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China: Every Boom Busts

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Since the beginning of the Industrial Revolution, every economic boom has been followed by an economic bust. The bigger the boom, the bigger the bust. Over the past 20 years, China has experienced the greatest economic boom in history. It is only a matter of time before the great Chinese bubble pops.

China’s economic model is based on export-led growth. That model is now even more bankrupt than the American model of debt-fuelled consumption, since Chinese exports are dependent on US consumption. In 1990, China’s economy was only twice the size of Belgium’s. It is now the second largest economy in the world. That economic transformation was due entirely to China’s trade surplus with the US, which soared from $10 billion in 1990 to $268 billion, or the equivalent of 6% of China’s GDP, in 2008, the year the global economic crisis began.

One way of gauging the importance of that trade surplus with the US is simply to subtract it from China’s GDP. Doing so shows that without that surplus, China’s economic output would have been 6% lower than it actually was in 2008. That approach would radically understate the importance of that surplus to China, however. In reality, a large multiplier should be applied to that figure, since there are three other less direct ways in which the trade surplus with the US drives Chinese growth. First, tens of millions of Chinese workers are employed in factories producing goods for sale to the United States. The wages they earn and spend boost consumption in China, and therefore appear in China’s GDP accounts under the heading of personal consumption expenditure rather than exports. Moreover, there is a multiplier on this consumption figure as well. When those workers buy from merchants, that boosts the merchants’ purchasing power, too. Therefore, the wages earned by Chinese factory workers making products for the US market make a significant contribution to personal consumption throughout the Chinese economy.

Second, much of the gross fixed capital formation (i.e. investment) in China has gone into the construction of factories that make goods for export to the US. This includes investment not only from domestic Chinese investors but also from abroad (i.e. direct foreign investment). During 2008, $148 billion of direct foreign investment entered China. A significant amount of that would have been directly or indirectly related to investments aimed at producing goods to sell to the United States. Therefore, much of the gross fixed capital formation in China’s GDP accounts is tied to US demand for Chinese exports.

A further route by which China’s trade surplus with the US drives China’s economy is the banking system. When Chinese exporters bring back their earnings from selling goods in the United States, that money goes into the Chinese banking system and leads to rapid growth in deposits. This in turn leads to rapid growth of loans, since to pay interest on those deposits, Chinese banks need to earn interest on loans. Chinese bank loans have expanded at an extraordinary pace for 20 years, and rapid loan growth has been a major driver of the country’s economic growth. Such rapid loan growth would not have been possible without China’s large trade surplus with the US.

So even though China’s $268 billion trade surplus with the US directly accounted for an already astounding 6% of China’s GDP in 2008, it had an even larger impact through its indirect effects on personal consumption expenditure, gross fixed capital formation and credit expansion. It would not be unreasonable to estimate that as much as 40% of China’s economy must be attributed to its dependence on exporting to the United States.

Seen in this light, it should be clear why the breakdown of the American economic model of debt-fuelled consumption has thrown China into a terrible crisis of its own. Whereas the United States’ problem is that it cannot make as much as it consumes, China’s problem is even worse. China can’t consume as much as it makes. Chinese factory workers do not earn enough to buy the products they make. If China can’t export those products, there is no domestic market for them. Then production must stop, and the workers lose their jobs.

Since the economic crisis in the United States began, China has averted disaster through an explosion of domestic credit creation. Over the last 24 months alone, China’s state-owned banks have expanded outstanding loans by 60%. There could be no more certain way to destroy a banking system that to permit 60% loan growth over a two-year period.

The rise of China’s economy over the past 20 years has changed the world. It is generally believed that China will continue to grow rapidly for decades to come. It won’t. Every boom busts. China’s boom will be no exception.


  1. This was well written and thought provoking as I am never surprised. Richard Duncan is and inspirational and intelligent man who offers us the knowledge needed to prepare for the future. I had never thought of how devasted China would be when it bust. Thanks Richard for the information!

  2. You say there should be a multiplier added to the 6% reduction in China’s GDP to obtain a more accurate picture of what the US component of Chinese GDP is but you don’t suggest a number. Is there one? Even a back-of-an-envelope estimate?

  3. What I am missing in the text is the curb on loans with which China is trying to cooldown their economy.

    I am not sure how the building contractors allready created an over supply in bad loans. In my view by creating a dollar slide the export of goods to the USA will drop significantly but it’s late to boost the US economy because they are dependant on consumer spending.

    It looks like that the Fed still have control over the money created in QE 1+2 and directed it in buying bonds so that for the very moment the Fed openly can stop QE 2 and still have a low interest rate for the rest of the year.

    To Dean Johnson I like to say your comment implies as if you were happy to see european economies slowing down because of less consumer supply in China.

    There must allways be someone and that could be China or BRICS or Europe to take the lead in trying to keep the economy on track because the USA is for the time beeing a patient that needs to develop products the world wants to buy.

  4. Very good analysis. Thank you.

    Other issues:

    * The % of China’s export to U.S. vs. the % of China’s export to the World …
    * Is China able to find other export countries to substitude for U.S.’s share?
    * Could China turn domestic Chinese into foreign Americans? (psychological & mental shift must take place)
    * Bank system is destoyed, scary, it is possible …

  5. What if China divert part of its export from USA to other developped and emerging economies, like EU, Japan, Australia, Canada, oil rich Arab countries, Latin America, South East Asia, and part of its loans in the form of investments to developing economies in Africa, Middle East? May be this would ease the bust of China’s economy rising from US downturn.

  6. When the bust happens the Chinese government will bail everything out, and assume control of banks and production. Communism with a capitalist twist. Then they can re tool foreign built factories for internal consumption.

  7. Convincing article. China’s economy can and will go bust. However, the same can be said about Europe, US, Australia, Japan and many other countries. And they are all interconnected. Which one will fall first and which ones will be able to recover more easily/quickly? Those who have more natural resources? Those who have better political/social institutions? And what are the implications for individual people (living location, investments)? Run to the hills?

  8. It is hard to believe that the U.S. consumers will change their over-consuming behavior over a short period of time. Although people has suffered from the financial crisis started in 2008, it seems that U.S. consumers are back to where they were and completely forget about the importance of saving.

  9. previously i have felt that i’ve caught glimpses through richard’s work of how a global depression could unfold. this posting seems to reach forward somehow, as if i can see more clearly how the dominoes could fall, taking with it the commodity markets, equities, and all the bullishness on global growth. i’d be curious to hear from richard where the trigger points for a decline could lie, ie., end of U.S. ability to prop up the economy through deficit spending? a natural topping out of debt levels in china? are we closer to the edge? as i recall, richard has forecast the U.S. had a five to ten year window to restructure. that puts the purported china declines some yards off. wondering if there’s insight to the endgame?

  10. Hi

    when you say:

    “Over the past 20 years, China has experienced the greatest economic boom in history. It is only a matter of time before the great Chinese bubble pops”, you fail to realise that the Chinese boom is not a bubble, but is based on primarily real production and growth. The reason this boom will not pop is because it is not a bubble. It is not a ponzi scheme. It is real production. Unlike the US which borrowed trillions to fund a giant ponzi scheme of a housing bubble.

    Therefore your entire article does not make sense.

    1. @Mark ” The reason this boom will not pop is because it is not a bubble.”

      While the American Ponzi scheme is predicated on derivative fiction, the Chinese growth boom is much worse… it is a critical misallocation of scarse resources. China has pumped untold hundreds of billions into phantom cities where no one lives, megashopping centers without a single tenant, entire office complexes without a single company. Sure, all these resources constitute infrastructure, but it’s infrastructure no one can afford to use and no one cares to use. Not at current prices. The ghost towns are perfect example. Flats selling on average for $200,000USD. Even average _Americans_ can’t afford homes at those prices, let alone the average Chinese worker with an annual income of around $3,000. Either the prices must come down, or the wages must go up. You can’t have it both ways.

  11. These sort of articles have popped over ever since the 90s. None of them have proven even remotely accurate. Let’s not forget there is still close to 50% of the Chinese population tied to farming at the moment. Urbanization to reduce that number even to 20% will keep the Chinese economy humming above 7% for the next 10-15 years.

    1. I’ve been living in Asia since the 1980s and pardon me for saying so, but I don’t know what you’re talking about. China only began serious liberalization of its economy in the 80s, I don’t recall reading any analysis that it was about to face an economic bust in the 90s. Quite the contrary, I believe it was readily accepted that the Chinese “model” up until the Cultural Revolution had been a complete and abject failure and China had nowhere else to go but “up.” On the contrary, I did read countless and untold articles how American industry stood to benefit from Chinese growth… the “One Billion Consumers” ready to bust out on epic shopping binges of Made in America products…. how did that pan out? We shipped out manufacturing off to China and have suffered record trade deficits ever since. Splendid.

      Yes, China is urbanizing, but again, the Command Economy model is frankly no working. A good solid bust should clear things out.

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