Investors across the globe are increasingly worried about the state of China's economy–the world’s second-largest economy after the United States–which has been severely impacted by rising credit levels, a slowdown in its gross domestic product (GDP), and the ongoing trade war with the U.S.
Very few economies have grown at the rate of China's; according to the World Bank, the growth rate of China's economy over the past 30 years has averaged 10% per year. However, China's GDP growth in 2019 was 6.1%, the slowest year since 1990. Accelerating credit growth, the overvaluation of the yuan, and a frothy housing market have contributed to a slowdown in the second-biggest economy in the world.
- Investors across the globe are increasingly worried about the state of China's economy which has been severely impacted by rising credit levels, a slowdown in its gross domestic product (GDP), and the ongoing trade war with the U.S.
- China's GDP growth in 2019 was 6.1%, the slowest year since 1990.
- Accelerating credit growth, the overvaluation of the yuan, and a frothy housing market have contributed to a slowdown in the second-biggest economy in the world.
- If China's troubles persist, there could be significant consequences for foreign trade, financial markets, and economic growth in the U.S. and around the world.
Accelerating Credit Growth
Economists Wei Yao and Claire Huang of Societe Generale consider that much of the growth in China's economy was due to credit expansion. In an attempt to shift from an investment-based to a consumption-based economy and reverse the 25-year trend of slowing economic growth, the Chinese government adopted an accommodative monetary policy. From 2008 to 2018, China’s overall debt jumped from 164% to 300% of its gross domestic product (GDP). In an attempt to alleviate its supply of debt, China has tried to increase demand by easing restrictions on market entrance for foreign investors. These efforts have achieved little success. Theoretically, when bond markets become more accessible, foreign investor demand should increase. However, there hasn't been any data to support an increased level of investor interest in Chinese bonds.
In addition to its credit woes, China is also facing a currency crisis. Through excessive debt creation and money printing, the People’s Bank of China (PBOC) has created one of the largest money supplies and total banking system assets of any country. An aggressive monetary policy has led to total banking system assets of $40.57 trillion at the end of the third quarter of 2019. From 2010 to 2017, the total assets of banking institutions in China increased by over 200%. This has contributed to an overvalued yuan.
Perhaps even more concerning are the statistics about China’s total social financing (TSF). Total social financing reflects an economy's credit level, taking into account off-balance-sheet financing, or "shadow banking," including initial public offerings, loans from trust companies, and bond sales. At the end of December 2019, China's total outstanding TSF was $36.6 trillion, up 10.7% from the year before. This is an indication that debt growth is accelerating via China’s shadow banking system.
Frothy Real Estate Market
After the loss of $3.2 trillion during China’s stock market crash in 2015, the PBOC attempted to encourage potential equity investors. Compared to Americans, the Chinese have historically invested more of their capital in real estate than in the financial markets. The latest stock market crash reinforced that trend; Chinese direct investment in the United States hit a record $15.7 billion in 2015.
At the end of 2017, the median price per square foot for real estate in China was nearly $202, almost 40% higher than the median price per square foot of real estate in the U.S. in 2017, despite the fact that the per-capita income in the U.S. was 700% higher than China in 2017. This housing data indicates that, for a time, the Chinese continued to invest in real estate for their economic growth. Historically, real estate has been the main driver of growth in China's economy, accounting for a large portion of its gross domestic product (GDP). China's efforts to float its housing market, keeping prices rising and continuing development, might have hurt other areas of its economy.
The housing price growth of China is expected to hit a five-year low in 2020, growing just 3.1%. Policymakers have been tightening policies in order to crack down on speculative buying that has been prevalent since 2015. For several years, although income-level lagged, housing prices consistently rose in every major city.
China’s economic situation can be difficult to assess. While China has taken steps toward becoming more transparent in its financial sector, its GDP data is known to have been manipulated in the past. Some economists and analysts speculate that official data about Chinese industrial profits are also manipulated and do not reflect the true state of the economy. It's likely that China’s economy is underperforming compared to government reports. If China's troubles persist, there could be significant consequences for foreign trade, financial markets, and economic growth in the U.S. and around the world.