The travails of Greece continue to preoccupy the world, but its $249 billion economy is small compared to China's $8.2 trillion one. In December 2005, for example, China announced its output had unexpectedly grown by $285 billion. In other words, it had suddenly found an economy bigger than Singapore's that its statisticians hadn't known about. Today, simply put, a Chinese crash would make the 2008 collapse of Lehman Brothers seem like a mere market correction.
The kind of meltdown if were to happen would end Japan's revival, slam economies from South Korea to Vietnam, savage stock and commodity prices everywhere, force the Federal Reserve to end its tapering process and prompt emergency national-security briefings in Washington. So feel free to obsess over Turkey and Argentina, but the real "wild card" is the world's second-biggest economy.
That's how Bill Gross referred to China. "Nobody knows what’s there and there’s a little bit of bologna," Gross said of China's financial system on Feb. 4, "so we’re just going to have to wonder going forward through this year as to the potential problems in China and other emerging markets.”
The hedge fund-manager Jim Chanos characterizing China as "on a treadmill to hell” with growth driven by the “heroin of property development.” But there's a disturbing element of truth in what Gross and Chanos say, truth that even the smartest China watchers anywhere -- can't quite get to the bottom of. China is doing all it can to keep the prying eyes of the media -- both foreign and domestic -- away from the nexus of Communist Party power brokers, shadow-banking activity and state-run enterprises that feeds corruption and stymies reform.
Much is made of how Chinese growth may slow to 7.4 percent this year, a downshift seen as evidence that President Xi Jinping is restructuring the economy. Yet if Xi were really turning China's model of excessive investment and exports upside down, growth would be closer to 5 percent than 7 percent. Because such a slowdown might foment social instability, China keeps its foot on the gas. The faster China grows, the less it's remaking the economy. The more growth remains in the 7 percent range, the more over-borrowing and over-lending is taking place. In other words, the shadow-banking system is still growing.
The problem here, is that the longer China delays its reckoning the bigger and more painful it will be.China as an economy,is obviously too big to fail. But the real question is whether its opaque banking system ultimately proves too big to save.
China didn't avoid the 2008 global crisis so much as delay the pain. It insulated itself by opening the credit floodgates and allowing banks to take on untold mountains of foreign borrowings, largely in U.S. dollars. To some, China's mystery-meat scenario resembles Japan's credit explosion in the 1980s; to others, it looks like the crash that undid Indonesia, Korea and Thailand in 1997. But what if it's none of the above? We could witness a crash of a magnitude never before seen. If that's not case for indigestion, what is?