The ripples of the 2008 financial crisis in the United States set in motion a debt supercycle, its waves reaching Europe in 2010 and extending to the economies of numerous low-income and lower-middle-income countries. Amid these shifts, the attention turns to the predicament of Country Garden, a mammoth Chinese real estate developer grappling with substantial losses. Could this upheaval mark the onset of the next phase in the debt cycle?
The future remains uncertain, even as China's economic authorities have displayed an impressive track record in managing economic crises. However, the amalgamation of a notable growth deceleration and soaring debt levels, particularly among local governments and the real estate sector, presents an unparalleled challenge.
China's current conundrums trace back to its extensive investment stimulus post-2008, with a significant portion contributing to a construction boom in real estate. The aftermath of rapid construction has yielded diminishing returns in a property sector that accounts for a substantial 23% of the country's GDP (26% including imports). This outcome isn't surprising, given that China's housing stock and infrastructure rival those of advanced economies, despite per capita income levels that remain comparatively modest.
In contrast, the United States has embarked on an artificial intelligence-driven technological advancement, accelerating its pace toward higher long-term economic growth. The concept of "secular stagnation," which once dominated discussions, now seems obsolete. As per the perceptive observation of Greg Ip, a prominent economics commentator at The Wall Street Journal, the era of secular stagnation has faded into the background.
Interestingly, this sentiment echoes a prediction made years ago. During a conference presentation, the point was articulated that post-crisis lulls were transitory and would eventually dissipate. The confident forecast asserted, "In nine years, nobody will be talking about secular stagnation," albeit hyperbolically to emphasize the point.
While the consensus has leaned toward an era of ultra-low interest rates driven by sluggish growth, some luminaries, like billionaire investor Peter Thiel and former world chess champion Garry Kasparov, have argued otherwise. The rise of artificial intelligence, rather than stagnation, concerns these thinkers, as they highlight the potential for AI's growth to outpace our ability to regulate it.
Debates surrounding secular stagnation often center on demand-side factors and demographic decline. Yet, Charles Goodhart and Manoj Pradhan challenge the notion that demographic shifts inevitably erode demand, pointing to the rapidly growing elderly population. Furthermore, the steep fall in real interest rates post-2008 is not solely attributable to long-term trends; the crisis itself played a pivotal role.
As the debt supercycle evolves, its duration might exceed initial expectations, potentially influenced by the COVID-19 pandemic. It remains an integral narrative in understanding the broader picture, particularly as China grapples with economic turbulence, offering insights into what the future may hold.
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