China has been growing steadily over the last couple of years, helped by market manipulation and a large economic stimulus programme. However, the ‘Great Fall of China’ last year hinted at cracks in the country’s economic foundations, which appear to have enlarged over the last two weeks. But is this a temporary hiccup – or is China on its way to collapse?
All eyes were on China last summer, with economists eager to ascertain whether the 30 percent fall in the Chinese markets, dubbed ‘Black Monday’, was a one-off – or whether it signalled worse things to come. After huge market intervention from Beijing, which included an interest rate cut and a 250 billion RMB loan to prop up state banks, Chinese markets seemed to stabilise for the rest of the year. However, last week global economies shook again as trading was suspended twice, wiping away all market gains made last year. Whilst the ruling Chinese Communist Party continues to assure the world that China’s economy is not in the midst of a meltdown, the reality is that economic data from the region looks undeniably shaky.
On Monday, the private Caixin/Markit Purchasing Managers’ Index showed China’s manufacturing sector had declined for the tenth month in a row, in sharp contrast with the official figures released by the Chinese government; causing a 300 point drop in the Dow Jones Industrial Index and impacting on economies across Europe and Asia.
On Thursday, another devaluation of renminbi caused trading suspension on the Chinese markets and a 400-point tumble at the close of trading in New York. China have continuously devalued their currency since the beginning of last year, but it doesn’t appear to have the desired effect – largely because there is a lack of demand for money.
Furthermore, China’s growth is looking rocky. Whilst the official National Bureau of Statistics reported that growth in the third calendar quarter of last year was 6.9 percent, Citigroup’s chief economist has said that China is probably looking at growth of around 4 percent. Combined with this, China’s overall debt is climbing rapidly. Household sector debt is a modest 38 percent – but when combined with its rocketing private non-financial business sector debt, at 163 percent, it reaches a total of just over 200 percent.
Despite appearances, the government in Beijing are panicking. Chinese Communist Party (CCP) is panicking. They are faced with slowing growth, a market hindered by short-sighted government intervention and an aging work-force – something that has been tackled with the abolition of its decades-old one child policy. But China won’t see the effect of this change for a few generations – and unless the government’s short term measures start to kick in soon, it may be impossible to prevent the spiralling decline of the world’s second biggest economy.
Miranda Wadham on 11/01/2016
