China, a country with bright outlooks for the future, a country whose domestic market have no regard whatsoever to the global demand. It is a market where supply and production are skyrocketing. And it has been following that trend the last decade, where spending is in focus and growth rates are what the government strives for. However that strategy of spending on steroids has some unwanted effects, In China today, there exists entire parks that no one is using because they were built, not for the citizens of China, but to stimulate growth within the economy.
Mainland China has throughout the last decade spent 10.8 trillion US dollars on infrastructure and transportation projects, while in comparison, North America and Europe combined has spent less than that amount. So why do they spend so much on infrastructure and why does that spending lead to growth. Let's go back to the basics for a while — During the great depression in the 1930s, economists from around the globe tried to explain how it could be, that a strong economy could “just like that” fall into such a deep recession period. However, the current models of the early 1900s could not explain this wicked phenomenon, so someone had to think outside of the box, that someone was John Maynard Keynes.
Keynes came with the revolutionizing idea that the most important driving force in an economy is spending, which is the aggregate demand — which is calculated as the total amount of spending by households, businesses, and governments. Keynes was an advocate of increased governmental expenditures and lower taxes in order to stimulate demand and thereby create a stronger and less volatile economy, something that was well needed in the state of depression the US economy came aboard in during the 1930s. So by reducing taxes, for example, every consumer will have more money in their pockets which will theoretically increase spending, bigger government expenditures will create better infrastructure and more social innovation such as job generation.
So what is the deal with these giant projects? Well, China has an oversupply of commodities such as steel and copper, more than the domestic market can consume and more than the global market can buy. The majority of people in China has not yet reached the economic stage where they are able to consume to the level that the domestic supply is at — creating a big surplus. One might think that China’s 5.4 trillion dollar debt is only gonna get worse with such a high level of spending, as that debt keeps on rising. So why do they still continue to spend?
China is investing big money in transportation projects, an initiative which is expected to generate more jobs in the long run and therefore, they can pay off the debt in the future, with job generation and long-term economic gains. Today, China has a debt load of 46.8 percent of the total economy. To know that, brings us to estimate that China, on a debt ranking scale place themselves as the 100th country out of 184 with the most debt. In 2013 the Intl Audit Office made an examination, confirming China’s 18 trillion yuan debt. Investments are one factor why China has their very own grand zombie projects, big infrastructural works attract investors, and so GDP growth will surge.
The government is keeping its fingers crossed that more stimulus can make the country grow out of its current issues, like a child who hopes for the boogeyman to go away once he hides under the blanket. However for China, in comparison to the boy, their way actually worked a decade ago and with the budget constraints they had back then, they turned those constraints to a remarkable growth rate. What we have to think about here is that this was a time when China had a much lower debt rate, they had just opened themselves up for WTO and the rate of growth that we saw on an international level pulled up China’s exports — contributing to an economic surge in the country. As I said, that was different times and nothing says that pulling the sheet over your head and hope that the problems go away, will work again.
Another, not so slight problem for the Chinese economy, is its excess industrial capacity, where once again, spending or too much spending takes its toll. The Chinese government has said in a statement earlier this year that overcapacity and getting rid of stockpiles is something that China has to find a solution for, no later than this year. It all started with China’s economic boom in the late 90s/early 2000s. The government basically poured a lot of money into infrastructure.
So how does this relate to some sort of a Zombieville? Well, during the economic boom sectors like sheet glass, coal, and cement ballooned and the government poured money into infrastructure. However, now when economic growth is slowing down and global trade is declining at its fast pace in comparison to global economic growth; in fact, there is this tenacious oversupply from these industries, which is the problem China must face and unravel, soon. So there are a lot of Zombie projects in the form of parks, businesses, and roads that are not being utilized. The government does not wish to get rid of its zombie business, as that would harm jobs and make a lot of people upset. To oversupply an economy and create imbalances in the supply & demand cycle makes the debt rise as well. Goldman Sachs has estimated that the debt China faces could potentially rise from its current 235 percent to 344 percent of GDP by the year 2020 — a future in which the economy would become ever more volatile, and its effects would echo throughout the entire world economy.
An example of a situation where demand is much lower than the supply is if we look into the situation of Miao Leijie and his cement company in Changzhi, an industrial city in the northern part of mainland China. Like many other cities, this one and most of its industries bloomed up during the great economic investment boom, but as the economy slowed down, so has demand. Miao Leijie loses money for every ton of cement that is being produced; still, they can not stop producing or shut down the factory, they know that there is an oversupply but they still have to pay off the loan to the bank to which they owe money to.
This is an example of many of the various zombie businesses that exist in China, in particular, the industrialized parts of China. There are businesses, but they are of no use, they simply just exist, not for the citizens of China, but simply for their own sake, to pay off their debts. Just like a walking undead, they are of little use due to oversupply. Many experts within the field of economics believe that in order for China to return to a healthy growth, Zombie Businesses like Miao Leijie’s cement company must be annihilated so that the economy overall can become more effective than it is in its current state. However, for now, the industries keep on marching in a state of deadness, but alive enough to keep on doing a useless job, it is the march of the Walking Dead — company edition with no ending in sight.