Silver as an investment

The Chinese Economic “Death Spiral”

China and the U.S. China are in the worst position, where 4 units of debt are needed to create 1 until of growth. This suggests a debt “death spiral” ending in a credit crisis, recession, or both.

wallstreetexaminer.com / by James Rickards via  The Daily Reckoning / 

China has reported annual growth rates since the panic of 2008 of between 6.7% and 12.2%, with a steady downward trend since early 2010. If China’s growth engine is running out of steam, as I’ve described, how has China managed to maintain such relatively high growth rates?

The answer is contained in three key words: debt, deflation and waste.

Waste is a blunt word referring to non-productive investment. The investment component of China’s GDP is about 45% of the total. Most major economies show about 25% to 35% for investment.

But at least half the Chinese investment is wasted. It goes to projects that will never produce an adequate return, either on an absolute basis or relative to alternative uses of the funds.

If this wasted investment is subtracted from GDP, similar to a one-time write off under general accounting principles, then 8% growth would be 6.2%, and 6% growth would be 4.7%. There are other distortions in Chinese growth figures, but wasted investment is one of the most glaring.

A simple example will make the point. During a recent visit to China I took the high-speed train from Beijing to Nanjing and passed through the magnificent new Nanjing South train station.

The train had the smoothest, quietest ride I’ve ever experienced even at speeds of 305 kph. The noisy clickity-clack of Amtrak’s Acela service from New York to Washington seems like a Wells Fargo stagecoach ride through the Old West compared to the Chinese railroad.

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