Winter Chills for Chinese Economy


For the last two decades, China has outgrown many economies to become second largest economy in the world and achieved this landmark by making its economy an investment driven economy. And for that, it had borrowed huge amount of money from domestic as well as foreign sources. At present Chinese firms have foreign debts to the tune of more than $1 trillion which increasing their default and bankruptcy probabilities in case significant slowdown (that is evident now). Unlike other large developed and developing economies with high GDP growth, the economic prosperity in China has not reached the bottom of pyramid.
The high GDP growth rate in China was export led through leveraged investment rather than consumption. Once the global demand for export from China cooled down because of simultaneous events like global economic slowdown since 2008, problems in Europe, rising costs in China, strong Renminbi Yuan and cheaper alternatives like Bharat, Philippines and Brazil, the GDP growth rate started falling down resulting in lower returns on investments but hardly an concession on exposure. So risk increased but earnings fell simultaneously. This made China less lucrative. So the foreign investors started looking for alternatives to sell off Chinese assets.
To make Chinese economy more investment friendly and lucrative in times of fierce competition, Chinese authorities took some flawed decisions in name of reforms. In a command economy like China, where government has direct interference in investment and consumption level, authorities went on pushing investment but ignoring consumption. Result was in form of huge mismatch in production and consumption. Also at the same time to provide with liquidity and make investment even sweater, authorities allowed stock trading using borrowed funds and also artificially helped markets to maintain uptrend. This provided Chinese citizens opportunities to earn high returns with very low investments and risks. This made prices of stocks unsustainable resulting into crash.
The devaluation of Renminbi Yuan was taken as signal of gravitating problems in Chinese economy. Also there is fear about the probable currency war like 1997 during East Asian Crisis. Though on the surface the current situation in China does not seem to be bad as in 1997 but fundamentals seem to have shaken in such ways that the world stock market is now driven by news from China than the Greece. Oil prices are falling and the stocks markets in Asia, Europe and the US are in seeing new lows. This shows how world in concerned with development in China and it does not seem that China is going to escape from this problem this time so easily and indications are there already.
The efforts of Chinese authorities to contain the fall of the market are not working although huge money has been poured into the market by the government authorities and firms and the falls in stocks markets across the world continues.
As far as Bharat is concerned, if China can settle this problem in short term, then it would be beneficial for Bharat as it will attract more investments for its Make in India and Smart Cities projects. 
(Published in Organiser Issue 13 September 2015)

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