during its financial crisis.

The wealth vs. income distinction still does not receive enough attention in macro.  There is much more at the link.  I also consider under what conditions China might avoid a crack-up altogether, namely if the forces of catch-up keep on validating the ongoing malinvestments.  Forecasting China is more like judging a race than just identifying a bubble.  Note that “At least by traditional metrics, the Chinese system has showed signs of trouble and excess capacity at least since 2006.”


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