The Chinese economy has been a global focus for many years and what happens there always has important implications for the rest of the world. Join us as we have a look at some of the current challenges China is facing and what this could mean for other countries around the world:
1978 in China
To understand some of China’s current issues, we need to look back in time at some of the decisions that may have brought them to where they are now. For a long while, China was largely insulated from the rest of the world and not overly active in the global market. In 1978, however, the powers in China decided to model the country on Japan and South Korea which at the time seemed the way to go. Little did they know at the time how things would turn out for Japan just 11 years later when we saw the highest point in the Japanese equities market. Host Andrew Baxter explains the 3 main issues that were gripping Japan – bad debt, deflation and demographic challenges in the form of an aging and older population. Upon opening up, previously quiet parts of China were suddenly receiving copious amounts of foreign direct investment and becoming hubs of global trade. Now that we have seen the boom, similar to that of Japan, there are signs that they may be facing similar challenges to that of Japan. In a way the growth was a form of industrial revolution in China, with workers stopping work in farms and working in manufacturing. The amount of goods they export has significantly increased now with respect to how much they produce as consumers in China have grown wealthier and consume more. This is a large cause for China’s issues on a global scale.
The Chinese Property Market
Property is a hot topic in Australia and likewise it has had a major impact in China. Host Andrew Baxter notes that currently, 70% of the Chinese population’s store of wealth is in property which is an enormous proportion of overall wealth in the country. Real estate is also a large component of the tax revenue in China. This applies at both a federal and local level with governments being heavily reliant on real estate for their tax revenue. The fact that there is so much hinging on real estate values in China is problematic for the country because being overly reliant on one particular asset class can be dangerous for the country should property prices soften at all. Evergrande, one of China’s largest property developers, is currently experiencing some issues as it is looking to insure its US held assets. It has an astronomical amount of debt held in properties which they can not sell or are vacant, so likewise when property prices are coming down, they experience a world of pain.
What Happens From Here
As you can tell by now, the economy is in quite a dire state in China at the moment. You have lower imports and exports, higher unemployment which can be seen particularly in the youth statistics, and a deflationary environment while the rest of the world is fighting to curb inflation in their countries. Host Andrew Baxter explains that the import and export data is concerning as there have been significant slowdowns in both which can have major implications not only for China, but for its trade partners globally. If we look for a contrast between Japan and China, during Japan’s woes they had high interest rates and fairly high wages. China is in a position where they have fairly low wages and currently declining interest rates. Although their control over the value of their currency gives them some flexibility to deflate their currency and take other defensive measures, but their massive amounts of debt are still a major issue. With so much debt tied up in real estate, and with the value of that real estate coming down, China is beginning to see some significant issues in its economy.
