China's Silent Depression: An Unseen Economic Crisis

The world often marvels at China's meteoric rise over the past few decades—a narrative that has played out like an economic fairytale. Yet, beneath this facade of unstoppable growth, there lies a complex tapestry of challenges, gradually unfolding into what can be attributed as a "silent depression."

This term might seem paradoxical, as "depression" evokes images of visible economic hardship, reminiscent of the 1929 Great Depression, but China's version is unique, insidious, and largely shielded from the public eye.

The Economic Boom and Dependency on External Demand

During the 1980s and 1990s, China experienced what can only be described as a golden boom. External demand metaphorically poured 'free energy' into the country's economy, courtesy of globalization and an insatiable world appetite for Chinese goods. This demand-driven growth created an illusion of exemplary central planning and economic governance. The synergies of liberalized trade practices and China’s own manufacturing prowess culminated in decades of high-octane growth.

The 2008 Global Crisis: A Turning Point

However, the global liquidity crisis of 2008 marked a pivotal shift. As globalization faltered, the ripple effects reached the Chinese shores, exposing vulnerabilities long masked by external demand. China's buoyant economy, heavily reliant on exports, now faced the dawn of a silent depression. It was anticipated that global markets would rebound within a few years, prompting China to take measures straight out of the Keynesian economics playbook: massive debt issuance and a focus on real estate to tide over the perceived shortfall.

This approach inadvertently sowed the seeds for a housing bubble, a financial apparatus aimed at bridging a gap perceived to be temporary. But as the world edged towards sluggish recovery, the bubble inflated beyond safe limits, a behemoth looming with potential repercussions.

Debt, Bubbles, and Waning Globalization

Fast forward to the present, and the consequences of these early post-crisis decisions are glaring. China's approach to managing the silent depression has resulted in rising debt levels and an oversized real estate sector, both of which are increasingly viewed as ticking time bombs. The once-dependable engine of globalization that fuelled China's growth is now stuttering, if not entirely sputtered out.

Our favorite guide for these things over at Eurodollar University put it this way: