The BBC tomorrow airs a programme investigating the dangerously-high levels of debt sustaining China’s current annual GDP growth of 7%.
The programme, How China Fooled the World, BBC2, Tuesday at 9pm, follows BBC business editor Robert Peston as he investigates the explosion in lending in China that followed the global financial crisis of 2008.
Writing in his blog today, Peston says China’s debts as a share of GDP have been rising at around 15% of GDP annually and have increased since 2008 from around 125% of GDP to 200%.
“There are no exceptions to the lessons of financial history,” writes Peston.
“Lending at that rate leads to debtors unable to meet their obligations, and to large losses for creditors; the question is not whether this will happen but when, and on what scale.”
At the end of his piece Peston makes the point that a Chinese collapse might not necessarily be all bad, given the fact that the rise of its exporters “killed many of our manufacturers”.
If the debt taps are suddenly turned off this could make UK-based production seem even more attractive
What implications could a Chinese collapse have for UK process industries?
As I wrote last week, there is already a growing trend of manufacturers returning production lines to the UK in a phenomenon that is being called “reshoring”.
The government’s Manufacturing Advisory Service (MAS) in November 2013 surveyed 500 small and medium sized manufacturers and found that 15% of firms had or were in the process of bringing production back, compared to just 4% moving production overseas.
MAS today confirmed to me that of those firms reshoring or considering reshoring in the near future, just under one quarter were from the process industries: 14% in the chemicals sector and 10% in pharmaceuticals.
One of the key drivers for reshoring is the rising cost of production in China, which though still not near UK levels, is getting close enough that when it comes to a trade-off between price and a greater control over quality, many firms are choosing the latter.
It seems likely that a huge collapse in the Chinese banking sector could accelerate this reshoring process.
While recessions tend to apply a downward pressure on salaries, therefore slowing the labour cost growth that is largely responsible for the Chinese production cost rises currently driving reshoring, the huge levels of debt in the Chinese economy suggest the health of many businesses in the country is predicated on an abundant supply of cheap loans.
If the debt taps are suddenly turned off, if loan prices rocket, this will most likely drive up the production costs of those companies affected, making UK-based production seem even more attractive.
A Chinese slowdown would also help bring down energy costs, currently the greatest inhibitor of the global competitiveness of UK chemicals production.
A Chinese collapse would have a massive impact on the global economy but, for the UK process industries at least, the consequences of that collapse might not be all bad.
Update 19/02/14 - How China Fooled the World can now be viewed on BBC iPlayer.