Here's How – Here’s How 169

Mario Rosenstock is a comedian and impressionist, and creator of TodayFM’s Gift Grub.

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Here’s something about the Chinese economy.

China’s ‘investment’ in real estate makes Ireland’s property obsession seem breezy and carefree. Just before our crash, 12 per cent of our economy was house-building.

Even if Chinese GDP figures are true, then their reliance on homebuilding is double our peak. (If their GDP is overstated, it’s worse.)

If China crashes, it will shake the world. China holds trillions in dollar and euro reserves, and US sovereign debt. China is not a democracy, but its leaders are sensitive to public opinion, and deeply paranoid about preventing unrest.

If threatened, the Communist Party is likely to pull investment from anywhere it needs to, to keep their internal economy going, and keep their population working, not protesting. But with ghost cities, and one quarter of the economy building more of them, something has to give. But when?

Maybe now.

Shanghai is China’s largest stock exchange. The Shanghai Stock Exchange (SSE) Composite has been in freefall for nearly a month. That crash – nearly 30 per cent of the peak – has put the values back a year or so, but it shows no sign of slowing.

No matter how unthinkable, China’s building boom must end sometime, just as ours did. There is no reason to hope that it will be a soft landing.

I suppose that I’m not the only one talking about the Chinese economy, and its potential to take the rest of the world down with it, if it collapses. But the thing about what I wrote there, is the ‘maybe now’ bit. Because I actually wrote that in July 2015. That’s more than eight years ago.

I remember in about mid–2009, when the property myth in Ireland was still just barely believable, but only for the really gullible, I heard one journalist on the radio, who had been preaching the soft-landing gospel of the time that was becoming untenable, refer to David McWilliams, who had been a lone voice warning of the instability of the property market, they referred to him sarcastically as ‘having predicted all 10 of the previous one property crash’. They were trying to argue that the property crash was not a real thing.

Now, I think that sort of comment was totally disingenuous, but the point is not necessarily wrong. If you keep predicting something that is at least not impossible for long enough, then odds are eventually that you will be proved right, not because you are Mystic Meg, but because most non-impossible things happen sooner or later.

But I think it’s unfair to characterise David McWilliams like that, at that time he was pointing out obvious contradictions, such as the proportion of our economy dependent on building, and the unsustainability of that, as well as of the impossibility high prices of accommodation. He wasn’t so much Mystic Meg as Capitan Logical, pointing out that predictions from others were just physically impossible.

That brings us to the China problem. People have been predicting the end of their long boom for years – including me. Does that mean it can continue forever? Well, no, obviously. One of those supposed Chinese anecdotes fits in well here. I’m not so sure of their cultural appropriateness, or even if it’s pure orientalism, but you’ll see the relevance.

A poor man does a favour for the emperor. The emperor says he can choose his reward. The poor man takes out a chess board, and asks the emperor for one grain of rice to be placed on the first square of the chessboard, two grain of rice on the second square, and so on all the way. The emperor laughs at him and says that he is a fool, he could have anything from the riches of the palace, but will only get a few sacks of rice.

The point is that, if you continue doubling the number of grains, and get the 64th square, then how much rice would you have? Not a few sacks, not just a whole year’s Chinese rice harvest, not just the world’s harvest in a year, but actually more rice, far more rice than the total amount that has ever grown on the planet.

That’s the power of compound interest. But the Chinese economy wasn’t doubling every year, it was growing, at its height, at about 15 per cent per year. That, by the way, means it was doubling every five years. That is a totally unsustainable rate of growth, and basic economic gravity means it must come down some time.

But the Chinese economy has become addicted to growth. I’m not going to detail it all here, but I’ll give one example. Chinese local governments get more than half their funding by selling land for development – and in China, ‘local’ governments usually have responsibility for far larger populations than the whole of Ireland.

Obviously, that gives them a massive incentive to keep the property boom getting boomier. They are huge and powerful organisations, and they are able to do that for a long time, but not forever, and the fact that they can keep the property boom going for longer means that the crash will be bigger and harder when it does come.

That crash will have a global economic impact when it comes. And it will come. I don’t know when, but maybe now.