Satyajit Das: “All Feasts Must Come to an End” – Fake Goods, Fake Growth? (Part 3)

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010) Part I; Part II.

A significant part of China’s growth has been an illusion. Since 2008, China’s headline growth of 8-10% has been driven by new lending averaging around 30-40% of GDP. Given that (up to) 20-25% of these loans may prove to be non-performing, amounting to losses of 6-10% of GDP. If these losses are deducted, Chinese growth is much lower.

The China economic debate is focused on the alternatives of a soft or hard landing. Both scenarios assume a slowdown in growth and transition to a troubled maturity.

The case for the soft landing assumes that the investment and property bubbles are less serious than thought. Beijing has sufficient financial capacity to boost growth by loosening monetary policy and bank lending, while adjusting specific policies, such as lifting restrictions on housing sales to prop up prices. China is able to boost domestic consumption, replacing investment as the key driver of its economy. Excess capacity is gradually absorbed as the world economy recovers.

Growth comes down gradually, without causing social and political disruptions.
The case for the hard landing assumes the rapid and destructive unwinding of asset price bubbles and problems within the Chinese banking system. A poor external environment and losses on foreign investment exacerbates the problem. Growth collapses triggering massive social unrest and political tensions.

More benign scenarios rely on the self interest of the Party and Chinese leaders, who will risk anything to maintain growth at around 7% or 8% to preserve social stability and control.

But the end of a cycle of debt and investment driven growth is typically disruptive. Japan’s experience, which China has drawn on in shaping its economic model, is salutary. Japan grew by 10% in the 1960s, 5% in the 1970s, 4% in the 1980s, and has remained stagnant since, adjusting to the deflation of its debt fuelled bubble.

China analysts, like Michael Pettis, believe growth will decelerate sharply as the identified problems emerge falling below 5% by the middle to end of the decade. While growth of this level is high by the standards of developed nations, it is below that required in China to meet the needs of its population and their aspirations. A lower growth rate is also problematic for external investors and trading partners, assuming higher rates of growth.

Chinoise Exceptionalism…

Interestingly, both scenarios assume China continues as part of the international trading system and the global economy. A deteriorating external environment, losses on international investments, foreign pressure on China’s currency and trade policy may drive a more radical outcome. Like its competitor the US, China might be tempted to embrace an isolationist policy as a way of solving its problems.

China would de facto write off its foreign exchange reserves but refuse to purchase new US, European and Japanese government bonds to avoid the risk of future losses. It would further limit access to its own market to foreign investors. China would then redirect its attention to the domestic economy and seek to rebalance its economy.

External economic engagement would be sharply curtailed and would be limited to acquiring needed commodities, technology and skills in the open market on commercial terms. In effect, it would retreat behind a wall as a quasi autarky. Brazil’s import substitution industrial strategy is a possible model.

A variation would be a Chinese zone of economy influence within Asia and the emerging market block. This would entail trading and capital flows within member nations, with transactions denominated in non-G3 currencies. China’s increasing interest in denominating more of its trade in Renminbi and establishment of currency swap lines with interested nations is consistent with this strategy.

China’s large population and huge internal market provide a significant incentive to co-operation. As part of a deal to establish mutual swap lines between the central banks of China and Japan, Japanese investors will gain access to the domestic Chinese bond market.

Isolationism is not a given. But criticism of China’s policies, losses on its foreign investment, domestic needs and perceived weakness of developed economies and their limited tangible future benefit may drive China to re-assess it policy of international re-engagement.


China’s adjustment will affect the global economy.

The global economy increasingly looks to China to drive the world’s growth. These febrile expectations are ill founded. China’s GDP is only around 20% of the combined GDP of the US, Europe and Japan, which make up around 60% of global output. The view that China, because of its large population, can compensate for a decrease in consumption in the developed countries is fanciful. China’s consumption is only a little more than France, a little less than Germany and around 1/8th of the US.

In the aftermath of the crisis, industrial and direct investors have looked at China for earnings growth and returns. High growth rates, fables of urbanization, rising domestic consumption and the need for investment in upgrading infrastructure have attracted investments. Fairy tales about how a billion Chinese would urbanise and consumerise, driving 10 % growth forever and replacing America as the global consumer of last resort captivated audiences at business conferences. In reality, a major source of interest in China and other emerging markets was that it wasn’t America, Europe or Japan.

Investors generally chose to ignore the truth underlying the fairy tales, ignoring how the growth was going to be achieved. China’s debt driven and investment fuelled growth is now vulnerable. There is a significant amount of unproductive investment and mis-allocated capital. Some of this will manifest itself in the form of bad loans.

For businesses seeking to capitalize on the domestic economy, there have also been disappointments.

China’s median household income is around $6,000, less than 20% of that in the US where it is $45,000. There is a growing number of consumers, around 100-150 million, which is expected to double in the next 5 years. But a large portion of China consists of “survivors” (a term coined by research firm Dragonomics) whose income levels only allow purchase of basic food and other necessities, making them less interesting for foreign firms.

China’s growing consumption has been a function of increasing income. But as China slows and the identified problems emerge, growth in consumption is likely to slow, limiting opportunities and returns.

Chinese industrial policy and regulations has also favoured local incumbents. China lack of protection for intellectual property is well known with the practice of shanzhai or clever fakes widespread. The US Trade Representative’s annual report of December 2011 found that 8 of 30 of the world’s most notorious counterfeit markets were in China, including the infamous Silk Street market in Beijing. Around 20-30% of branded mobile phones in Chain are fakes. Estimates suggest that up to 80% of software sold in China is pirated.

Financial investors have also discovered the “muddy waters” of Chinese corporate governance, fraud, lack of transparency and state intervention in business. The Chinese stock markets fell around 23% in 2011, remaining around 60% below its 2007 high.

Chinese Backdrafts …

China’s problems are likely to affect the global economy is a variety of ways. As the Chinese economic slows, it will affect global growth.

There will be significant effects on commodity prices and volumes, affecting resource producers and commodity-exporting nations, like Canada, Australia, Brazil, Russia and South Africa. Chinese demand for iron ore constitutes around 2/3 of the global market. China accounts for 15% and 23% of Brazil and Australia’s exports.

It will also affect demand for industrial goods, especially advanced machinery. China consumes over $500 billion of these products, mainly imported from Europe, US and Japan.

Chinese demand for US dollars, Euros and Yen will diminish. This will force borrowers, primarily governments, to find alternatives buyers for their bonds. This may drive down the value of these currencies and increase the interest cost.

A hard landing will be especially traumatic for the global economy, which has not dealt with its core problems – excessive debt levels, weak non debt fuelled demand and global imbalances. The crisis and its affects have been masked in developed economies by artificial demand from government spending, which is proving increasingly difficult to sustain. In China, it was masked by debt fuelled investment. Now, that feast too is coming to an end.

© 2012 Satyajit Das All Rights Reserved.
Satyajit Das is author of Extreme Money: The Masters of the Universe and the Cult of Risk (2011)

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About Matt Stoller

From 2011-2012, Matt was a fellow at the Roosevelt Institute. He contributed to Politico, Alternet, Salon, The Nation and Reuters, focusing on the intersection of foreclosures, the financial system, and political corruption. In 2012, he starred in “Brand X with Russell Brand” on the FX network, and was a writer and consultant for the show. He has also produced for MSNBC’s The Dylan Ratigan Show. From 2009-2010, he worked as Senior Policy Advisor for Congressman Alan Grayson. You can follow him on Twitter at @matthewstoller.


  1. F. Beard

    There is a significant amount of unproductive investment and mis-allocated capital. Some of this will manifest itself in the form of bad loans. S. Das

    The interest for bank credit does not even exist in aggregate so some loan failures are INEVITABLE. To call those that fail “unproductive investment and mis-allocated capital” is thus not necessarily true.

    We need to move away from money that is lent into existence to money that is spent into existence.

    1. rjs

      in like manner, i couldnt get too far past the first paragraph, in which das begins “A significant part of China’s growth has been an illusion.”

      exactly the opposite; skyscapers & high speed rail are real; it’s the debt das speaks of that’s the illusion…

      debt is a barbaric relic…

      1. F. Beard

        debt is a barbaric relic… rjs

        I agree though some will argue that all money is debt. Be that as it may be, certainly usury (interest) is not needed nor desirable at least within a nation.

  2. Paddy Brown

    Who holds the note on the debt that fueled the bubble?

    If it’s the Chinese Central Bank, can’t they just write the debt off and finance future growth with their own Chinese version of greenbacks?

  3. Aquifer

    Move to “isolationism” – at least economic isolationism seems to me a good strategy to pursue for all areas. Make/grow/sell what you need in your own country/region, adjust what you need around your ability to do it yourself – importing only that which you really NEED, but can’t produce.

    Advantages: 1) reduced long distance trade much better on the environment 2) when your own resources are relied on for sustainability, much more like to husband them wisely – premium on reuse and recycle 3) much less incentive to raid other areas, economically or militarily 4) more innovation – necessity is the mother of invention 5) incentive for transfer of technology as prime arm of foreign policy – reduce others incentive for raiding one’s own resources. 6) more redundancy in the system as shock absorber – disasters in one area less likely to have global repercussions, and more able to be compensated for by others 7) cripple the power of monopolies ..

    I realize this is economic heresy – but for some time now it has seemed to me that separating producers from consumers – the heart of “globalization” – is at the root of a lot, if not most, of our current woes in many areas …

    Mother Nature’s economies have been “local” for billions of years – global climate change, it seems to me, is an outgrowth of “globalizing” them …

    1. Susan the other

      I agree with what you just outlined Aquifer. The only advantage to globalization is that we all come to need and respect each other to the extent that we do not resort to war. But it’s not really working. It would be better for many reasons if every country met some national quota of industry to stabilize its own population before it did any global deals.

      1. Aquifer


        Thanx for responding …

        i would agree – It hasn’t worked too well for the “promoting mutual respect” argument. In fact i would argue that it has reduced too many folks to being considered as considerably less than whole humans, but rather as “consumers” or “labor” whose sole worth is measured within the paradigm of “market values”; what does it mean to be a “human resource” when we consider resources something to be mined, processed, sold, used and discarded all according to market rules? The “Market God” is the omnipotent deity and his “commandments” are the subject of study by the new “biblical scholars” aka economists. This God demands not only human, but planetary sacrifice – and his religion seems to have more adherents than any other on the planet. As Colbert pointed out the other nite – Blankfein was indeed doing God’s work …

        i just read Bill Black’s piece on the advisability of nations having sovereign economies – being more flexible to meet their needs. Seems to me this is another branch of the same kind of “localized” thinking. So why is “isolationism”, within this framework, not discussed? Why is it ignored, or if not, then denigrated and warned against?

        It is the only way – we can plan now to do it in an an orderly fashion or we can wait til the banks and MN crash the whole system and it will become a necessity for survival.

        Why can’t we discuss the “P” word – protectionism?

        Everytime i raise this issue, which i have on a number of occasions, and which I think should be a fulcrum for discussing “economics” I am pretty much ignored. It’s not that it is not doable – but it is considered so outre, apparently, that no one even bothers engaging enough to refute the advantages, let alone sitting down and seriously figuring out how to do it. So thanx!

  4. jake chase

    None of this really matters except to those attempting to speculate in Chinese financial markets. They will experience disaster deja vu all over again.

  5. Min

    “But the end of a cycle of debt and investment driven growth is typically disruptive.”

    Debt and investment driven growth. Isn’t that characteristic of capitalism? Couldn’t that statement apply to any modern major economy? Yet somehow debt and investment driven growth is portrayed as a bad thing. What is the alternative? Barter driven growth?

    1. F. Beard

      What is the alternative? Barter driven growth? Min

      No, equity based growth is the alternative. Common stock as money requires no fractional reserves, no usury and no inherently valuable money. It is democratic (at least per share), decentralized and ethical. Is is the IDEAL private money form.

      Liberals and Progressives should love common stock money since it “shares” wealth and power.

    2. different clue

      How about survival-driven non-growth? As per Herman Daly’s steady-state concepts and advice?

      1. Aquifer


        Daly’s stuff ought to be the basis for economics – human economics as a subset of planetary ones, not the other way around. And it certainly ought to be, at the very least, the subject of articles on blogs like this.

        I don’t care how many “models” you come up with, or how sophisticated they are, if they don’t incorporate natural limits, they are USELESS …

        It seems those limits are being included more recently in the discussion, in terms of “peak oil” etc., but only ad hoc, piecemeal, reluctantly and with a great deal of resentment – as raggedly, uncivilized intruders in our elegant “models” who are decidedly unwelcome and to be ignored or rebuffed as long as possible, when they and the other natural boundaries should be at the core of the discussion and our “models” built around them as MN has been doing, forever ..

        1. different clue

          Reality is the stuff that stays real no matter how hard the irrealist refuses to believe it.

          There are none so blind as those who will not see.
          There are none so dumm as those who will not think.
          There are none so lost as those who will not read a map.

          Life is a gift, not a reward. And survival is a privilege, not a right.

    3. reason

      Yes, Austrian more influenced nonsense. All credit is evil? See my more detailed comment below.

      1. reason

        An alternative description to “all credit is evil” is “only the already rich know how to invest, and the already rich always invest wisely”. (Codswallop!)

        1. F. Beard

          I disagree! Credit creation FAVORS the rich since they are considered the most “credit-worthy”. Sure, the non-rich are allowed to enslave themselves for consumer goods at high interest but the rich are allowed the most access to stolen purchasing power.

  6. charles sereno

    With much respect, Mr. Das’ exposition reminds me of a Drama — “Multiple Scenarios in Search of a Foregone Conclusion,” namely “All Feasts must Come to an End.” IMHO, I think a better focused analysis would be more useful, although “Thar’s a Lot of Pigmeat there.” I learned a lot and appreciate it.

  7. jxie

    I am a bit lazy to fact-check everything… It’s fashionable for many pundits to write about China when they have absolutely no idea of it. Let’s look at the first paragraph of this one alone:

    From 2008 to 2011, China’s new lending to GDP was 15.5% (2008), 27.9% (2009), 19.8% (2010), & 15.8% (2011). From Q408 to Q110 there was certainly a lending binge in China, but nothing like “averaging around 30-40% of GDP [since 2008]”, but rather more like 19.8%. Yang Kaisheng, the CEO of ICBC (the largest bank in China), said in 2010 his bank’s NPL ratio was at 1.08%. Granted ICBC is a better bank, but “(up to) 20-25% of these loans may prove to be non-performing”? Where the heck did you get these stuffs?

    BTW, if you add all Minister of Railroad’s liabilities to the debt pile… shouldn’t you factor in MoR’s assets? You know, if anything, Chinese MoR actually runs a small profit after interest, amortization and taxes — with state mandated low prices to boot. If China is to divest the MoR business, I will be shocked if it can’t fetch at least a couple of trillion yuans (book value > Y1.5T). Infrastructure building is tricky for a society and you have to consider externalities — otherwise you may come up a conclusion that tearing down the Interstate Hwy System is good for America.

  8. reason

    “A significant part of China’s growth has been an illusion. Since 2008, China’s headline growth of 8-10% has been driven by new lending averaging around 30-40% of GDP. Given that (up to) 20-25% of these loans may prove to be non-performing, amounting to losses of 6-10% of GDP. If these losses are deducted, Chinese growth is much lower.”

    This is confusing the financial economy with the real economy. There may be some such confusion in the national accounts, but that needs to be demonstrated. Much “malinvestment” (a term I greatly dislike – I think it is misleading because it is premised that there is a correct investment allocation that we can and should find) is not a complete loss – mostly the problem is not that the investment is useless, but that too much was paid for it. That problem can be solved by insolvency. But that is water under the bridge, and the capacity and structure of the economy (including importantly its human capital) has been changed by that investment. The economy did not produce an “illusory” amount of goods – it produced them. China will not need to deindustrialise because some of its investment for foolish.

    1. skippy

      Agree with the way you handle malinvestment as a priori to profit only metrics.

      Skippy… what other species had to be profitable to survive?

  9. Lafayette

    This report of Gloom & Doom for the Chinese economy overlooks the fact that China has a reserve asset cushion of $3T in official reserves and another $200/400B in unofficial reserves.

    The Chinese have therefore very little fear of any catastrophic economic downturn in the immediate future.

    Moreover, for years the EU and the US have been insisting that Chine shake off its dependence upon Export Markets, which it has been doing by vast internal construction projects. As well, there is a blossoming middle-class that will enhance Domestic Demand considerably.

    All in all, China is well placed to confront the future. Quite unlike the US or Europe – the former plagued with Income Disparity (meaning an enlarged class of the desperately poor as a result of the Great Recession) and the latter with its Debt Overhang that is firmly constraining growth.

    Go east, young man, go east.

    1. skippy

      Concur, whom has the debt leverage over the other. The West arrogantly thought it had superior market knowledge and experience to coerce China in to a blind ally and take over, this has not come to pass.

      Presently America is the largest debtor country on the planet. The military and oil backed FRN is the only leverage it has in its hand. China builds and America bleeds its people with austerity to paper over the bad debt. One moves forward the other backwards, last hand of empires stuff.

      Skippy… its a mean game, don’t get caught in the middle.


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