An epic bust is coming

China's Economy Goes From Boom To Bust

by IBD EDITORIAL

The news these days is filled with stories about the euro zone economies and their ongoing crisis. But another, potentially bigger and even more important crisis is brewing — this one in China.

Amid seemingly endless stories about the Chinese Miracle and how China's soaring economy is about to overtake the U.S. comes news that suggests the death of America as No. 1 may be exaggerated — and, in fact, may be dead wrong.

Indeed, China's economy may be on the cusp of a major growth reversal.

The cause: China's imploding real estate market. Since late summer, Chinese home prices have tumbled, partly a result of Chinese government policies intended to keep the economy from overheating.

Barclays Capital Research, the venerable British bank, predicts China's home prices will fall 10% to 30% next year, hitting the economy hard — and putting at risk the Chinese economy's 20-year string of 10% average GDP growth.

But that's only the beginning of the Big Cooldown.

Much of China's growth over the past three years has been fueled by a massive pile of debt. Chinese banks have lent an astounding $8 trillion since 2008 — an amount that dwarfs the Eurozone's $4 trillion in debt.

That debt binge is now abruptly ending as China begins to ratchet up interest rates and limit home-buying to keep prices in line. An epic bust is coming.

How big will the bust be? Earlier this week, the Conference Board predicted China's GDP growth will fall to 8.7% next year — about in line with Barclay's outlook.

But from there, if you're Chinese, things get scary. From 2013 to 2017, China's growth will average 6.6%. And after that, through 2025, it will average just 3.5%.

Doesn't sound so bad? Well, economists generally believe growth below 6% for China is tantamount to recession, given its huge debts, rampant rural poverty, tens of millions of underemployed, massive infrastructure investments and aging work force.

So, like fast-growing but overly indebted Japan before it, China may be entering a period of relative economic stagnation — marked by rising prices, increasing social pressures from rural Chinese seeking a better life in the big cities, and rising costs for its fast-aging population.

"If China's growth decelerates that fast, that far," wrote columnist Walter Russell Meade on his Via Meadia blog, "the biggest question in world politics won't be how the rest of us will accommodate China's rise. The question will shift to whether China can last."

That's quite a big change from headlines reading "China Will Overtake U.S. Economy" and "Age of America Nears End," both of which we saw just last summer.

Sure, China may dodge its economic bullet. But chances are it won't. And when it happens, China's bust will make the EU's — and U.S.' — seem tiny by comparison.