China’s economic problems will come to a head in 2017

This article talks about the future of China’s economy because of its debt issue (increasing debt: equity ratio), escalating property prices, and the concern raised because of Donald Trump’s claim to impose tariffs on imported Chinese goods.

The Chinese rely heavily on low cost exports, which have suddenly declined, and an external shock like a trade war with the United States would worsen their trade balance in the future, decreasing net exports. China’s overall debt has substantially increased because of the fiscal and monetary stimulus, by increasing spending and lowering interest rates to increase overall credit in the economy. Corporate debt has increased, along with bankruptcies, low industrial profits, decreasing returns on investments, and a slowdown in the real estate sector.

The Chinese economy has heavily depended on fixed investments like roads, railways, and housing. As cheap exports have declined and household consumption of goods and services have continued to slide, this fixed investment is the reason for China’s economic growth and employment. The vast majority of Beijing’s investment has been financed by debt in the form of loans, bonds, or other types of lending. Therefore, the debt in China is used for financing different fixed investments like the costs of land, roads, railways, etc.

2016 has brought a stronger growth in China’s property sector, but it has largely been concentrated in the wealthiest cities and has been induced at the expense of creating more available credit. The future of China’s housing sector looks bleak because of the substantial upward pressure on housing prices, which will lead to lags in real estate investment and construction.

Their debt to equity ratios have been rising since the 2008 financial crisis. Chinese companies in the construction sector, concentrated in northern and central China, might not be able to repay their debt, and in turn, declare bankruptcy next year.

There is a high risk of uncertainty in the Chinese economy. There is an over-dependence on housing and construction, and the United States president elect of Donald Trump creates uncertainty on Chinese exports because of his statement to impose tariffs on imports of Chinese goods. Trump vowed to enact a 45% tax on Chinese goods, which seems unrealistic, but even small tariffs imposed on Chinese goods would damage the Chinese economy in the long run. 

A tax on Chinese exports to the United States would lead to a decrease in consumption of Chinese goods, and an increased consumption of locally produced goods, since they are cheaper. This could negatively harm companies in China, who would have to cut down on production, along with a decrease in revenue, due to the decreasing demand of Chinese products by US locals. This might thereby lead the Chinese government to increase purchases and domestic spending in order for companies and different corporations to continue operating. An increase in purchases leads to decreased national saving, which would reduce net exports, along with a rise in the exchange rate.  

Overall, 2017 is proving to be a difficult year for China, and it will be interesting to see the impact of the tariff on trade between China and the United States, its effect on the GDP and Labor Force Participation/unemployment rate, the level of inflation, and the different measures the Chinese government will impose to continue to maintain a healthy economy in the long run.

Link: http://www.marketwatch.com/story/chinas-economic-problems-will-come-to-a-head-in-2017-2016-11-23