Steve Keen: China’s Stock Market Is an ‘Unbelievable Bubble’

The most famous unconventional economist talks about debt in China and why it's a problem
January 17, 2016 Updated: April 28, 2017

It’s the debt, stupid. This is what professor Steve Keen of London’s Kingston University has been saying all along: Private debt is responsible for financial crises. He’s also been saying that conventional economists are wrong, and even wrote a book about it: “Debunking Economics.”

Apart from his razor-sharp logic and witty style, Keen was one of the few analysts who predicted the financial crisis in the West in 2008. Now he sees another crisis looming in the East.

The Epoch Times spoke to Steve Keen about why private debt is again responsible for China’s economic problems and why the debt fueling China’s stock market is the most ridiculous thing ever.

A private person can’t direct the central bank to pay that debt.

Epoch Times: How did China avoid the financial crisis of 2008?

Steve Keen: The crisis in 2008 destroyed their export policies. There was a 45 percent fall in Chinese exports in one year.

The response at that time was to dramatically boost private lending, trying to cause a boom domestically, to take the place of exports which they have relied on. So you had an enormous increase in private debt in China.

Professor Steve Keen, an unconventional economist, in every way. (Steve Keen)
Professor Steve Keen, an unconventional economist. (Steve Keen)

Epoch Times: Some people say that doesn’t matter because in China the debtors are mostly related to the government.

Mr. Keen: It’s state-owned banks and state-directed banks that lent to private institutions. The liabilities are private. State-owned banks have loaned to private companies. Almost all of the increase in debt is to private organizations, and almost all of that has gone to Chinese property developments.

It’s not like the debt in the West where private banks lend to private organizations. What matters is, who owes the money. It’s still owed by private individuals and companies. If they can’t pay, they are bankrupt and they want to run away and get out of their liabilities. This is going to cause the usual downturn in the economy, even though the debt is owned by state-owned banks.

It comes down to who the liabilities are owed by. If the federal government has a debt, it can direct the central bank to pay that debt. A private person can’t direct the central bank to pay that debt.

Total demand will fall, and that’s the situation we find in China now.

Epoch Times: Give us some numbers please.

Mr. Keen: Seven years ago private debt was about 120 percent of GDP, according to the Bank of International Settlements (BIS). Now it’s 201 percent. The American level peaked at 170 percent before the financial crisis.

The level of demand coming into the economy is relying on continually increasing that debt ratio. But once you reach a peak level of debt, people will not be borrowing beyond that point. The change in debt goes from 20 percent growth to zero. As a result, 20 percent of GDP disappears.


Epoch Times: Please explain how that works.

Mr. Keen: Total demand in the economy is demand generated from existing money plus the change in debt. Let’s say GDP is running at a trillion and debt increases 20 percent, then total demand is $1.2 trillion in year one.

So GDP is growing at let’s say 10 percent. So next year’s GDP is $1.1 trillion, but if the change in debt goes to zero, total demand will fall from $1.2 trillion to $1.1 trillion. So even if GDP keeps growing at the same rate—which won’t happen—total demand will fall, and that’s the situation we find in China now. That affects all asset markets.

This is an unbelievable bubble.

Epoch Times: What about debt and the Chinese stock market?

Mr. Keen: I have never seen anything quite as ridiculous as margin debt in China. The level of leverage per asset market is crazy. The Shanghai Composite Index had a bubble and a crash in 2008, but there was no margin debt after that crash.

It continued down until June 2014, then it took off and hit a peak of about 5,100. What had happened in the meantime, they had deregulated and allowed margin debt to be brought in 2010.

The level of margin debt began in March 2010 at 0.00014 percent of China’s GDP. You fast-forward to 2014, it was 0.3 percent of GDP. In July of 2014, it was 0.5 percent of GDP, by 2015 it was 1 percent of GDP, by July 2015 it was 2.16 percent of GDP. It has since fallen to 0.84 percent of GDP. This is an unbelievable bubble.

It’s the most volatile level of margin debt anywhere in the world—ever. So you have got this insane level of debt finance and speculation at the same time.

Epoch Times: What can the Chinese do?

Mr. Keen: The property market was the original way to boost demand in the Chinese economy. That has come to an end; the share market has come to an end. So you have this enormous hole in demand.

The 20 percent in debt growth per year was all financing the building boom; suddenly that’s over. All those workers are losing their jobs, and they are going back to the countryside.

There is not going to be demand for new housing in China for 10 years. For example: China is still a major buyer of Australian concrete. A huge part they are buying they can’t use it anymore. So it has been used by China as foreign aid in Africa.

A big part of the political shifts we are seeing are reactions to the slowdown and they are desperately trying to soften the slowdown, and that’s where all the crazy policy choices are coming from out of the Politburo.

Most of the infrastructure projects, they can’t keep on doing. The only thing that’s needed is to replace coal with solar. They have huge excess capacity, there is no new export market to go into anymore, and they can’t boost domestically.