Explosive Credit Growth Forestalls Chinese Economic Collapse

To fortify its tenuous economic pickup, China’s local governments recently embarked on a new cycle of debt financing. While this step may be effective in the interim, industry experts point out that the rest of the world should consider it a revelation regarding China’s actual financial stability. The country’s explosive credit growth is supporting its growing economy. This situation is adding to worries about expanding bubbles within the commodities and real estate classes. The bond market is also experiencing growth in corporate defaults making the situation even more worrisome.

A Peek Behind China’s Growing Economy

According to Reuters, the country’s growing public sector investment is behind China’s improving economy. Most of this investment is being bankrolled locally with debt. In a Credit Suisse research report, analysts wrote, “With new infrastructure projects effectively all funded by debt and more consumer mortgages, the leverage problem and risks on the financial sector are rising.”

To sidestep official spending limits, Chinese cities are using local government financing vehicles. With this strategy, they were able to raise at least 538 billion yuan in bonds, which is $83 billion in U.S. currency. This amount is up by 178 percent from a year prior, and it is the biggest quarterly issuance since June of 2014. March’s issuance came to 287 billion yuan making it a monthly record.

Delaying Structural Reforms

The South China Morning Post reports that the association between a sustainable future, the wellbeing of the country’s people and economic growth has long been at the heart of the nation’s debate over its development.

China’s policymakers likely experienced a sense of relief when the growth numbers came out since the first quarter’s figure of 6.7 percent was within the target of 6.5 to 7 percent. However, economists point out that this growth is a signal that the country is following a tradition that has caused many of the issues that China is currently facing. This harmful path involves delaying structural reforms and forcing companies to take on massive amounts of debt as well as bringing about major losses within the banking sector.

To be fair, the government’s task is herculean since it must oversee an economic transition that shifts the country from a growth pattern resulting from the swift expansion of exports, investments and industrial yield to one that’s based on the country’s service industries and private consumption. In considering the recent data release, it would seem that the government is failing to accomplish the transition since China’s current growth has been achieved through a stimulus. The most recent stimulus featured considerable lending.

Contributing to the Collapse of the Global Economic Order

According to reports, the Chinese people are feeling skeptical about their country’s economic situation, and they have been showing it by moving their money out of China. During the third quarter of last year, the country saw a net capital outflow of $460.6 billion in U.S. currency. This situation is contributing to a collapse of the global economic order. With hundreds of billions of dollars escaping China, there is a major threat to the global economy, and it is one that could cause an actual economic dislocation.

The Guardian reports that China’s banks are bust. The country’s banks have been making loans that borrowers are unlikely to repay. Because of this, they are unable to lend at the rate that the country now needs to sustain its growth. In fact, China’s real growth is lower than it was during the Mao years.

The global markets have been unable to deal with China and its fluctuations. One problem is that the financial community has listened to the country’s government about its economy without considering how severe the downturn will be when it happens. If the bad news out of China keeps cropping up, the global markets are sure to react in a big way.

An Economy On Hold

The National Interest published an article about China’s economy. One paragraph states, “The Chinese economy has never made sense, but confidence, both inside and outside the country, held it together. Now, the confidence is disappearing fast, and Beijing does not know how to get it back, except by repackaging solutions that have not worked.” A number of economists are hesitant about China’s latest efforts that involve explosive credit growth to forestall an economic collapse. For now, the country’s economy seems to be holding. The world’s other financial markets are sure to keep a close eye on China. To read more about the country, and its attempts to improve the economy, visit the PersonalMoneyStore.com.

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