Indeed, I think world economists really need to make a clear distinction between consumption driven debt and investment driven debt.
If you borrow to consume (be it private or government), what you are doing is bring forward consumption from the future to spend more now at the expense of your future spending and consumption power. That is wholly unsustainable and highly problematic.
Investment driven debt is very different because that money is used to finance investments, which if made wisely, will yield an economic return. Again, if invested right, that return on investment should not only cover the finance costs (interest payments) but also cover some of the principle (original amount borrowed) such that the investment effectively pays for itself throughout the loan repayment period, and then generates you a net profit after the loan has been fully paid off. That's not only sustainable, but profitable.
Western governments and consumers typically borrow to consume, either on credit card financed consumer goods for the individual, or on generous social welfare and healthcare costs for the government (bribe to voters).
China, on the other hand, be it at individual or governmental level, typically borrows to finance investment.
This is why I always scoff when western economic pundits selfishly pontificate about China needing to switch to a consumer driven economy.
That's peddling China the same rotten medicine that is hobbling their own home economies!
What they really want is to take China's nest egg for themselves! For China to go bananas buying up all the cutting edge financial products, healthcare and other non-tangible assets and services they are world leaders at providing, so their home economies can cash in enough to pay off their own debts and then make China pay them interests for all time so they can continue to live well beyond their means.
They are not advocating what is best for China, but trying to trick and pressure China into diving under the bus to give themselves a tiny glimmer of hope of being able to dig themselves out of their own hole by taking China's hard earned savings hand over fist as fast as they can.
Fortunately, China's leaders are technocrats and are smart enough to easily see through all the mass market BS.
The actual key to switching from an investment to a consumption driven economy is actually wealth, not spending habits.
Trying to prematurely force the economy into a consumer driven economy by getting people into the bad habit of spending tomorrow's money today is a recipe for disaster.
The only way a sustainable transition can occur is if the people and the economy are wealthy and high earning enough that their regular, sustainable spending is enough to generate a market demand big enough to drive your economy.
As such, a consumer driven economic is actually an indicator of the power of your economy, rather than being a tool to make your economy more powerful.
That is a simple, but fundamental rule that a surprising number of western economic media pundits simple do not appear to be able to grasp.
The key to getting to that state is, ironically, something they now label as a 'weakness' and 'problem' for the Chinese economy - rising wages.
While it is true that at the start of economy development, rock bottom wages is a boon to the economy as it gives them price competitive advantages, that's not a sustainable model of economy development unless one is content to forever sit at the very bottom of the economic food chain and make basic cheap goods for tiny profits.
Moving up the value chain is the key towards economic advancement and ultimately achieving a consumption driven economy, and that is precisely what China is doing. And how do you move up the value chain? Well with investment of course!
As any first year economics student can tell you, new developing economies typically have one or both of the two key advantages that can help them get going. Those are the natural resources endowment, and human resources endowment.
New developing economies can generate a lot of income fairly quickly, easily and cheaply by exploiting its untapped natural resources, and the low cost of its labour.
In my view, countries get stuck in the so-called middle income trap because they fail to make the most of this initial windfall to invest and move up the value chain fast enough or for long enough by acquiring bad economic habits because their economists and leaders did not grasp the fundamental rule I mentioned earlier.
They were too quick to start enjoying the early fruits of their labour and thought that by promoting consumption, they would be able to magically arrive at the holly grail of a consumption driven economy before they had acquired the wealth and spending power critical mass to make a consumption based economy viable.
Rather than continue to invest to move up the value chain and grow wages (spending power), they instead started to consume more, and lost momentum and its earlier competitive advantage as advanced, consumption driven economies continued to invest, innovate and move up the value chain, while newer emerging economics took much of the low cost work they originally relied upon, but which are now not competitive in because of the raised wages and living standards of its people.
If you look at average income per head, you can see that China is still some way off from having the spending power to be sure of breaking into the consumption driving economic club despite the size of its population.
OTOH, after all those decades of break-neck investment, the choicest investment opportunities had already been taken, and increasingly, yields are falling on new investment as the country nears investment saturation. At the same time, there western economies are tightening their belts as a result of their own economic chickens coming home to roost.
That is where China finds itself currently.
So what is the solution? The one road one belt initiative backed up by the newly created AIIB.
China's economy is geared towards, and supremely effective at massed infrastructure projects. So it is going to create a vast new market and invest infrastructure abroad.
Yields on those new, basic investments are going to be vastly superior to what can now be achieved in China. And the best thing is that all the equipment, labour and products are already fully developed.
That means there is going to be little to no R&D overhead associated with those projects, which in turn means more profits and/or more competitive pricing.
That foreign infrastructure investment income is going to finance Chinese firms to continue moving up the value chain as it upgrades China's existing infrastructure back at home. In doing so, they are developing the technologies, tools and procedures that can be exported at a later date to upgrade the infrastructure it is building abroad.
All that infrastructure investment in neighbouring countries should also generate economic growth in those countries, and that in turn creates new demand and markets, which are already supremely well connected to China and its vast marketplace.
It's a brilliant strategy the more you think about it. China would effectively be corning much of that new market it is creating, since all the transport links lead to China first and foremost. That's going to immediately give its firms a cost and response time advantage that other foreign competitors would find hard to compete with and not break any trade rules.
Once connected to the Middle East, that will help to secure China's energy supplies from the threat of naval blockade. Once connected to Europe, that opens up the way for vastly reduced shipping costs and transport times to one of its primary markets. Later they can connect Africa and have a whole continent to sell infrastructure to, tap resources and create new customers.
That's enough work to keep China busy for the next 50 years at least. By which time Chinese GDP would be several times the size of America's and per capita income should be comparable or even significantly higher depending on how well growth is sustained. By that time, China would have long since transitioned to a consumption based economy without really needing to change any of its domestic spending patterns and habits.
We are seeing some rough times now, but once the big projects starts kicking off in central Asia, the good times will start to roll again for China.
Brilliant post! I tried many times to 'like' it...but it seems my like button is broken
