Europe and America, operating largely on free market principles, are trying to cancel their huge debts. The only way they can do this safely, i.e. without hyperinflation (which could mean creditors getting back less money in real terms than they lent) is by real economic growth. This would generate profits, capital growth and tax revenue.
So far this is not happening and the hope was that China, with its state capitalism, would manage to keep growing fast and so buy exports from other countries, thereby stimulating their economies. It was also hoped that Chinese foreign currency reserves might be used to buy European and American government bonds. The money from this would help western governments (not only Greece but larger indebted economies) to avoid huge public spending cuts and to stimulate economic growth.
Doubts that either of these lifelines will materialise are beginning to surface.
The rate of GDP (i.e. economic activity) growth in China looks likely to fall considerably. An article in the New York Times section of the UK’s Observer (Oct 9) quotes an estimate of only 5% p.a. for the coming year. Over the last decade China has been expanding at close to 10% p.a., although recently it has been closer to 8% p.a.
So China is slowing down.
Its stock market’s Hang Seng index has declined by 30% over the last year and property prices have stopped rising in 54 out of 70 cities. Chinese savers had been investing in property because of fears about inflation eroding their savings as it reached double the interest rates. But the bubble is deflating. Government restrictions on lending by banks are causing a shortfall in loans to small businesses and there is rising unemployment.
The foreign currency reserves of China are large but this is not spare money free of obligation. It belongs to the Chinese savers and they are not likely to be happy about using it to rescue prolific spending governments and western banks burdened with gambling debts.
If there is widespread unemployment in China, a country where economic success means everything and where hopes have been raised unrealistically, and if savers find their money disappearing, it could cause social unrest and undesirable consequences for us all as the world economy contracted, although it would slow down greenhouse emissions.
Perhaps the world would be forced to find a way of growing in knowledge and spiritual fulfilment, while ensuring that everyone has enough food, water, shelter and medical help.
Author, 2077 AD