China’s economy is characterized by three main things that form a vicious cycle that will continue to deteriorate the nation’s economy. First, there is excessive debt. Real estate sales have dropped 15.8%, meaning that many will find it increasingly more difficult to pay back loans. Coupled with China’s debt-to-GDP ration, which is now the highest among all emerging-market economies, this will continue to hurt their investment-driven economy. Second, China is overcapacity. The easy access to liquidity has lead to unnecessary factories producing an excess of steel, cars, and cement. As a result, industrial production is beginning to slow and is now only growing at 6.8%, the slowest in 7 years. Third, China lacks any obvious new sources of growth. In an effort to increase consumption, the country’s central bank has implemented an array of inflationary policies. But, instead of increasing consumption that currently makes up only 40-50% of GDP, it is exacerbating the amount of debt and overcapacity.
This harmful combination of factors will surely have a negative effect on China’s ability to govern. President Xi Jinping faces the Communist Party Congress in two years where his position in the party will be under review. Until now, unemployment has not been a problem in China, but if it does become one, the Party will be facing much social unrest and political instability.