Complex Made Simple

Exclusive: China debt is a “big bomb.” Will it explode?

"It's kind of bizarre to have this high economic growth rate for 30 years. I think what's happening is a controlled slow down," says Prof. Mark Greeven, IMD.

Chinese companies need to be more efficient; they need to be using their resources more effectively There is a slow deflating of the debt bubble of debt in the state bank sector The key is to build a healthy economy that is competitive and make sure that people spend money

2019 has been a mixed bag of anxiousness and optimism for those keeping an eye on the global economy, the ebb and flow of tech companies, and interactions between the worlds’ leading players.

The U.S. Federal Reserve dialed back on its 2018 hawkish stance with a more “patient” approach to rate hikes in January 2019. The U.S.-China trade war spilled over into the markets even as years of quantitative easing in China began to take its toll. After years of debt accumulation, China’s resilient economy began to show signs of a slowdown, which further sparked concerns about a global recession.

AMEinfo had an in-depth conversation with Prof. Mark Greeven, a leading voice on China, innovation and the global economy to make sense of a score of issues by taking a deep dive into the reality of each situation. This is the first of a three-part interview with him.

Prof. Mark Greeven, IMD 

Before we take the plunge, here’s a bit more about Prof. Greeven.

Prof. Mark Greeven is a Chinese-speaking Dutch professor who has been associated with China’s Center for Global Research and Development (GLORAD) and Netherlands’ well-known Rotterdam School of Management, Erasmus University. He has been advising Fortune500 companies in China and Europe since 2004 and has published multiple pieces of research in international academic journals as well as leading newspapers such as The Financial Times


China’s slowing economy

Prof. Mark Greeven: To some extent, China’s slowing economy is necessary. I think it's kind of bizarre to have this high economic growth rate for 30 years. So, I think it makes some other sense. I think what's happening is a controlled slow down.

It makes little difference if the economic growth slows from 7 percent to 6 percent or 5 percent because the economy is still growing. People’s lives are getting better every year and the economy is expanding. The key problem would be if the economy starts shrinking, but it’s not – it’s still growing, but at a less rapid pace.

This does mean that the pressure on Chinese companies inside China is getting bigger. They need to be more efficient; they need to be using their resources more effectively; they need to make sure that they go higher up in the value chain.



Prof. Mark Greeven: In terms of the built up debt, that’s not a secret anywhere in the world. It is a big debt; it is a big risk; it is a big bomb. The question is whether it is going to explode – and when? Considering the fact that the stakes for the private sector, the public sector, and the government are high – because they are all interconnected; in China, everything private is public, and everything that's public is private – I think that it’s not likely that it’s going to explode in the form of a huge financial crisis.

Such a crisis would literally mean that the majority of people living in the big cities would not be able to afford their housing would not be able to keep living there. Considering the size of the population, that would mean one of the biggest disasters in history, which cannot come to pass. So, the government will do everything to prevent that.

The Chinese people will also get more aware of this. This is already being seen in new regulations in real estate. There is also a slow deflating of the bubble of debt in the state bank sector.

There is no easy answer to this. However, one of the ways of tackling this is to get people to spend the money that they have in their accounts and the money that they have locked up. There’s a lot of money still locked up. The key is to basically build a healthy economy, which means a private sector that is really competitive and makes sure that people spend money. In the long run, that’s the best answer to this problem. In the short-term, however, we will see other measures like interest adjustments that are necessary to make sure that there's nothing explodes today.


The U.S.-China trade war

Prof. Mark Greeven: The short perspective on this is that, in fact, the trade war is one symbol of a much more fundamental tension that is not going to go away for the next 15 or 20 years.

That’s the tension between the U.S. and China in the sense that, China is re-emerging as an economic and political player globally and now the United States government needs to find a way to be comfortable with that.

So how does that work? If you were, for the last hundred years, the biggest and most influential economy in the world, but you enter into the 21st century and realize you cannot be that sole player anymore, it’s not easy. So, even if someone gets up one of these days and declares that the trade war has ended, I can guarantee you that it will not truly be the end. It may be temporary, but after one issue is resolved, another will arise, and after that another, because at the end of the day it is fundamentally about the world rebalancing. Also, given the current political climate, that is not going to be a very friendly push and pull tension. On both sides, the U.S. and China have outspoken leaders that have very clear opinions about what they want, which does not make it easier to arrive at a solution. Due to China’s emergence, especially, this is not going to change for the next 15-20 years.