business

Forget the trade war, the Chinese economy has other big problems

Forget the trade war, the Chinese economy has other big problems

Beijing is already struggling with other problems that could aggravate the trade war. The Chinese economy is now growing the slowest since the global financial crisis. It is fraught with debt and with concerns about a real estate bubble and weakening currencies.
Despite the new Trump government rates at $ 200 billion Chinese goods, exports are still growing strongly, an increase of 16% in October. But that could change in the coming months if rates rose to 25% at the end of December, up from 10%, while the US has threatened, contributing to China's growing list of problems.
The Chinese economy grew rapidly in the years after the global financial crisis due to repeated debts.
"China's growth has been very credit-intensive," said Gerard Burg, senior economist from Sydney at National Australia Bank. The total amount of debts in the Chinese financial system is now several times the size of the entire economy.

Part of this money was spent on building bridges, roads and other infrastructure. But much has ended up in less productive parts of the economy, such as large, inefficient state-owned companies. The more dynamic private sector has not benefited so much.

At the end of last year, Beijing stepped up its efforts to control the high debt levels, which is one of the main reasons why the economy is now losing momentum.

The Chinese economy is growing the slowest since the financial crisis

Some analysts are skeptical about the commitment of the Chinese government to clean up its financial system, especially as the growth slowdown becomes deeper and the trade war gets bigger.

Many provincial governments and state-run companies would find it difficult to stay afloat without regular injections of cheap credit, according to Kevin Lai, an economist at investment bank Daiwa Capital Markets.

Cutting off their credit lines would have "very negative consequences, such as social unrest, layoffs and bankruptcies," Lai said. That is a scenario that Beijing wants to avoid.

Falling currency

The government also tries to ward off pressure on the Chinese yuan, which has fallen more than 9% against the dollar since January. It was hurt by concerns about the health of the Chinese economy and interest rate hikes by the US Federal Reserve that pushed the greenback.

The weaker yuan has stimulated the huge export industry in China, because it makes Chinese products cheaper on the international markets. But collapse in the yuan has led to headaches in the past.

In the midst of sharp falls in 2015 and 2016, large sums of money flooded from China, while investors bet that the yuan would continue to fall. The crisis forced Beijing to spend hundreds of billions of dollars to support its currency.

The yuan has declined more than 9% against the dollar since January.

A rapidly declining yuan could become a vicious circle, according to Manu Bhaskaran, the founder of Singapore-based research agency Centennial Asia.

"There could be a huge capital outflow that could feed itself," he said.

In the past few months, Beijing seems to have begun to submerge itself in its huge foreign currency war chest to slow down the yuan's drops, according to research firm Capital Economics.

Real estate bubble

Another threat lies in the overheated real estate market of the country.

Prices have more than doubled in the last decade, according to research firm Gavekal, stimulated by low interest rates and a shortage of housing in large cities.

But the property market now appears to "show some cracks," said Aidan Yao, a senior economist in emerging markets at AXA Investment Managers. He pointed out some examples of large landowners who lower prices in the light of declining demand.

Chinese officials are struggling to keep the sky-high prices in cities like Beijing under control.

"It's only a matter of time before the market cools down," Yao adds.

The real estate sector was one of the few bright spots for the Chinese economy this year, but according to analysts from research firm Fitch Solutions it becomes a burden when it collapses.

"This will add a new layer of pressure", they wrote to customers in a note last month.

Chronic problems

Chinese officials have turned to tax cuts, infrastructure expenditures and a looser monetary policy because they are trying to support growth. But some experts think that these are the wrong rules for the economic misery of the country.
How the trade war could make China even stronger

"China's problems are chronic, not acute," said Derek Scissors, a China expert at the American Enterprise Institute, a think-tank in Washington.

According to him, the main problems, such as the rapidly aging population of China and the uncompetitive business environment, are largely ignored.
The Chinese government has relaxed its decades-old one-child policy and tried to increase competition with plans to give foreign companies more access in areas such as banks and cars.

But those steps have come too late or do not go far enough, causing serious concerns about China's long-term economic future, according to Scissors.

"Old economies with indebtedness do not grow," he said

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