74 THE BiG DROP
stocks, corporate loans and commodities all crash at once.
Chinese growth statistics have been overstated for years. This
is not because the officials lie, but because 45% of Chinese
GDP is investment and much of that is wasted on white el-
ephant infrastructure that will either never be used or produce
scant gains in productivity.
Adjusted for waste, real Chinese GDP growth is more like
4% than the 7.5% claimed until recently. Chinese growth is
also slowing for other reasons having to do with demograph-
ics and declining marginal returns to factor inputs. Growth
will no longer be sufficient to service the mountain of debt on
which the growth was built.
The Chinese people have extremely high savings rates but
limited choices as to how to invest their savings. They are gen-
erally prohibited from buying foreign assets. Local banks pay
almost nothing on savings accounts. This has forced Chinese
savers into real estate, local stocks and so-called “wealth man-
agement products” (WMPs). This has resulted in property and
stock bubbles, which are just beginning to come down to Earth.
The WMPs seem safer because they are sold by banks and
offer steady yields of 5% or more. But underneath, the WMP
market is a giant Ponzi scheme. The WMPs may be sold by
banks, but they are not guaranteed by the banks. The proceeds
are diverted to wasted real estate projects and dubious loans
to inefficient state-owned enterprises.
Chinese investors who try to cash in their WMPs receive
proceeds not from profits on the loans but from new sales to
new investors in an ever-expanding pool. This is the essence
of a Ponzi scheme.
Almost all of the economic data coming from China lately
suggest the greatest unwind in modern economic history could
happen this year. Rail and sea cargo shipments are declining,
producer prices are crashing and loan growth has hit the wall.
Chinese officials can see this house of cards collapsing but