Why China’s Economy Ran Off the Rails

from Maudlin Economics,
China’s economy, long the world’s growth engine, is having serious problems. This post from economist Noah Smith says it’s all about real estate. Key Points:
  • For decades, China reaped huge productivity gains by liberalizing pieces of its state-controlled economy.
  • As China became the world’s factory, exports and GDP soared.
  • After the 2008 financial crisis, Chinese leaders pivoted from exports to real estate. This avoided recession but had unintended negative consequences.
  • Construction and related industries tend to have lower productivity growth than other industries, so the boom reduced China’s overall productivity.
  • Meanwhile real estate became the public’s main savings vehicle, producing a giant bubble that had to pop eventually.
  • The popping process is now underway as prices decline and debt defaults surge.
Bottom Line: In this analysis, China seems to be going through a period much like 1990s Japan or the post-2008 US. Those were rough but both countries finally recovered. The difference is China’s authoritarian politics may make the process worse, with global implications in everything from energy to currencies. More From Maudlin Economics:

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