What is really happening to the Chinese economy? What is wrong with it? Its health is raising more and more concerns worldwide since this is the world' second-biggest economy and the largest manufacturer of consumer products.
Indeed, this is not just an ordinary emerging economy. This is an economic heavyweight. Therefore, it cannot but worry experts circles worldwide, especially as some experts call it the major locomotive of the global economic growth. Yet, the locomotive seems to be slowing down.
The pace of the Chinese economic growth is currently slowing down indeed. Experts predict that China's GDP growth may slow down to the lowest point in 25 years. Yet this may happen this year.
Well, it should be noted that most markets (both emerging and developed ones) have close economic ties with China. They benefit from that. At least, they used to be since more and more analysts start predicting a «hard landing» for the Chinese economy. If this is the case and the doomsday scenario manifests itself, the entire world may fall into another global economic recession followed by a tough crisis. Or maybe the economic picture we are currently seeing in China is painted deliberately to prevent the forthcoming economic disaster? Let's think about it together…
What does the hidden Chinese crisis look like?
Indeed, investors are really worried about the current economic figures reported by China.
They proved to be much weaker than expected. On top of that, last week, China faced the first corporate bonds default in its history! Well, this is definitely not the best time to mock at China. Experts say this is the first wake-up call indicating the forthcoming wave of bankruptcies. What makes them picture such doomsday scenarios? In short, there are those very weaker-than-expected economic figures:
The GDP growth is down to 7%. For any other economy such a pace of economic growth would be a real gift! Still, China is an exception since it is really suffering for excessive production capacities. The Chinese government set the 7,5% goal for this year but experts say this goal is unreachable under such circumstances. At the same time, the country's 4 major investment banks have already downgraded their forecasts from 7,8-7,6% to 7,5-7,2%.
At the same time, the industrial production figures are down as well. They dropped from 9,7% in Dec 2013 down to 8,6% in Jan-Feb 2014. This means they slowed down to the lowest level since Mach 2009.
The retail sales figures are also down to 11,8% in Jan-Feb 2014. For comparison sake, the figures seen in Dec 2013 indicated 13%. Therefore, the latest figures are at the 3-year low.
It appears that Chinese households haven't increased their spending much so far. The rest of the year promises to be the same.
As for the investments in the major capital, they are up by as little as 17,9% against 19,6% in Dec 2013. Still, even December's figures represent the lowest point in 10 years! It is especially hard to realise since China is still investment-dependent. Investments accounted for 54% of the GDP growth seen last year. At the same time, the corporate debt increased by as much as 1000% ( or 10 times)!
So, what exactly do these figures tell us about? Most experts are inclined to think that China is currently suffering from an overproduction crisis. Indeed, China has too many factories and other production facilities while their output is getting cheaper, thereby making them lest profitable. Most of those companies are alive only thanks to governmental support. Still, this support wasn't a burden when the Chinese economy was growing and flourishing. While the economy is slowing down, it is getting harder and harder to support such companies. This leads us to believe that a series of defaults is coming… Everything is fairly simple. Until December 2014, the borrowers must pay off 5300bn Renminbi. This credit bubble cannot but burst sooner or later and therefore is a point of creat concern to the Chinese authorities. In short, all those skeptics have a lot of reasons to be worried about the future of the Chinese economy.
Is everything that bad?
Still, there are some optimists in international expert circles. They say that despite the current weakness, it is too premature to call it a «hard landing».
First of all, this is a relatively closed economy and the government has a lot of power over it, including the possibility to interfere and intervene when necessary. Therefore, some economic facts remain unclear and difficult to grasp. On top of that, the latest figures given for the first 2 months of the year are not the reason to panic since first data are usually volatile. Consider the Chinese New Year which is celebrated for a whole week. Apparently, the economic figures for such periods are usually weaker than those seen during the rest of the year. Still, this is not the major factor to consider.
The biggest thing to take into account is the fact that last year China announced a transition to a new economic model – from a model based on export and investment to a model based on active domestic consumption with an increasing share of services. In this aspect, the current slowdown looks natural as this is the first inevitable consequence of such fundamental economic reforms. Well, this is good news because this point of view leads us to believe that the weakness is temporary and the Chinese economy will start recovering and growing in the near future. At least, this is a controllable crisis. In other words, it is better to face and survive a minor crisis now than to face a bigger devastating crisis later.
Experts say Beijing will start stimulating the national economy soon. They mean the People's Bank of China may well start quantitative easing in order to increase the spending on local infrastructure and social support.
As for the Chinese Yuan (also known as the Renminbi), it is trading in a downward trend against the US Dollar, which means USDCNY is rallying. The current price is around 6,19, Masterforex-V Academy reports:
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At the same time, China has a lot of trump cards up its sleeves:
Its major trade partners are the USA, Europe, Asian-Pacific economies, Japan and some emerging economies that are currently recovering.
On top of that, we can add to the list decent market conditions, especially when it comes to Chinese products.
And finally, it is about China's gold-and currency reserves and the status of the Renminbi. The Yuan used to be called toilet paper. Now it is among the world's TOP 10 currencies. As for the gold-and-currency reserves, they are the world's biggest – $3500bn.
