China’s Economy: An Inevitable Fall

Chinese Economy Shanghai
Written by Sam Fearnley

A few years ago, people talked about China with superlatives: ‘fastest growing’, ‘largest’, ‘most powerful’. People were right to be fascinated, growth on the scale of China’s was unprecedented. When a country’s economy does not follow anything before it, people are bound to become excited and frenzied.

The tumultuous and sporadic nature of global politics, however, means economies rarely grow unchecked. And China was not immune to this effect. In the last few months, China’s economic profile has seen somewhat of a decline. China is in the middle of a stock market crash – the stockmarket has lost 40% since its peak in June, a larger fall than the dot-com bubble in the late 90’s.

This decline was most noticeable on August 24th 2015, deemed “Black Monday” by many, which saw China’s stockmarket take its biggest one-day fall since 2007. Ignoring the headlines, China is capable of riding out this storm, to a degree. Its economy is still growing, by 7% at the last count – more than three times that of the UK or America. Though these ‘official’ Chinese figures are likely to be overstated, its growth will still be at least twice as much as the UK or America.

Global economics

The problem here is not necessarily that China’s economy is in turmoil, although that is a pressing issue. Perhaps the bigger problem is the interconnectedness of those countries which export to China. China is in the midst of a transition from an exporting country to one based on consumption: it now has a huge appetite for commodities: emerging countries like Zambia, Brazil and Angola, along with developed ones like Australia, have been so far been satisfying this need. As China takes this tumble, however, these countries will be stuck with surplus iron, copper and steel reserves and no-one to sell it to. Africa has seen huge investment from China in recent years, and was China’s largest trading partner between 2008 and 2011. Developing countries in Africa as well as Malaysia, Indonesia and many in Latin America will suffer from China’s recent misfortune, and they will no doubt see falls in the value of their currencies.

These raw materials are not the only part of the economy to be affected. This crash spans manufactured goods, as well as services and luxury products. Burberry is just one of a huge number of brands to see their shares de-valued and a declining demand for their products from Chinese distributors.

The Chinese government has been trying to amend the situation using a number of resposes. They provided (via the central bank) $156 billion to buy shares, in order to stabilise them. The state-run media also ran a number of stories that tried to inspire confidence in investors. All this should have brought some benefit, as 80% of Chinese investors are individuals and not institutions, but, to China’s dismay, share prices have continued to drop. Almost 200 Chinese people have been arrested for spreading rumours about the stock market crash and the recent Tianjin Explosion. In addition, the renminbi (yuan) has been de-valued multiple times.

Is it as bad as it seems?

The recent news has made for troubling reading, but not everything is bad. Fortunately for China, its economy’s tradable value is equivalent to a third of total GDP, whereas some developed economies have values around 100%. This means that huge increases in share price do not bring about vast changes to the economy, and, more relevantly here, neither do huge decreases.

What matters a lot more to China’s economy is the property market. In fact, land and housing make up the majority of the collatoral in the whole financial system. This is important. All the time that the stockmarket has been struggling, China has been seeing a property rebound. The average house price in China has been increasing for three consecutive months. Added to this is the fact that China has a hybrid economy: there is indeed a huge private sector, but state-owned banks and public corporations take a significant role in the whole system. This has given China the ability to absorb some of the effects of this stock-market crash, certainly to a greater extent that many western countries could have. People would be talking about this whole situation a lot more if the American stock market had seen the results of its Chinese counterpart over the last few months.

This trouble in China mirrors the Asian financial crisis of 1997-1998, notably by the withdrawal of capital from emerging markets. The magnitude of the effects will, hopefully, be far less: many Asian financial systems no longer rely on foreign creditors but, instead, have large foreign exchange reserves.

In addition, the west is likely to be sheltered, to a degree, from this whole debacle. Exports from many rich countries to China are, for the most part, only a small proportion of thse countrie’s GDP figures.

The recovery from the 2008 recession has been record-breakingly slow: many countries still have incredibly low interest-rates. People therefore have become agitated and worried. This continuing crash in China will do nothing to hold back these fears, but it is definitely not anything to be too concerned with. China is more than capable of dealing with these issues. The wider world should take the main focus: without wide-reaching economic reform, the west will inevitably plunge back into recession.

Can China weather this storm? Have your say in the comments below.