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Is China’s Upturn Built to Last?



There are good reasons to expect a resumption of last year’s slow-down in economic activity. After all, deep structural imbalances in the Chinese economy remain – namely, a rapid build-up of private sector credit relative to GDP, leading to high share of non-performing loans in the banking system; overcapacity in the manufacturing sector leading to deflationary pressures; and strong house price appreciation leading to an excess supply of property. If anything, the stimulus efforts of the past 18 months may have exacerbated these imbalances by boosting credit growth, encouraging investment in overcapacity sectors, and further stoking house price inflation. These imbalances may offset the boost from stimulus by acting as a drag on economic growth, and in a worst-case scenario could trigger a ‘hard landing’ that leads to a rapid slowdown in Chinese growth.

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Market Realist – Structural imbalances

China (FXI) (MCHI) has serious structural imbalances that could impact its economic growth in the long run. China’s loose credit and investment-led growth, which resulted in buoyant activities over the past few decades, have been faltering. Huge debt and increasing non-performing loans weakened much of the private sector. On the other hand, current aggressive deleveraging to avoid a debt trap could damage the private sector. This would result in slower economic growth. China’s total debt-to-GDP (gross domestic product) ratio increased to 247% at the end of March—compared to 164% in 2008.

Bad loans

According to the China Banking Regulatory Commission, China’s non-performing loans stood at 1.4 trillion yuan as of March—the highest in 11 years. The non-performing loans-to-total loans ratio increased by 0.07% to 1.8% over the previous quarter. Industries such as iron, steel, coal, photovoltaic, electrolytic aluminum, and cement are facing severe strain.

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Massive overcapacity

In many industries like steel, iron, paper, glass, and basic organic chemicals, China (GXC) has huge overcapacity due to shrinking internal demand. The massive capacity addition in the past few decades increased the investment level in the country to around 46% of the GDP. This is much higher than the level of 30% reached in other prominent emerging markets (VWO) (EEM). According to Oxford Economics, the production and capacity gap for China’s industry was zero in 2007. It increased to 13.1% by 2015. The gap is much higher for heavy industries.

Stimulus may have exacerbated the imbalances

These structural imbalances could have exacerbated the economic slowdown in the country. They might have been responsible for lessening the effect of stimulus measures on economic growth.


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