As China’s economic miracle continues to unfold, few people outside of China have any idea how precarious it is. In 2017, China’s economy grew at its slowest pace in almost three decades. Meanwhile, its stock market has been hit by a series of punishing sell-offs and its currency devalued sharply against the dollar in August 2018. But there are even more fundamental problems lurking beneath the surface of this great nation’s economy: namely, debt and over-investment on an unprecedented scale that threaten to bring down one of the world’s largest economies within our lifetimes. Lets take a look at what is specifically causing China’s Imminent Economic Collapse.
China’s economic miracle is built on unsustainable over-expenditure.
In order to understand the imminent collapse of China’s economy, it’s important to first understand that the country is no longer growing at the same rate as it used to. In fact, this growth has been slowing down for years now. According to official statistics from China’s National Bureau of Statistics (NBS), during 2017 Q1-Q3 alone, China’s GDP grew by 6.9% year on year (YoY). This is significantly lower than their average 10% YoY growth rate during 2010-2017, when many analysts were calling for a “soft landing” scenario in which China would continue its rapid expansion without any major issues or crises.
There are two main reasons why China’s growth rate has slowed down so significantly: overproduction and debt accumulation. Overproduction occurs when there is an excess supply of something relative to demand for that same thing; this can happen in any industry—from clothing manufacturing all the way up through high tech electronics manufacturing—and it leads directly into debt accumulation because businesses need capital in order to stay afloat while they wait out periods where they have too much inventory (and thus not enough revenue).
Over-investment in Chinese real estate has led to a wave of “ghost cities” and much of the money “invested” has been debt-fuelled.
The Chinese government has encouraged investment in real estate, and this has led to a wave of “ghost cities”. The boom has been debt-fuelled, with over-investment drying up liquidity and pushing down prices.
As Evergrande tries to sell off some of its properties on the mainland, local governments are struggling with their own debt repayments as well as funding social programmes such as housing and healthcare for their citizens. This means that Evergrande’s ability to develop new properties or sell existing ones is being squeezed by local government debt repayment requirements across the country.
Evergrande Group, China’s largest property developer, has taken on $300 billion in debt in recent years.
Evergrande Group, China’s largest property developer, has taken on $300 billion in debt in recent years. The company is a symbol for China’s property boom and possible imminent bust. Debt repayment is squeezing Evergrande’s ability to develop new properties and sell existing ones. Over-investment in Chinese real estate has led to a wave of “ghost cities” and much of the money “invested” has been debt-fuelled.
China’s economic miracle is built on unsustainable over-expenditure
Debt repayment is squeezing Evergrande’s ability to develop new properties and sell existing ones.
The large and growing debt burden at China’s property companies is a looming threat to the country’s economy. At Evergrande, which has a market value of about $50 billion, this means the company can’t pay its bankers back with cash flow from its existing projects. It must rely on new debt — which has become increasingly expensive in recent years — or sell assets to raise funds for repayment.
Evergrande’s predicament illustrates why so many companies have been going public: They need capital to expand as demand from home buyers declines and are desperate for fresh revenue streams after years of easy access to cheap credit. But they’re also showing signs that they’re thirsty enough for liquidity that they’ll do anything — even list themselves on global exchanges — just so long as it provides them with money right now.
Evergrande is a symbol for China’s property boom and possible imminent bust.
Evergrande is the largest property developer in China. It has many of the same characteristics as other property developers, such as a high debt load and low cash reserves. However, there is an added concern that Evergrande will default on its loans: The company has been using money from one subsidiary to pay off loans owed by another subsidiary, which could be seen as fraud.
Evergrande is also experiencing a wave of defaults on its loans. This is bad news for a country where investment banks are already struggling with debt—especially if those banks were holding on to Chinese securities derived from Evergrande’s mortgage-backed securities (MBS).
China’s economy could be about to fall off a cliff.
In a nutshell, China’s economic model is unsustainable. The country has been growing at an average rate of over 10% per year for the past several years. This growth has been fueled by debt-fueled over-investment and real estate bubbles that have pushed prices beyond anything rational or sustainable.
Now, you may be asking yourself: if this is true, then why isn’t China’s economy already falling off a cliff? Well, there are two main reasons we haven’t yet seen such an event take place:
The first reason is that China still has plenty of room for fiscal expansion (i.e., government spending). The government could spend more money on infrastructure projects or social programs to prop up demand in its economy (and thus keep it from collapsing). In fact, this appears to be exactly what they’re doing right now! Recently Chinese policymakers announced plans to spend $1 trillion on infrastructure over the next five years. While this may help stabilize things temporarily—it certainly won’t solve China’s underlying problems permanently—it will also add further strain on their finances going forward as they attempt this massive expenditure program while simultaneously trying not to go bankrupt themselves…
The second reason is that their most recent countermeasure of continually lowering interest rates, and injecting additional cash into the market is most likely only a last ditch effort to curb their collapse. China’s growth at all costs mentality potentially will have lasting implications on not only their economy but the rest of the world. These efforts could buy them enough time to try to fix their underlying issues, but most likely will only postpone the inevitable.
Conclusion
China’s economy is built on a mountain of debt, and it might all come crashing down. The Chinese government has set an ambitious goal of becoming the world’s largest economy by 2030, but if it continues to pour money into unproductive investments like real estate, its economy will never get there. A more sustainable model would be one based on services rather than manufacturing and exports, but even then there are no guarantees that China will avoid a financial crisis in the coming years. The scary thing is how large of an impact China’s economy has on the rest of the world, and will certainly have reverberations across every country.
