An investor monitors stock prices at a brokerage house in Beijing. (Andy Wong/AP)

You shouldn’t worry too much about the big U.S. stock market sell-off. You should worry about China’s instead.

Indeed, while it might not have gotten as much attention, China’s benchmark stock index was, with its 25 percent drop, the world’s worst-performing in 2018. Part of this was because of the fear that President Trump’s nascent trade war might turn into something even more serious, but only a part. More significant than what Washington was doing, you see, was what Beijing was. That’s because, in what has seemingly become an every-other-year tradition in recent years, China’s government has stepped on the economic brakes pretty hard in an attempt to put an end to what looks like some bubbly behavior.

The important thing to understand here is that, in the depths of the Great Recession, Beijing unleashed a stimulus the likes of which the world hadn’t seen since World War II. It amounted to some 19 percent of its gross domestic product, according to Columbia University historian Adam Tooze. By point of comparison, President Barack Obama’s stimulus was only about 5 or 6 percent of U.S. GDP. Aside from its size, what made China’s stimulus unique was the way it was administered. The central government didn’t borrow a lot of money itself to use on infrastructure, but rather pushed local governments and state-owned companies to do so. The result was a web of debt that’s been even harder to clean up than it might have been because of all the money that unregulated lenders — so-called shadow banks — were frantically handing out above and beyond what Beijing had been hoping for.

The challenge then has been for Beijing to stop even more debt from turning this boom into a bust without stopping the boom in the first place. In other words, to navigate the economy between the Scylla of a bubble and the Charybdis of a severe slowdown.

Not that this is new. It’s what the Chinese Communist Party has had to do ever since it substituted ever-increasing prosperity for Marxist-Leninist ideology as the basis of its legitimacy. And the good news, insofar as both Beijing and the world economy are concerned, is that it’s become exceedingly efficient at it. As Bloomberg News’s Noah Smith points out, China has actually managed to avoid a recession for 25 years now, in large part because of the government’s novel use of credit policy — directing banks when and how much to lend — to smooth out the usual ups and downs of the business cycle.

What is new, though, is that this isn’t working quite as well as before. Why is that? Well, as the International Monetary Fund reports, China simply seems to have reached a point of diminishing returns with this kind of credit stimulus. So much new debt is either going to pay back old debt or into economically questionable projects that it takes a lot more of it than it used to just to achieve the same amount of growth. Three times as much, in fact. Whereas it had only taken six-and-a-half trillion yuan of new credit to make China’s economy grow by five trillion yuan a year back in 2008, that had risen to 20 trillion yuan of new credit by 2016. Which is why Beijing has had to resort to even more old-fashioned stimulus like tax cuts and infrastructure spending — in particular, it recently announced a new wave of subway construction around Shanghai and Hangzhou — to try to keep growth above the 6 percent that the Party thinks it needs to keep people from protesting.

The global economy needs it, too. Apple, for one, has already revised its revenue projections down because of soft sales in the Middle Kingdom. And Wall Street thinks the rest of the Fortune 500 won’t be far behind. Although even that doesn’t give you a true sense of how much the world has come to depend on Chinese growth. To get a better idea of that, it helps to look at a chart the Financial Times put together of crude steel production. Consider this: Between 1978, when it began its market reforms, and 2000, China’s share of world steel production increased from 4.4 percent to 15.1 percent. This was, as far as economic development goes, a fairly typical success story that saw China’s production nearly match North America’s. What’s happened since then, though, has no precedent in economic history. China’s steel production didn’t plateau like everyone else’s, but kept growing even faster and faster, to the point that it now makes up 49.2 percent of the world total.

To put that in perspective, Europe and North America together went from making two and a half times more steel than China in 2000 to China making three times more steel than them in 2017.


(Source: World Steel Association)

It’s long been said that when the United States sneezes, the rest of the world catches a cold. Well, it’s been a long time since China has sneezed, but with its industrial profits falling for the first time in three years and its car sales dropping for the first time in nearly 30 years, we might find out just how sick it can make everyone else.

That’s one Chinese export we don’t want.