China’s chin is just above the water

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. 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 befell 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 are 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 aluminium 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 the ratio of 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 fell 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.

 

14 Comments Add yours

  1. Hi Shrey,

    would you not agree that this downward trajectory could be fixed through maybe forcing owners of property in ghost city to sell their properties or to impose stamp duties for people who are now speculating real estate?

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    1. Thanks for the comment! I don’t think that it can be fixed through those means, as there are simply too many holes in the Chinese economy as it is, as even if you force them to sell their properties, or impose a stamp duty for people speculating on real estate, you won’t be able to get the debt to sustainable levels any time soon.

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  2. J says:

    Hey Shrey, I just saw your post on Twitter and decided to check this post out. You really have a gift; both for economics and writing. It’ll do you wonders to start at this age; I can already see that you’ve accrued quite an extensive knowledge of economics for your age. Keep writing; I really enjoyed this one and the others!

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    1. Thank you so much 🙂

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  3. Pat says:

    Fantastic article.

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    1. Thank you so much 🙂

      Like

  4. Feita says:

    Shrey,
    I applaud your effort to learn about the economy around you. I also have an interest in trading/investing. I find it is a topic you can explore and learn about without ever feeling you are finished. Great post.

    Like

    1. Thank you so much 🙂

      Like

  5. John says:

    China is too big to fail.

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    1. I don’t think anything is too big to fail tbh – look at the 2008 financial crisis!

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  6. gino984 says:

    The free market economy is what makes all economies strong. Freedom of choice is what drives supply and demand. The free movement of goods and services will strengthen and grow any economy. governments must minimize their fingerprints on the markets and everything will grow.

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    1. I agree completely 🙂 Thanks for the comment!

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  7. oarubio says:

    When the China Collapse occurs, it will give its leaders more “reason” to return to its communist/ govt. controlled market — unless the capitalist cat is hard to stop now that it’s out of the bag.

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    1. I think it definitely is.

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