How to understand China’s Mammoth Debt

Current Chinese Economic Threats

Mountain-high levels of debt are continuing to increase despite an overall decline in GDP growth. The majority of this debt is owned by state-owned enterprises, making the situation more complex. Debt can be misunderstood, as personal debt is usually an undesirable choice. However, for large companies, high borrowing can be beneficial if the company can use the investment to generate income.

Still, a large slice of China’s debt problem is categorised as “risky”, meaning that if the economy starts to falter, defaults may become common. Countless times we have seen the impact on economies when debts are unrecoverable. The financial crisis saw many banks on the brink after sub-prime loans collapsed and house values did not cover the outstanding mortgage amount. China’s debt problem is serious, and one that the government is trying to address. Although the government is trying to manage the issue, it is still not under control.

Political Chinese Economic Threats

Worldwide political unrest is another factor that may cause concern. Understanding the level of influence this may have on China’s economy is hard. Certain economists believe political changes such as Brexit may open up opportunities for China. An independent UK may become a stronger partner to China and help the country’s economy. Alternatively, the UK leaving the EU may make it harder for China to access the EU market.

Donald Trump was recently confirmed as the next President of the United States. This signals greater disruption in the US and China trade relationship. Events occurring in politics often catch the world by surprise. No one truly knows how political changes will affect the ever-more-interlinked global economies. With many countries already having a frosty relationship with China, the threat of economic disruption resulting from politics is possible. Further barriers to trade could be implemented, seeking to discourage cheap Chinese exports. China’s economy is heavily reliant on its export industry. Even though the country has been transitioning towards a service-based economy, an abrupt decline in exports would still be damaging. Worldwide politics is a Chinese economic threat that has a high risk factor, but that is difficult to manage.

Another of the possible Chinese economic threats comes in the form of other countries. Asia as a whole is continuing to see rising manufacturing levels. Traditionally, China has been able to compete on price. However, many alternative Asian countries can now beat China when it comes to value. This may not concern China too much, as the country wants to move away from being a low-cost-manufacturing nation. However, if the transitioning economy hits turbulence, a rise in the number of competitors would start to cause concern.

Conclusion

The situation is slightly precarious. The declining growth rate seen over the last several years caused concern for many economists. In recent months, positive news regarding China’s economy suggests the start of economic stabilisation. Some threats can be seen from the outside, and, if known, an action plan can be created, though the most concerning threats are those that aren’t initially obvious. China has shown that it can manage its economy successfully, but there has not been too serious of a disruption yet.

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