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China into a Full Blown Economic Crisis

China could be into a full blown Economic Crisis by early 2018 or so, due to the speed and size of buildup in debt that it encouraged rescuing the economy after Great Recession, i.e., the Great Financial Crisis of 2007-08. The country has since then become addicted to borrowing as its debt has exploded from $6 trillion to $28 trillion, and its ratio to GDP is up from 140% to 260% which has afflicted the country with serious asset bubbles. China’s 2015 stock market dip was a portent of things to come; followed by falling house prices for a while and reserves have depleted. China faces following challenges:

  • China has yet to tackle the asset bubbles caused due to financial crisis.
  • China’s manufacturing and export dependent economy crumpled in the aftermath of the global financial crisis.
  • China, to sustain a minimum annual growth rate of 8 per cent unleashed what economists have called the greatest example of monetary easing in history — an enormous wave of easy loans channeled through the state-owned banking system.
  • Chinese economy was saved in the short term by the government’s decision to open the credit floodgates, but that has resulted in an economy addicted to borrowing and afflicted with serious asset bubbles.
  • China has gone on a spending spree, borrowing money to build cities, create manufacturing giants and nurture financial markets — money that helped drive the economic powerhouse in recent past. But the debt-fueled binge now threatens to sap growth in the world’s second largest economy.
  • China’s economy has become reliant on a property boom: every attempt to tighten creates worries about GDP and renewed easing – worse, consumers ramp up property buying in the face of attempts to discourage them.
  • China has added mountains of debt but still lacks much of basic social security and institutional infrastructure.
  • China has reached the demographic problem that one child policy has delivered a rapidly aging population with no easy reversal. Smaller productivity gains and the sheer math of diminishing returns mean that China has to borrow more money to achieve less growth.
  • China’s savings and investments are not up to the desired levels. Quality is crucial. China has saved and invested in overpriced, poorly designed assets including overpriced foreign assets. Sooner or later that will come home to roost.
  • There is lack of transparency and accountability. Outsiders cannot be certain of the real figures but even insiders are misleading each other.

 

The ultimate test will come when Beijing eventually attempts to wean the country off this debt dependence. Historically, bonds and equities have moved in opposite directions. Today, both are at all-time highs. Not because this makes economic sense, but because the tidal wave of central bank money has to be put somewhere.

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