After three decades of unprecedented growth, China’s strength is rupturing. The country seems to moving on a bumpy road with no real direction in sight, especially when it comes to financial markets. The country’s manufacturing sector is stalling and the world's second-largest economy is relying on a more dangerous growth engine- debt—to solve its woes.
The Chinese government is encouraging banks to lend and people and businesses to spend and people are listening. According to data released this week, new loans in China hit a record level in January of 2.51 trillion yuan ($380 billion) and prominent investors are warning that China is playing with fire.
January’s surge was higher than the usual yearly start which ordinarily takes place when governments increase quotas for state-owned banks. The increase followed several months of bad loans known in the financial world as "non-performing loans" – which jumped over 50% from December 2014 to December 2015.
After three decades of unprecedented growth, China’s… manufacturing sector is stalling and the world's second-largest economy is relying on a more dangerous growth engine- debt—to solve its woes.
Debt Up 3x
One hedge fund manager warned in September that "The debt is still growing two to three times the economy every year."
Analysts are concerned about two major issues: how fast the debt is growing and whether China's banks are healthy enough to handle a wave of defaults. As China's economy slows, fears are growing that people and businesses won't be able to pay, which is why the default rate will become a key statistic.
While many banks around the world, including the United States, have been beefing up their cash reserves to prevent another financial crisis, China doesn’t seem to be doing the same.
Instead, the government is encouraging its populace to continue spending. Last spring, Beijing basically told people to go out and buy stocks just before the market peaked. It has spent a mammoth $500 billion in the past year to buttress its currency, only to turn around and cut the value of the yuan.
Other measures have been taken by China's Communist Party in an attempt to stop market volatility, going as far as halting the stock market for almost an entire day on January 7 and using government money to purchase stocks. But all this has not prevented the Chinese stock market from tanking and has taken the main Shanghai market into bear territory while dragging down the rest of the world including the U.S. In addition, there seems to be an unusual number of Chinese CEOs and executives "disappearing" and the government's economic statistics are now under a high level of scrutiny. China says it's still growing at close to 7% but independent experts say the real figure is probably half that.
The reality is that China's Communist Party holds an enormous amount of power over the economy and most major decisions on China's stock market-as well as the economy-aren't made by the Securities Regulatory Commission but at the premier's office.
In the past, this has proved beneficial as China's government was able to step in and quickly bail out failing businesses or make fast decisions to spend a lot more money to jumpstart the economy. But now this scenario isn't working as China moves from a manufacturing and export-driven economy to a middle class consumption economy.
Additionally, close to 50% of companies with stocks trading on Chinese exchanges are now private and there has been a big surge in non-state owned listings in recent years.
China continues to be one of the biggest trading partners for many global economies and many large American conglomerates now sell substantial amounts to China. As its economy slows, it causes waves all around the world. China is still a wild card and no one is sure quite what it will do next and how much of an impact it will have.