China is on borrowed time

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Getting a solid read on China’s economy is no east feat, but here’s what we do know.

Beijing faces a looming threats to its economic instability. Picture: Greg Baker/AFP

SLOWING housing and construction sectors, huge corporation debt and a protectionist Donald Trump all threaten China’s good economic times.

That is the warning issued by private-intelligence firm Stratfor which predicts China’s economy is living on borrowed time with Beijing facing a series of internal and external threats.

Stratfor, which successfully predicted Europe’s inability to cope with the global financial crisis and the US-jihadi war, warn several factors will impact heavily on Beijing’s economic stability over the next 12 months.

In, China’s Economy: Living on Borrowed Time, Stratfor lead analyst John Minnich predicts China’s housing and construction sectors will begin to slow by next year.

And he warns it is this very industry which holds a lot of the country’s outstanding national corporate debt.

Beijing’s ability to cope with slow construction growth, along with skyrocketing debt, will also be tested in coming months with company defaults and bankruptcies set to spike in 2016, he warns.

A move towards US protectionism, being pushed by President-elect Donald Trump will also add to the growing pressures on the Chinese economy.

A worker watches as he sits on a pillar at a construction site in Beijing as weak global demand for Chinese exports dealt a blow to the world's number two economy. Picture: Wang Zhao

A worker watches as he sits on a pillar at a construction site in Beijing as weak global demand for Chinese exports dealt a blow to the world’s number two economy. Picture: Wang ZhaoSource:AFP

According to Mr Minnich, low cost exports, which the Chinese economy has relied on in the past, have declined in recent times.

This has helped lead to construction becoming the main driver of both economic growth and employment across China.

However, in a bid to prop up the country’s growth and “protect its near universal employment rate, China has embraced stimulus measures causing the country’s outstanding debt to balloon to almost 250 per cent of gross domestic product”.

According to Mr Minnich, much of Beijing’s investment is financed by debt from state-owned banks.

China’s biggest borrowers hold around 60 per cent of the country’s outstanding corporate debt and most industries are tied to real estate, which is a potential issue given construction appears to be slowing.

How well Beijing responds to these issues and others will “determine China’s economic, social and political stability for years to come,” he writes.

Two men look out over a shopping complex in Beijing. China’s retail sales growth slowed last month, in a worrying sign for domestic demand in Chinese economy. Picture: Greg Baker/AFP

Two men look out over a shopping complex in Beijing. China’s retail sales growth slowed last month, in a worrying sign for domestic demand in Chinese economy. Picture: Greg Baker/AFPSource:AFP

FALL OF CHINA

It wouldn’t be the first time warnings about China’s economic stability have been questioned.

In the Decade Forecast report, released last year, Stratfor warned China will begin to slow down as the country nears the end of its high-growth/low wage cycle.

It predicted the nation will enter a new normal followed by a period of slower growth.

“China will continue to be a major economic force but will not be the dynamic engine of global growth it once was,” its report reads, further predicting several South-East Asian nations will emerge as a new economic powerhouse.

SINKING EXPORTS

Whichever way you look at it China’s economy has faced unsteady times.

Beijing’s exports sank for a seventh consecutive month in October, according to data released two weeks ago as weak global demand dealt a blow to the world’s number two economy following recent signs of stability.

China’s retail sales growth also slowed last month, according to government data in another worrying sign of troubling times ahead.

Workers stand outside a construction site on a polluted day in Beijing last week. Picture: Greg Baker/AFP

Workers stand outside a construction site on a polluted day in Beijing last week. Picture: Greg Baker/AFPSource:AFP

Retail sales in October grew 10 per cent from a year earlier, missing expectations for sales to match the previous month’s pace of 10.7 per cent, the National Bureau of Statistics (NBS)

said.

However, despite a cooling economy, China’s e-commerce market rose by 26.1 per cent in the first nine months of the year, AFP reported.

THE TRUMP EFFECT

While internal challenges remain a huge concern for China, the country also faces external economic threats.

Experts warn President-elect Donald Trump’s plan to dump the Trans Pacific Partnership (TPP) will have massive consequences for China, but also for other nations.

John Chisholm, a corporate dealer at HiFX, said Mr Trump campaigned on policies including opposition to free trade, including slapping a 45 per cent tariff on imports from China, and this will have “huge ramifications for Australia and even more than New Zealand” if implemented.

This would largely affect the price of the Australian and New Zealand dollar which he predicted could fall as a result, AAP reported.

Meanwhile Mr Trump labelled the ambitious Asia-Pacific trade pact linking the United States, Australia and 10 countries lies “a potential disaster for our country”, Reuters reported.

US President-elect Donald Trump vowed to ditch the Trans-Pacific Partnership on his first day in the White House. Picture: Greg Baker/AFP

US President-elect Donald Trump vowed to ditch the Trans-Pacific Partnership on his first day in the White House. Picture: Greg Baker/AFPSource:AFP

China, Japan and South Korea are already in the initial stages of discussing a trilateral trade deal, and Beijing has been pushing its own limited Asian regional trade pact that excludes Washington for the past five years.

Japan and Australia, Washington’s closest allies in Asia, pledged after Mr Trump’s announcement to push ahead without the United States, although removing the largest market for goods and services would shrink it dramatically.

Mr Trump has pledged to redraw trade deals to win back American jobs, and has threatened Mexico and China with punitive tariffs in a move that some economists have warned could spark a trade war that threatens to roll back decades of liberalisation.

Ending the TPP was a key election pledge of Mr Trump’s and was also the policy of his Democratic opponent, Hillary Clinton. However the deal died in Congress after Mr Trump’s election victory.

The Trans-Pacific Partnership, a signature diplomatic initiative of Democratic President Barack Obama, was intended to lower tariff barriers in countries that accounted for 40 per cent of the world economy, as well as providing a bulwark against China.

An employee of Century Furniture working in the firm’s factory in Hickory North Carolina earlier this year. Chinese imports have been a significant drag on local economies in swing states like North Carolina. Picture: Mike Bellene/The Wall Street Journal

An employee of Century Furniture working in the firm’s factory in Hickory North Carolina earlier this year. Chinese imports have been a significant drag on local economies in swing states like North Carolina. Picture: Mike Bellene/The Wall Street JournalSource:The Wall Street Journal

‘KNOCK ON EFFECT’

ABC Bullion chief economist Jordan Eliseo said any economic downturn in China would have a significant and negative impact on Australia.

“The obvious thing is it would lead to more interest rate cuts in Australia,” he said.

“And the reality is any slowdown in China, which could happen, would also affect demand for Australian exports.”

Mr Eliseo said he believed the Chinese government would clamp down on capital flight (money leaving China), which in turn would effect things such as investment in Australia, which in turn would have a knock on effect on things such as property prices.

“We may also see commodity prices start to turn south again and this could affect our budget deficit,” he said.

“The impact on Australia would not be great.”

‘WALLED IN’

In a Goldman Sachs report released earlier this year,Walled In: China’s Great Dilemma, the leading global investment banking firm warned the Asian powerhouse faced a growing debt

burden.

The report also raised concerns about the slowdown in China’s economy coupled with “opaque policy responses” from the government which were the primary reasons behind the past two

significant downdrafts in global equity markets.

The report predicts China will remain a significant source of volatility in financial markets and commodity driven economies over the next several years,

It also warned the country faces a great dilemma and limited options amid the herculean challenge of rebalancing the economy toward consumption and a more sustainable growth path.

Warning that reform was needed, it said China faced a sharp slowdown if such reforms were introduced too quickly.

However on the flip side, if they were not implemented quickly enough Beijing “risked an unsustainable increase in its debt-to-GDP ratio, which could push the country past the tipping point into economic and, in all likelihood, political instability”.

debra.killalea@news.com.au

Chinese President Xi Jinping said China would offer ?open, more inclusive? commercial relations with the rest of the world, in his keynote speech at the Asia-Pacific Economic Cooperation (APEC) Economic Leaders’ Meeting in Lima on Saturday. Jinping said China was ?going to provide more access to foreign investment? and introduce reforms that would give ?China a more transparent and open investment environment? that guaranteed ?an equal playing field to every business in China, whether national or foreign.? The Chinese president said that even amidst the ?economic crisis, China has accounted for approximately 40 percent of global growth? and called on the Asia-Pacific region ?to lead the way and take strong and coordinated actions in order to energise the global economy.? Outgoing US President Barack Obama as well as Russian President Vladimir Putin are also scheduled to hold keynote speeches at the summit. Others involved include IMF Managing Director Christine Lagarde, entrepreneurs, investors and world-known business people such as Facebook CEO Mark Zuckerberg. Founded in November of 1989, APEC is a forum of 21 economies in the Asia-Pacific region. Together they seek to promote the liberalisation of trade and investment and foster business and economic cooperation.

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