We could all end up paying for China’s astronomical debts, says philip delves broughton |
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What if the Chinese economy turns out to be nothing but a giant pyramid scheme? It is not as outlandish a theory as it sounds. Already, economists and strategists are bracing for the consequences of China's economic collapse.
Forget for a moment the construction boom in Beijing as it prepares for next year's Olympics. Ignore the glittering malls of Shanghai and its twenty-something millionaires. Set aside the airline magazine hype about China's boom and imagine for a moment a local Chinese bank in a three-year-old city perhaps out towards Mongolia.
The bank manager has earned his position thanks to his relationship with local Communist Party officials. They instruct him to lend to businesses in sectors targeted for |
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| For the West, the collapse of China would create enormous economic and political instability |
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growth by Beijing's economic mandarins - a textile plant or a construction company with a contract to build a new road.
He asks to see a business plan. "Don't worry about that," he is told. "It is your duty to lend to help the nation's economic growth and create jobs."
So he makes the loan. When the borrower defaults, he goes to his government contacts to complain. They tell him to shift the loan to one of the government's businesses and keep lending. "Unemployment is increasing," he is told. "People are getting restless and we're having to keep them down by force. This is no time to cut off investment."
And so it goes on, year after year. Bad businesses are kept afloat. The government keeps subsidising them and the number of bad loans multiplies until it rivals even the country's fabled reserves of foreign currency, earned by all those cheap 'Made in China' exports.
What happens next? Suddenly inflation is out of hand and the government must either raise interest rates, worsening the debt  |
