Worth Wray quotes Michael Pettis from his 2013 book, Avoiding the Fall: China’s Economic Restructuring, about the future path of China’s debt-laden economy:
Every country that has followed a consumption-repressing, investment-driven growth model like China’s has ended with an unsustainable debt burden caused by wasted debt-financed investment. This has always led to either a debt crisis or a lost decade of very low growth.
We couldn’t agree more. China is no different to Japan or Brazil. Investment-driven growth is only sustainable where investment earns a higher return than the long-term cost of servicing the debt. With diminishing returns on additional investment, returns dwindle and a debt/investment imbalance develops.
Keynesian thinking goes even further, however, suggesting that a fiscal deficit can be used to fund expenditure that does not earn a return, whether public fountains or school libraries. But that is short-term thinking, as Keynes indirectly acknowledged with his response “in the long run we are all dead.” In the long run, as with Japan, the government ends up with a huge pile of public debt and no income from investment assets with which to service the interest, let alone repay the principal.
The effect of a Chinese slow-down is likely to be similar to that of Japan in the early 1990s — just on a larger scale.
Read more at John Mauldin’s Thoughts from the Frontline: Can Central Planners Revive China’s Economic Miracle?