China’s vicious cycle

Published on Author delucam17

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.

One Response to China’s vicious cycle

  1. 1. How about consumption as a source of growth? What holds that back?

    2. Who has issued and who holds debt? By any measure there’s less debt in China than in the US, and our economy isn’t in an unstoppable tailspin as a result. At the macro level, there’s a surfeit of savings so interest rates remain very low. Central government debt is not a problem. What about business debt? local government debt? (Do households have an ability to borrow? — if not, then the equivalent of the US housing collapse would have far fewer ramifications in China.)

    3. A rapidly growing economy will always have excess capacity in some sectors, insufficient in others. But (say) if the car market is expanding more slowly — only 7% per annum instead of 15-20% per annum — how long does excess capacity remain? Remember our rule of 70! Alternatively, if vehicle sales are at 20 million units, a 7% rise is 1.4 million units, or (at 250K annual capacity) 6 assembly plants. [Since these are consumer products, there will always be excess capacity because not every light vehicle will sell well — in industrial organization (econ of strategy, econ 243) we expect to observe excess capacity in most markets.] So where have firms gotten a bit ahead of the game, and where is there capacity that has no likelihood of being needed in the next 3-5 years???