Time Bomb: China's Debt Is Out of Control

The Buzz

“Once you start thinking about growth, it's hard to think about anything else,” remarked the economist Robert Lucas, who won the Nobel Prize for his work on the topic. Policymakers in China agree.

Since 1979, GDP growth has symbolized the nation's dynamism, determination and confidence, and China's growth machine has spawned an industry of forecasters who jostle over decimal points.

In recent years, the totemic 8 percent has been gradually guided down to 7-7.5 percent as “the new normal.” National GDP hit 7.4 percent last year, controversially missing the 7.5 percent official expectation. Policymakers are attuned to market reactions, so feel obligated to deliver “7-point-something.” Growth at all costs has become a dangerous obsession, without heed to prudent economic management. There is a law in economics stating that variables become meaningless once targeted; Chinese GDP might well qualify.

(Recommended: The Real China Threat: Credit Chaos)

Of course China's GDP isn't meaningless. It's huge, it's real, and it's merely slowing “from a very big base.” It represents a stunning 40 percent of total world growth and it seems churlish to question it. Still, there's always been something a little fishy about this dataset. It gets reported far sooner (in 19 days) than in any other major economy. In punctual Tibet they report even before quarter's end!

More advanced economies regularly revise growth data retroactively; China's GDP is suspiciously accurate and seldom corrected. And it seems no longer to correlate well with other underlying indicators, suggesting officials or statisticians may be smoothing the data.

Shanghai's recent removal of its target is likely to be followed by other provinces currently in thrall to “GDP-ism.” The economy's high and rising dependence on investment has been criticized as unsustainable. “7.X” growth, like the magic formula for Coca-Cola, is seen as contrived. There are a few cynics who mutter that the Chinese growth number is a fiction, too good and too stable to be true.

(Recommended: Tokyo Time Bomb: Japan's Looming Debt Disaster)

There is another explanation: Beijing really is delivering the reported number but is straining to do so.

China's national balance sheet is starting to look ragged. Goldman Sachs thinks China's industrial debt is, at 240 percent of GDP, approaching American levels, but at a much lower development stage. McKinsey reckons China has piled on 83 percent debt/GDP in 2007-14. In this period, total debt has quadrupled, certainly the world's largest ever credit buildup but also one of the fastest. This latter point is significant. By Goldman's count, China is coming off a “97th-percentile” episode of credit accumulation. Historically about half of such events have culminated in a banking bust. Since China “doesn't do crises,” it must eventually correct through rebalancing.

China has much going in its favor.

It has excess savings, which are captive. Although foreign borrowing has soared, external liabilities are less than 10 percent of GDP. There is large “catch-up” potential remaining. Goldman calculates cumulative capital return rate is 15 percent, double America's, meaning there is still much room to deploy investment. But as Greg Clark has noted, that doesn't mean it will be done efficiently in the future: “a manager of the Eastern Bengal State Railway, touring the United States in 1901, remarked that most American railways were not up to European or Indian standards.” Clark's point is that long-term growth is derived from the efficient use of railways (to take a germane example), not how “advanced” the locomotives are.

Much of China's capital is trapped in dud state companies that are all too capable of pursuing white-elephant projects. Many of these companies are local government entities, and stories of alarmingly leveraged municipalities (here and here) are surfacing. Undeterred, 14 provinces (of China's 31) have already unveiled US$2.5 trillion of new projects for this year “to bolster economic growth.”

For now, total debt continues to outpace nominal GDP growth by 6-7 percent annually, meaning that debt/GDP keeps piling up. There is an insouciant view, expressed once to me by a Japanese central banker when discussing quadrillions of yen of public borrowing, that debt is “just a bunch of zeroes.” It doesn't matter, since it's “owed to ourselves.” But Japan's experience actually informs otherwise. And Goldman's historical database suggests that a growth hiccup of at least 2-4 percentage points would normally ensue. The days of 7-point-something growth may be over soon.

Julian Snelder is a Kiwi who has resided in Asia for almost a quarter-century. This piece originally appeared on the Lowy Interpreter.

Image: Flickr/Premshree Pillai

TopicsEconomics RegionsAsia

U.S. Seeking Submarine-Launched Stealthy Anti-Ship Missile

The Buzz

Lockheed Martin is developing a submarine-launched stealthy long-range anti-ship missile for the U.S. Navy.

Last week Inside Defense reported that Lockheed Martin has begun work on an undersea-launched variant of its Long-Range Anti-Ship Missile (LRASM). The report, which is based on an interview Inside Defense conducted with a senior Lockheed official, said that the submarine-launched LRASM would utilize the same type of system that currently launches Tomahawk missiles. It went on to say that Lockheed is “working to integrate the missile with different targeting systems as well as different software and electrical interfaces.”

The report quoted Frank St. John, Lockheed's vice president of tactical missiles, as saying that “The primary work there is to just get it out of the sub, free of the water, and then once the engine starts it runs just as if it was dropped off a plane or shot off a ship." Testing is scheduled to start sometime in the third quarter of this year.

As previously noted, the LRASM has a reported range of 500 nautical miles and carries a 1,000-lb. penetrator and blast-fragmentation warhead. It is primarily designed to provide the U.S. Navy and Air Force with a precision-guided long-range stand-off capability that can survive in aggressive electronic warfare environments. To achieve this, it uses on-board sensors and a semi-autonomous guidance system to reduce its dependence on intelligence, surveillance and reconnaissance (ISR) platforms, network links and GPS navigation. It also employs “innovative terminal survivability approaches and precision lethality” to avoid advanced enemy countermeasures while still reaching its intended target.

The LRASM is being funded by the U.S. Air Force and Navy as a stop-gap measure because the existing Harpoon anti-ship missile has a limited range and cannot survive in contested anti-access/area-denial (A2/AD) environments. It underwent its third successful test earlier this month and is currently expected to reach early operational capability on the Air Force’s B-1s in 2018 and Navy’s F/A-18 Super Hornets the following year.

Lockheed Martin is using internal funds to conduct the ongoing research into the submarine-launched variant with an eye towards winning the second increment of the LRASM contract. Bidding for that contract is expected to begin sometime in the next few years. Inside Defense quoted St. John as saying that Lockheed has already invested $50 million in developing the three variants of the LRASM and expects to invest upwards of $100 million before all is said and done.

"All this is done on our own investment to prepare for an eventual Navy competition," he is quoted as saying in the report. “It's a significant, significant activity for us, it's one of our most important pursuits."

Image: U.S. Navy Photo


Jeb Wishes the Bush War Away

Paul Pillar

Jeb Bush's foreign policy speech at the Chicago Council of Global Affairs has received generally poor reviews, and it not hard to see why. The slips of the tongue and of facts did not help, but more fundamental was the substance, or a lack thereof, that entitled people to ask, “where's the beef?” W. James Antle characterized accurately most of the substance as “interventionist clichés.” Bush endeavored to criticize the Obama administration, of course, for its policies toward the turbulent Middle East, but the listener was hard-pressed to discern from the speech exactly what Bush would be doing differently there.

That uncertainty makes all the more important Bush's handling of a topic that came up in the question-and-answer portion of his appearance: the Iraq War. One might be inclined to cut Bush some slack here in the interest of brotherly love, by not expecting him to repudiate, directly and explicitly, what was by far the biggest endeavor of his older sibling's presidency. But what about the presidency of his father, for whom Jeb Bush also expressed his love in his speech? George W. Bush's launching of the Iraq War was a repudiation of the wisdom of George H.W. Bush and his advisers in not following up the U.S. victory in Kuwait in 1991 with an attempt at regime change in Iraq. Later events, of course, confirmed that the 1991 decision was indeed a wise choice. The overall foreign policy of H.W. also was far more successful (including skillful management of the U.S. side of the end of the Cold War) than the policy of W. It would seem to be consistent with familial love and with good politics, as well as making good foreign policy sense, for Jeb Bush to identify more with the father than with the older brother.

Jeb Bush's partial and circumlocutious acknowledgment of some of the things associated with the Iraq War that went wrong did not reflect any such good sense, and only served to perpetuate some of the misconceptions that promoters of the war have pushed ever since. “There were mistakes made in Iraq,” said Bush, using one of the hoariest semantic devices to acknowledge in the passive voice that everyone realizes something is a disaster but to try to avoid identifying oneself with that disaster. Of course there was in Bush's answer the usual reference to bad intelligence about weapons of mass destruction, thus perpetuating the misconception that this is what drove the decision to go to war rather than being a convenient and scary selling point to muster public support for a war launched for other (mostly neocon) reasons. If Bush has any doubt about that he could ask one of the most fervent promoters of the war, Paul Wolfowitz, who admitted as much in an unguarded comment in an interview and who, astoundingly, has not been banished to a policy wonk wilderness for being so closely identified with the enormous blunder that the Iraq War was but instead is now on Jeb Bush's list of foreign policy advisers.

One of the mistakes that were made in Iraq, said Bush, was “not creating an environment of security after the successful taking-out of Hussein.” This perpetuates the myth, dear to many promoters of the war, that if things did not go well it was all just a matter of flawed execution. This totally evades the grand, fundamental mistake of launching the war in the first place. It also begs the question of just how big and costly an effort Bush thinks it would have taken to “create an environment of security.” Maybe he could refer back to the judgment of the Army chief of staff at the time, Eric Shinseki, whose assessment on this question got him shunned and expelled from the administration of George W. Bush.

Jeb Bush lauded his brother's re-escalation of the U.S. war in Iraq—the “surge” of 2007—as one of “the most heroic acts of courage politically that any president's done.” The surge tamped down the violence of the Iraqi civil war enough so that when George W. Bush left office he could say that the flames in Iraq were not leaping as high as they were a couple of years earlier, and he could leave the remaining mess to his successor without having to say that Iraq fell completely apart on his watch. That remaining mess included a civil war that was still being waged at a substantial, even if reduced, pace, a failure of the surge to facilitate political accommodation and compromise among the Iraqi factions, and the operations of extremist groups—including the group that now calls itself Islamic State and that was born as a result of the U.S. invasion of Iraq. Shoving such messes aside (at a cost of additional American blood and treasure) just enough to be able to get out the door and slam it shut while leaving office is hardly an act of courage, political or otherwise.

The Iraq War was not just the biggest endeavor of George W. Bush's presidency; it was one of the biggest and costliest endeavors of U.S. foreign policy of the last several decades, as well as being the only major offensive war that the United States has initiated in more than a century. American voters are entitled to expect candidates for their nation's highest office to come fully to terms with the reality of that piece of recent history. Jeb Bush is not the only one who has to (Hillary Clinton still has to answer for the vote she cast as a senator in favor of the war resolution in 2002). But Bush's handling of the subject in his appearance this past week leaves several serious and gnawing questions. Would he, if president, put the nation at risk of getting into anything like the Iraq mess with another war of choice? What does his handling of this subject say about his attitudes about the use of military force, and his beliefs about what it can and cannot accomplish? Does he have any appreciation for the severe and widespread consequences the war has caused, and for the relationship of the war to some of the most serious problems in the Middle East today? Brotherly love is insufficient reason to sweep such questions under the rug.                                      

Image: Flickr/Marion Doss

TopicsIraq Politics RegionsMiddle East United States

The GOP Must Be the Big-Tent Party

The Buzz

The United States’ political parties have always been amalgams of factions rather than vehicles for any single interest. Partly because of the pressures of the electoral system and partly because of the republic’s vastness, forging either of the two major parties into a political monolith has been impossible; the need to cater to a wide base of Americans tends to keep the parties broad and relatively inclusive.

This embedded pluralism of the U.S. party system has diminished somewhat in the current era of polarization but it has not evaporated entirely. The parties are still relatively broad churches. This is clearest of the contemporary Republican Party than it is of the Democrat Party, with the emerging lineup for the GOP presidential primary season providing a good case in point.

From the brash conservative “fundamentalism” of Ted Cruz to the “compassionate” conservatism of Jeb Bush and from the “angry” neo-conservatism of John Bolton to the “libertarian-ish” bent of Rand Paul, the modern Republican Party encompasses an impressive array of views and interests. On issues such as immigration, foreign policy and civil liberties, healthy disagreement would seem to reign supreme. To be sure, it would be wrong to overstate the case: there are many issues on which the GOP does not gladly suffer dissenters and key demographic groups—most racial minority groups, for example—stubbornly refuse to see the party as an ally. But the point remains that the party edifice has been built in spite of deep political fissures.

Often, these split foundations are regarded as a weakness. The Republican Party will tear itself apart in the primary season, pundits aver. Civilized debate has been replaced by “trolling” or worse. Whoever emerges as the GOP’s presidential nominee will do so battered and bruised, the bloodied recipient of countless wounds inflicted by the leaders of rival factions within the party.

Moreover, the hydra-headed nature of the party makes it difficult to attract voters because almost everybody in America can find something offensive in the Republican crop. Rand Paul’s flirtation with the anti-vaccination lobby and his apparent willingness to entertain decidedly unorthodox monetary policies will alienate moderate conservatives. Mitt Romney’s background as a venture capitalist is off-putting to blue collar Americans. The tepid paternalism of Jeb Bush is anathema to hardcore Tea Party activists. Sarah Palin’s anti-intellectual populism appears vulgar to liberal-leaning would-be Republicans, and so on.

There is some truth to such arguments. Yet they should not be overstated. The internecine warfare of primary season is a routinized occurrence and hurts both the Republicans and the Democrats equally. In any case, there is no reason to believe that voters look less favorably upon a party capable of holding a vigorous internal debate than they do upon a party that looks rigid and unimaginative. And just because some voters might be irreparably turned off by the vulgarism of Sarah Palin or the cringe-worthy cluelessness of Mitt Romney, it does not mean that these same voters cannot be excited by the supposed “big ideas” of Newt Gingrich or the straight-talking persona of Chris Christie.

Broadness and inclusivity should be seen as strengths of American political parties. Narrowness and homogeneity are weaknesses, things that lead to introspection and condemn a party to the political wilderness if not terminal decline. The most successful political parties in history have been those that forged broad coalitions out of disparate interests: the Jacksonian-era Democrats; the progressive-era Republican Party of 1896-1932; the New Deal coalition, which was solid between 1932 and the late 1960s; and the Reagan coalition, to name but a few examples.

Today, the Democrats have few problems accepting diversity within their fold. But Republicans would do well to recognize that seemingly fringe politicians such as Rand Paul, Sarah Palin and Ted Cruz have a critical role to play in sustaining the vitality of their party. While they are unlikely to secure the mantle of leadership within the GOP, they nevertheless serve a valuable function as outriders—political entrepreneurs capable of rallying motivated groups of people to the Republican banner. Without such politicians, the great catch-all parties of the American republic could not exist. Narrow sectional interests would run amok instead of being knitted together into a “big tent” coalition.

Indeed, the biggest problem with the modern Republican Party is probably not that it is too diverse, but rather that it is not diverse enough. Too many Americans dismiss the party as “not for them.” As such, while Rand Paul’s politics might vex co-partisans such as Rick Perry, Ted Cruz and Jeb Bush, it should not be forgotten that this same brand of politics can serve to excite and engage large numbers of young Americans, racial minorities and others not usually tempted by the GOP brand. If the cost of making headway among such demographics is merely to chafe against other grandees within the party, it might just be a price that the party deems worth paying.

Peter Harris is a Ph.D. candidate in the Department of Government at the University of Texas, Austin and a Visiting Lecturer in Politics at Earlham College.

Image: Flickr/Gage Skidmore

TopicsPolitics RegionsAmericas

Watch Out, China: India Is Building 6 Nuclear Attack Submarines

The Buzz

The Indian government will be launching a major naval expansion soon that will include the indigenous construction of seven stealth frigates and six nuclear powered attack submarines. Indian Prime Minister Narendra Modi’s cabinet approved plans to build the 13 new ships at about a cost of one trillion rupees or about $16 billion on Tuesday.

The expansion would triple the size of India’s nuclear submarine fleet and comes on the heels of Narendra Modi’s pitch to increase the proportion of indigenous defense production in India. In a recent speech, Modi said that he would like the percentage of domestic procurement in India to increase to 70 percent. According to The Times of India, this decision comes at a time when India has a “critical necessity” to boost its “overall deterrence capability” in the Indian Ocean, especially the region stretching from the Persian Gulf to the Strait of Malacca.

India’s move is widely understood to be aimed at countering China and its alleged “String of Pearls” strategy as well as increasing Chinese naval forays into the Indian Ocean. India was spooked last year when two Chinese submarines docked in Sri Lanka.

India’s plans to procure six nuclear powered attack submarines (SSN) are also in line with regional trends where many nations are building up their undersea fleets as a way to counter Beijing’s growing naval might. Many see China’s lack of anti-submarine warfare capabilities as its Achilles’ heel. India already operates one Russian-built nuclear submarine and it is currently building an indigenous one. The latter is likely to be a ballistic missile nuclear submarine (SSBN) rather than a SSN.

(Recommended: China's Worst Nightmare? Japan May Sell India Six Stealth Submarines)

In addition to its nuclear submarines, India also operates some fourteen diesel-powered attack submarines. The backbone of the fleet is its ten Kilo-class Type 877EM (Sindhugosh-class), which are being fitted to carry the Klub/3M-54E Alfa cruise missile system. Delhi also operates four of the German-built Shishumar-class Type 209/1500 subs.   

India’s new nuclear submarines will be about 6,000-tons each. They will be built in the Naval Dockyard of the city of Visakhapatnam in the state of Andhra Pradesh on India’s eastern coast.

(Recommended: The Indian Navy Has a Big Problem: The Subsurface Dilemma)

The seven stealth frigates will be built under “Project-17A,” an Indian project that has been under consideration since 2012. Four of the stealth frigates will be constructed at the Mazagon Docks in Mumbai while the other three will be constructed in Kolkata. Shipyards in both cities are already geared up for such a project because they recently completed three 6,100-ton stealth frigates. The new frigates will be larger and faster than India’s current frigates and will be designed to operate in a “multi-threat environment.” Additionally, they will be packed with sensors and weapons.

However, according to an Indian government source, the submarines and warships will not come into service until next decade.

Image: Wikimedia/S-62 Sindhuvijay

TopicsSecurity RegionsAsia