The Chinese Economy is Facing a Wall, a Severe Decline Follows

Unlike most other analysts and experts, Nobel laureate Paul Krugman believes that the slowed growth of the Chinese economy means only one thing – that China is in trouble.

One of the most renowned economists of today states in an op-ed in the New York Times that data about China is not easily accessible, but it is unequivocal.

“All economic indicators should be viewed as a boring genre of science fiction. This is especially true for data from China,” Krugman states in the article titled “Hitting the Chinese Wall.”

He writes that due to the government’s secrecy, controlled media, and the size of the country, it is much harder to ascertain what is happening in China compared to other major economies.

“However, the signs are unmistakable: China is in serious trouble. We are not talking about a minor slowdown here, but something more fundamental. The entire business model and economic system of that country, which have powered incredible growth for three decades, have reached their limits. We could say that the Chinese model is about to hit the Great Chinese Wall, and the only question is how severe that collision will be,” Krugman notes.

He says that if we set aside rapid growth, the imbalance between consumption and investment immediately stands out.

“All successful economies invest a portion of their current income into investments, not consumption, to ensure long-term consumption. However, China invests only to ensure space for further investment. America, although it is an extreme case, allocates as much as 70 percent of its GDP to consumption, while China is at half that amount, with half of its GDP being invested,”

“The main thing that keeps consumption low in China is the fact that families in China do not feel all that income that comes as a result of economic growth; rather, it goes to the elites,” Krugman states and adds that this is strange by Western standards, but it has been functioning for decades.

“The Chinese economy now finds itself in a situation where drastic rebalancing is needed. Investments are facing declining returns, and this will continue regardless of what the government does. Consumption must dramatically increase to compensate for this. The question is whether this can happen quickly enough to avoid a severe decline,” Krugman wonders.

He immediately provides an answer – “the more likely answer will be no,” explaining that China has postponed necessary changes for years and has been “filling” the economy by keeping the currency below its true value and “flooding” it with cheap credit.

Krugman states that the world will feel the impact and that under normal circumstances, the global economy could withstand it.

“However, now that Western economies are in such a state, the last thing we need is a shock in China. It could provoke a global downturn,” Krugman notes.