China Balancing On Debt

9 Mar

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China’s credit and banking sector in 2008 was 10 trillion, and now stands at 24 trillion U.S dollars. This increment is equivalent to the entire U.S banking sector which took more than a century to cultivate. This extensive investment on infrastructure like roads, airports and skyscrapers has been created with government subsidies and lending to offset the worldwide credit bubble. many argue this huge debt will eventually ‘bite back’ at the economy, as debt reliance produces a toxic economy. Optimists view china as capable of growing out of debt, whilst many argue that a crash will eventually occur, despite China’s previous successes (Peston, 2014).

Some reports suggest that China will face either massive over-capacity problems, or a Japanese style deflation (Evans-Pritchard, 2013). Some suggest that although Chinese government may be capable of deflecting large scale economic collapse, it will suffer politically and socially. In many respects, the government’s attempts to sustain growth have grossly inflated debt. The surging property prices and risk-free returns in China echo the pre- 2008 U.S economy. China’s export driven economy deflated after the collapse of Lehman, and subsequent demand from the West. Add to this, the decrease in working-age population and peaking urbanisation will likely see an average wage increase as competitiveness decreases. This may gradually make China a less competitive manufacturer, eventually loosing out to cheaper economies like Vietnam.

Worryingly, Chinese economists are continuing to suggest growth at 7.5% (2014, China media: Growth target) despite concerns that China should aim for sustainable growth. This is being observed in gold prices, as investors seek to protect their assets in what some deem an “unfolding credit crunch” (Critchlow, 2014) through buying up gold reserves. In equal measure, the discrepancies around China’s import figures have fuelled market speculation that China may be stockpiling to foist economic turmoil.

China faces an uncertain future, as analysts’ debate whether the economy will heal itself or falter catastrophically in what could be the largest economic crash ever.

 

References

·         Critchlow, A. 2014, Gold price signals China credit bubble bursting as investors seek safety

http://www.telegraph.co.uk/finance/commodities/10642184/Gold-price-signals-China-credit-bubble-bursting-as-investors-seek-safety.html

·                   2014, China media: Growth target, http://www.bbc.co.uk/news/world-asia-china-26462483

 

·         Peston, R. 2014, China growth fuelled by debt and government subsidies, http://www.bbc.co.uk/news/business-26235954

 

·         Evans-Pritchard, A. 2013,Fitch says China credit bubble unprecedented in modern world history http://www.telegraph.co.uk/finance/china-business/10123507/Fitch-says-China-credit-bubble-unprecedented-in-modern-world-history.html

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