A Lull in the Fairytale: China’s Immediate Economic Future Spells Gloom

Data shows that China's economy is starting to struggle and is yet to face upcoming issues like the property market and increased bad loans.

Background

This past week this editor had lunch with a friend from England. The conversation moved onto China’s economy. When I informed him that Michael Pettis, a leading economist on China, recently predicted the country’s average economic growth over the next decade to be as low as three to four percent, he looked amused, and responded: “Only three to four percent?”

In the UK, and elsewhere across the EU, finance ministers would rightfully be ecstatic if presented with a chance for 3-4% economic growth per year. In China these figures represent a sharp and depressing economic downturn. Other experts have been less pessimistic when compared to Mr. Pettis, but the views of the “China-bear camp” are being increasingly supported by the latest economic data coming out of the country. Manufacturing figures are dismal as firms struggle with declining orders at home and abroad. Demand for infrastructure projects is running dry; the railway ministry recently posted a loss of 8.8bn yuan (US$1.4bn).

Most worryingly, there are still bubbles in the Chinese economy that have yet to burst, the biggest being the property market. Property prices rose for the third straight month despite government efforts to cool the market down via third-home purchase bans and property tax trials. China’s four biggest commercial banks are also saddled with bad loans after years of reckless lending practices, and are scrambling for liquidity even as they continue making new loans to government financing platforms.

Why is the Economic Downturn Important?

China’s economy is the world’s second largest and inescapably intertwined with the other countries’. It is the growth engine for the world economy, and markets everywhere cannot possibly relish a China downturn at a time when the US and the EU still grappling with their own economic problems. As demand in Chinese markets evaporate, overseas firms with strong links to China will struggle in particular.

The incoming economic malaise could also promote domestic discord. Migrant workers in factories are earning more than 69% of college graduates working entry-level jobs without having to bear the burden of student loans and family expectations. For the outgoing generation of Chinese leaders headed by Hu and Wen, the downturn could prove ruinous for their legacy. When they took their positions, the promise was to create a harmonious society built on the foundation of the country’s rapidly growing economy. If the economy is to enter the doldrums their prospects for long-term success look increasingly dim.

Read more on this 360° series

Leave a Reply