It’s fair to say that China has been riding on a wave of optimism in past decades. Unfortunately, that wave could soon hit a storm of monumental proportions.

The country famed for its one-child policy has seen sensational economic growth over past years, with growth even hitting 9.5% in 2011. However, growth slowed in the past year, prompting fresh concern over the future of the Asian superpower. The growth that so often fooled the Western world into adulating China has been founded on a gargantuan debt bubble, and when this bubble pops, there’ll be trouble.

China’s Economic Overview

In the last quarter of 2015, China lost its position as the fastest growing large economy in the world to India, potentially indicating the subtle shift in power that 2015 brought. Regardless of this, however, the plethora of negative economic signals that have befallen China, including a decline in consumer demand and the aforementioned soaring debt level, spell trouble for the President, Jinping, and his compatriots. Investors have been similarly negative, with the Chinese stock market casinos reaching 14-month lows recently. So how can China stop their descent? There’s one, simple answer: they can’t.

70 million. That’s the number of luxury apartments which have been left vacant in China. Now, one might ask, what’s the problem with this? The simple answer is that it indicates a huge lack of consumer demand in comparison with supply. If this number stays the same or even rises in the future, market forces will ensure that China is setting themselves up for one of most spectacular property price crashes in recent memory. The worrying thing is: it’s not just property. The country has 1.5 billion tons of steel, but demand for steel is at less than half that amount.

This means that a similar price correction is in store for the Chinese steel industry, indicating that these problems are not only in one sector but intrinsic to the whole country. Bloomberg reported $460.6 billion in net capital outflows from the country in the third quarter of 2015, showing that the Chinese are taking their money out of the country at an alarming rate, further reducing consumer demand. I’ve only highlighted two of the most apparent bubbles in the bubble bath that is the Chinese economy here; the fact is that they are all over China, whether that be in the aluminum industry, the solar industry, in the “ghost cities”, or anywhere else.

Something which has been heavily obscured by the rapid growth of the Chinese economy is the huge debt level which China now has to tackle.

Their debt-to-GDP ratio has recently risen to 346%; to put this into context, a “safe” debt-to-GDP ratio for developing countries is 40%, meaning that the ratio of the Chinese economy is more than 8 times over sustainable levels. When prices of goods and services start falling in China, due to the market forces mentioned in the previous paragraph, it will trigger a negative domino effect that will shake the Chinese dragon to its core.

When prices fall, the Chinese government will not have enough money with which to pay back the interest on their loans and keep building up the country. This will result in a massive decrease in GDP growth, due to interest repayments on the debt which Jinping’s government has incurred. Because of the monumental nature of the debt needing repayment, there is the potential that China will be in an economic slump for decades to come. The interest payments will keep coming for the Chinese government, meaning that they cannot invest in the development of their country, sending the Chinese dragon into a long and deep slumber, which it may never be able to recover from.

The manufacturing sector, so integral to the past growth of the Chinese economy, may also be the one sector that brings it to its knees. Annual industrial profits in the country have fallen for the first time in more than a decade, putting the decline of this sector beyond any reasonable doubt. Their output of electric power and steel also fell for the first time in more than a decade in 2015.

This decline in production, if sustained for a long period, will result in businesses having to make difficult decisions, which will more likely than not include job cuts. When people are out of a job, they will not have enough money to invest in goods and services, resulting in the businesses selling those goods and services accruing less revenue, which will lead to more jobs cuts. This negative domino effect will further accentuate the downfall of the Chinese economy, with productivity continuing to slow.

Jinping’s empire has been built on shaky foundations, and, very, unfortunately, as a result of this, the Chinese ship has to sink.

Facebook Comments

11 COMMENTS

  1. […] Since China has the world’s second-largest economy, investing there is attractive for many reasons. [24] In the last quarter of 2015, China lost its position as the fastest growing large economy in the world to India, potentially indicating the subtle shift in power that 2015 brought. [25] […]

  2. […] Back in 1820, China stood proudly as the largest economy in the world hands down. [32] The fact that China excels at resource distribution and poverty eradication means that its economy will keep on booming. [32] In the last quarter of 2015, China lost its position as the fastest growing large economy in the world to India, potentially indicating the subtle shift in power that 2015 brought. [33] […]

  3. […] She developed curricula and wrote several books including Understanding Our Economy (originally published by Addison Wesley as Economics Our American Economy) and Econ 101 (Avon Books/Harper Collins). [28] China is slowly trying to transition into a service economy because of the decline in manufacturing sector and the other reasons you mentioned. [7] As the manufacturing economy slows, China is flagging the transition from the industry to services. [7] In the last quarter of 2015, China lost its position as the fastest growing large economy in the world to India, potentially indicating the subtle shift in power that 2015 brought. [29] […]

  4. […] Because China is such a major importer of oil and other commodities, a slowing Chinese economy means lower prices for oil, copper, iron ore and other materials imported by the U.S. and most other advanced countries. [18] “Wang Wenli, the deputy head of the China Economic and Trade Promotion Association, said: “Speaking overall, Chinese corporations? overseas investment has been unsuccessful. [19] If he follows through on his campaign promises to impose tariffs, how would China react? Is a trade deficit with China necessarily a bad thing for the US? One of the most thought-provoking economists on China, Michael Pettis examines the trade relationship between Washington and Beijing, and explains how the Chinese growth model is facing unique challenges. [20] When prices of goods and services start falling in China, due to the market forces mentioned in the previous paragraph, it will trigger a negative domino effect that will shake the Chinese dragon to its core. [21] […]

  5. […] President Xi must consolidate economic decision-making in the run-up to this year’s Party Congress if he is to implement the difficult reforms that will break China out of its debt cycle, and higher growth early in the year will make this politically easier to do,” Pettis wrote. [29] China Economic Net concludes that Chinese debt remain at a moderates level for major economies and is currently tending towards stability, while the country also enjoys greater growth momentum as a developing nation. [30] Something which has been heavily obscured by the rapid growth of the Chinese economy is the huge debt level which China now has to tackle. [31] […]

  6. […] KEY TOPICS In our agenda, trade policy, especially investment agreements, is most important as it would strengthen connectivity between the European economy, European companies and China,” he explained, adding data protection and infrastructure projects were also key elements of the strategy. [1] The data releases came against the backdrop of a summit in Beijing in honour of President Xi Jinping’s “Belt and Road Initiative” which China’s official news agency Xinhua describes as “a Chinese solution to global economic blues”. [1] The Moody’s downgrade could have an impact on China’s exchange rate and economy over the longer term as it could weaken Chinese companies’ ability to raise new debt or repay existing loans in global markets, said Zhu Chaoping, a China economist at UOB Kay Hian Holdings, a Singapore investment bank. [2] Because China is such a major importer of oil and other commodities, a slowing Chinese economy means lower prices for oil, copper, iron ore and other materials imported by the U.S. and most other advanced countries. [3] When prices of goods and services start falling in China, due to the market forces mentioned in the previous paragraph, it will trigger a negative domino effect that will shake the Chinese dragon to its core. [4] […]

  7. […] Trump was initially shadowing particularly strong trade grievances against Mexico and China during his campaign, with a punitive proposal that would slap a 45% tariff on Chinese imports. [16] When prices of goods and services start falling in China, due to the market forces mentioned in the previous paragraph, it will trigger a negative domino effect that will shake the Chinese dragon to its core. [17] […]

Write a Comment