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.
