Threats facing the Chinese economy

Despite an ever growing debt, China's economy has been steadily expanding in size and strength. The question is, for how much longer?

According to a report, titled 'R.I.P Chinese Exceptionalism?' published in Project Syndicate, authored by former chief economic advisor to the Indian Government- Arvind Subramanian, and Director of JH Consulting- Josh Felman, China's growing economy has, over the years, disobeyed a range of economic laws. One of them is the Stein's Law, according to which, something which cannot go on forever, will, eventually, come to a stop. China's debt accumulation, however, does not seem to be slowing down.

Statistics from the International Monetary Fund indicate that China's corporate, government, and household debt has added around USD 23 trillion in the past decade, while its debt-GDP ratio has increased by around 100 percentage points. Those are figures border-lining financial crisis.

 

Although China has used some of that debt to enhance industries and infrastructure, a major chunk has been utilised for aiding loss-making public enterprises and investing in public facilities and housing.

Another economic law that China stands guilty of violating is that accumulating extensive surplus capacity leads to dwindling investments and GDP growth, which in turn leads to financial instability if early warning signs are not worked on.

However, although China's GDP growth rate has slacked of late, investments in the country remain undeterred, with there being no pressure on the banking system as well.

An explanation for this stability lies in China's large domestic savings and foreign exchange reserves, the latter being over $3 trillion, which can cushion any impending financial stress. The country's strong balance sheet can be used to relieve and revive unsuccessful financial firms, thus avert any danger in that sector.

Political intervention also helps China maintain its economy, such as official constraints on outgoing foreign exchange.

China's economy is now facing the prospects of facing new obstacles, including the US-China trade war, the resistance in the One Belt, One Road Initiative (BRI) and toughening global financial conditions, especially in the US.

US President Donald Trump recently sanctioned tariffs on an additional USD 200 billion worth of Chinese goods, almost 15 per cent of China's total exports to the US. China's response to the same have been rather reconciling, a reflection of their growing vulnerability.

The second problem is the fact that China's mercantilism (country trying to amass wealth through trade with other countries) policies has recently come under attack. During the 1990s and 2000s China's export industry expanded exponentially as it allowed its currency to become undervalued.

China has adopted other these policies through a different approach, particularly the BRI, although it has come under fire both politically and economically. Sri Lanka, Myanmar, Malaysia, all recipients of Chinese loans as part of the BRI, has called it out for its neo-imperialism tactics.

Statistics from the Center for Global Development has indicated dangerous levels of debt build ups in as many as eight countries because of Chinese efforts. Malaysia has had to cancel $22 billion worth of Chinese projects, while Sri Lanka had to resort to the IMF for financial bailout. Pakistan may soon be another one of China's victims.

Rise in US interest rates represent attack on a third front for China's economy. With Chinese rates over shadowed by US rates, capital will be squeezed out of China, as has been the case with other emerging markets this year.

If they undervalue the Renminbi, they could complicate capital flight in the short term, while also attract currency manipulation accusations from the US. They also might have to spend as much as a trillion dollars from their cushy foreign exchange reserves if they want to prop the currency, like they did in 2015.

With the overwhelming nature of the threats the Chinese economy is facing, it seems rather sooner than later that the laws of economics will catch up, for the eventuality of which, China, and the whole world, should brace itself.