The Dominance of China
Daily Thoughts 4 Mar 2025
This week’s Weekly Forecasts will deal with the economy of China, and the collapse of the GDP nowcast of the Atlanta Fed. We have been following China closely, periodically, after we discovered her crucial role in the world economy in 2017. In October 2017, we warned on a ‘Global Minsky moment’, which would arrive, if China (Beijing) would pull back from her gargantuan debt stimulus.
It’s actually rather unfathomable how many economists and analysts still do not understand the role China plays in the world economy. You practically need just this one graph to realize this.
Between 2009 and 2017, credit (money) in the world economy would have grown only marginally without China running a massive debt-stimulus.1 Beijing enacted it to pull the Chinese economy out of the doldrums of the GFC (Great Financial Crisis), and saved the world economy at the same time. The first true effort to de-leverage the Chinese economy came in 2015 (visible in the graph), which led the Chinese and world economies to crater. This scared the ‘living bejesus’ out of Beijing, which enacted a gargantuan debt-stimulus through the shadow banking sector.
As many of you know, I was trained as a growth economist. I’ve studied economic growth since 2003, when I started my Master’s Thesis, while economic crises were the main subject of my post-doctoral research (2008-2017). My most cited academic article continues to be a short piece on the relationship between sovereign debt and economic growth I co-wrote with an econometrician, and an Associate Professor of Finance at the Aalto University, Matthijs Lof. My training as a growth economists is the reason, why we discovered this.
The message of these two graphs can be summarized by stating that the world economy would have grown much less, since 2009, if there would not have been the (gargantuan) debt stimulus of China. China has simply been the engine of global growth, since 2009, but in a very unsustainable way.
This utterly unsustainable debt stimulus has led us to issue several warnings on the “imminent” economic collapse of China (see, e.g., this, this and this). We cannot really argue them to have been false warnings, but just that Beijing has been very effective in concealing the economic decline. We analyze this in this week’s Weekly Forecasts.
I decided to make today’s Daily Thoughts something of an intro to our Weekly Forecasts of this week. We want to take a deeper look into the Chinese economy to understand what is going on and thus where the world economy is heading. I also want to remind you that you can read my Daily Thoughts also through my personal newsletter and receive our Weekly Forecasts through an individual service.
Best,
Tuomas
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Most of the new money (about 80%) is created through the lending of the banking sector.