What's wrong with the Chinese Economy?
China - The red dragon had an unprecedented growth rate of around 9% for the last 30 years. This economic miracle has turned China into the 2nd largest economy in the world and 3rd largest importer. While it clearly plays a vital role in the world economy in the last year its economy has faced a major crisis. Its stock market is at an all-time low, the property market is in a bubble and the economy was crashing under its own weight.
So, What’s wrong with the Chinese economy?
First, China’s impressive growth was fuelled by its impressive infrastructure projects. However, these projects caused a lot of debt. Over the years the debt has put a massive burden on the economy and given that there is a negative sentiment in the market more debt cannot be added which has caused the growth rate to fall as no cheaper source of funds has yet to make itself available.
A lot of bad investments especially have put pressure on Chinese banks. While the government is dealing with these NPA if no solution comes out soon the banking sector in China will have a spillover effect and its effect will be felt all over the world.
Another reason for the slowdown is the increase in the US fed rate. As the United States is one of the biggest consumers of Chinese goods (which was another reason China’s economy grew) the increased interest rates have caused a decline in the demand for Chinese goods and as China is more reliant on foreign demand than domestic that is causing its economy to suffer.
The housing market in China especially in the big cities is unaffordable for a lot of people, especially for young people where around 20% are unemployed. Migrant workers in the coastal regions also are suffering as global demand falls.
Also, for the first time in over 60 years, China’s population fell and the number of people who are above 60 years is over 250 million. This has caused a fear that many local governments have a shortage of welfare opportunities.
In Conclusion without a sound government policy, the red dragon will lose its sheen and power sooner than later!
Kautilya, IBS Mumbai.