China Built Miracle On Debt
The original boom in China came on the back of the release of Mao Tse-Tung’s authoritarian dictatorship. Effectively, there was no regulation or even laws in the years following the death of Mao.
That stimulated a massive move to a free market by the Chinese. And the Chinese people took full advantage of it. The economy exploded and we saw the greatest number of people leave poverty in human history. The free market worked it's magic.
But over time, the government reasserted control and that process accelerated with Xi Xiping. Now, businessmen are no longer invited to Party congresses.
Notice the chart which shows the amount of national government debt but then the IMF's estimate of their real debt. And, remember, this does not include any other levels of government.
Starting in 2014, the government embarked on a massive debt spree as a way to boost the economy. And it worked! As it always does at first.
But, over time, as always happens, the amount of debt required to produce more GDP goes down and down and eventually countries get to a level where it take more than one new dollar of debt to create one new dollar of GDP.
This debt spree has now caused China to have debt levels that are among the highest in the world. Japan is the most indebted country, per capital, but China is rapidly moving in that direction.
One major problem that China has is that the debt is not going to the private sector, which understands how to use debt to boost production. Instead, it is going to state owned enterprises which allocate the capital for political reasons not productive reasons.
In other words, it is largely being wasted.
Unfortunately, this means that debt will affect the Chinese economy even more than other indebted countries like Southern Europe, The US, and Japan. This is another reason why it is highly likely that the total Chinese economy will never surpass the US economy!
Now, how do we make money from this.
Unfortunately, there is nothing to do right now. This is a background feature of China which will exacerbate any bear markets and blunt any bull markets.
But, of course, you can get my actual trades on how I'm going to make money in China by subscribing to my weekly video newsletter, Wall Street Winners. Click here to learn more!