Why chinas economy might topple

A liquidity crisis at a large Chinese property developer has shaken global markets, and strategists say it could send ripples across the global economy. But they also say the issue will likely be contained by the Chinese government before it wreaks damage in the banking system, and it is not expected to lead to a broader global financial contagion. The critical question for investors is how and when do leaders in Beijing handle the situation and whether they launch a restructuring of China Evergrande Group , as many market pros expect.

Investors have worried that Beijing is likely to let the company fail, wounding stockholders and domestic bondholders. Evergrande faces a debt payment on its offshore bonds on Thursday, after it said last week it was facing unprecedented difficulties. There is a contagion issue if China Evergrande is not resolved. I think it will end up having some deep-pocketed state-owned enterprises to take over. Market pros don't think that Evergrande could lead to the next financial crisis, but it could lead to more volatility.

I think for a period of time, when you wrap this into everything else there, there's near-term financing questions around some of the other property entities, and when that happens then it can create some volatility and some financial contagion. My sense is the government will act, and my sense is it will stabilize.

Rieder said there could be some caution around Chinese property companies and multidisciplinary companies for a period of time. There is concern the already slowing China economy will be affected further and that could flow into other economies. Buffett disciple Guy Spier names two stocks that give him a foothold in China.

For the last 40 years, China's Communist Party has been able to promise a simple contract to its citizens: we'll keep your quality of life improving and you fall in line so that we can keep China on the right path. It is the social contract that China's leader Xi Jinping crystallised as the "Chinese dream" when he announced it in But the coronavirus could be putting that social contract at risk. Arguably more than any other economic crisis in the Chinese Communist Party's history, this health crisis has become a major threat for social stability in the country.

Millions of young people may not be guaranteed the same degree of success that their parents' generation has seen.

Keeping that contract of wealth, employment and stability is key to the Chinese Communist Party's legitimacy. Which is why economic recovery for China is so critical - and not having a growth target gives the government much needed flexibility to work out a plan.

What China's gloomy numbers tell us. Image source, Getty Images. Official unemployment numbers are close to historic highs - and the real figure is probably even higher. First, the good news. Rising unemployment. But most economists say the real number is much worse. It's going to get worse before it gets better. The current economic environment is the most challenging China has faced in recent years.

This time it's different. China's workers may be working again but "the rest of the world is in an economic funk," says George Magnus. China's decentralization of the economy led to the rise of non-state enterprises such as private firms , which tended to pursue more productive activities than the centrally controlled SOEs and were more market-oriented and more efficient.

Additionally, a greater share of the economy mainly the export sector was exposed to competitive forces. Local and provincial governments were allowed to establish and operate various enterprises without interference from the government. In addition, FDI in China brought with it new technology and processes that boosted efficiency. However, as China's technological development begins to converge with major developed countries i. Several developing economies notably several in Asia and Latin America experienced rapid economic development and growth during the s and s by implementing some of the same policies that China has utilized to date to develop its economy, such as measures to boost exports and to promote and protect certain industries.

However, at some point in their development, some of these countries began to experience economic stagnation or much slower growth compared to previous levels over a sustained time, a phenomenon described by economists as the "middle-income trap.

The World Bank classifies development levels of economies using a per capita gross national income GNI methodology. The Chinese government projects that China can cross the high-income threshold by It hopes to achieve this largely by making innovation a major source of future economic growth.

Skeptics contend that innovation growth in China will be hard to achieve, especially if it is mainly state-driven and imposes new restrictions on foreign firms,. Figure 5. Notes: Bar in red indicates the level China would need to reach to become a high-income economy. For some years thereafter, EIU projects U. GDP growth to be greater than China's Figure 6. Figure 6. The Chinese government has indicated its desire to move away from its current economic model of fast growth at any cost to more "smart" economic growth, which seeks to reduce reliance on energy-intensive and high-polluting industries and rely more on high technology, green energy, and services.

China also has indicated it wants to obtain more balanced economic growth. These issues are discussed in more detail later in the report. The rapid growth of the Chinese economy has led many analysts to speculate if and when China will overtake the United States as the "world's largest economic power. Measured in U. Many economists contend that using nominal exchange rates to convert Chinese data or those of other countries into U. To illustrate, one U. This is because prices for goods and services in China are generally lower than they are in the United States.

Conversely, prices for goods and services in Japan are generally higher than they are in the United States and China. Thus, one dollar exchanged for local Japanese currency would buy fewer goods and services there than it would in the United States.

Economists attempt to develop estimates of exchange rates based on their actual purchasing power relative to the dollar in order to make more accurate comparisons of economic data across countries, usually referred to as purchasing power parity PPP.

According to the IMF which uses price surveys conducted by the World Bank , prices for goods and services in China are about half the level they are in the United States. China's economic ascendency as the world largest economy has been impressive, especially considering that in , China's GDP on a PPP basis was only one-tenth that of the United States see.

Figure 7. Table 1. Comparisons of Chinese, Japanese, and U. Dollars and a Purchasing Power Parity Basis: According to a study by economist Angus Maddison, China was the world's largest economy in , accounting for an estimated However, foreign and civil wars, internal strife, weak and ineffective governments, natural disasters some of which were man-made , and distortive economic policies caused China's share of global GDP on a PPP basis to shrink significantly.

By , China's share of global GDP had fallen to 5. The adoption of economic reforms by China in the late s led to a surge in China's economic growth and helped restore China as a major global economic power. Even with continued rapid economic growth, it would likely take many years for Chinese living standards to approach U. China has emerged as the world's largest manufacturer according to the World Bank.

Figure 8 lists estimates of the gross value added of manufacturing in China, the United States, and Japan expressed in U. Gross value added data reflect the actual value of manufacturing that occurred in the country i.

In , the value of China's manufacturing on a gross value added basis was Manufacturing plays a considerably more important role in the Chinese economy than it does for the United States. In , China's gross valued added manufacturing was equal to Figure 8. In its Global Manufacturing Competitiveness Index, Deloitte an international consulting firm ranked China as the world's most competitive manufacturer out of 40 countries , based on a survey of global manufacturing executives, while the United States ranked second it ranked fourth in The index found that global executives predicted that the United States would overtake China by to become the world's most competitive economy, largely because of its heavy investment in talent and technology e.

As a result, China was projected to fall to the second-most competitive manufacturer by More broadly, the World Economic Forum WEF produces an annual report that assesses and ranks based on an index the global competitiveness of a country's entire economy, based on factors that determine the level of productivity of an economy, which in turn sets the level of prosperity that the country can achieve.

The decline in China's working age population may have contributed rising wages in China. As indicated in Figure 9 , China's average monthly wages converted into U. S levels. In , China's unit labor production costs were Figure 9. Notes: Because data are listed in U. However, such data may reflect average labor costs in dollars that U. Figure Notes: The labor cost of producing one unit of output, indexed to U. China's trade and investment reforms and incentives led to a surge in FDI beginning in the early s.

Such flows have been a major source of China's productivity gains and rapid economic and trade growth. There were reportedly , foreign-invested enterprises FIEs registered in China in , employing That level rose from 2.

At their peak, FIEs accounted for The sharp increase in China's global FDI outflows in recent years appears to be largely driven by a number of factors, including Chinese government policies and initiatives to encourage firms to "go global. Table 2. A key aspect of China's economic modernization and growth strategy during the s and s was to attract FDI into China to help boost the development of domestic firms.

Investment by Chinese firms abroad was sharply restricted. However, in , China's leaders initiated a new "go global" strategy, which sought to encourage Chinese firms primarily SOEs to invest overseas. One key factor driving this investment is China's massive accumulation of foreign exchange reserves.

Traditionally, a significant level of those reserves has been invested in relatively safe but low-yielding assets, such as U. Treasury securities. On September 29, , the Chinese government officially launched the China Investment Corporation CIC in an effort to seek more profitable returns on its foreign exchange reserves and diversify away from its U.

Investing in foreign firms, or acquiring them, is viewed as a method for Chinese firms to obtain technology, management skills, and often, internationally recognized brands, needed to help Chinese firms become more globally competitive.

Table 3. Note : Ranked according to the top seven destinations of the stock of Chinese FDI outflows through These data differ significantly from official U. Economic reforms and trade and investment liberalization have helped transform China into a major trading power. China's rapidly growing trade flows have made it an increasingly important and often the largest trading partner for many countries.

According to China, it was the largest trading partner for countries in However, China's exports and imports fell by China's trade recovered in and , with export growth averaging However, since that time, China's trade growth slowed sharply. From to , China's exports and imports grew at an average annual rate of 7. From to exports and imports fell by an average rate of 4. However, in , China's exports and imports rose by 6.

Exports and imports in rose by 9. However, during the first three months of , China's exports grew by 1. In , China overtook Germany to become both the world's largest merchandise exporter and the second-largest merchandise importer after the United States. In , China overtook the United States as the world's largest merchandise trading economy exports plus imports. As indicated in Figure 17 , China's share of global merchandise exports grew from 2.

Table 4. China's Global Merchandise Trade: China's Merchandise Trade: Note : Data are in U. Note: Data are in U. China's Share of Global Merchandise Exports: Table 5 lists official Chinese trade data on its seven largest trading partners in based on total trade. China's trade data differ significantly from those of many of its trading partners. These differences appear to be largely caused by how China's trade via Hong Kong is counted in official Chinese trade data.

China treats a large share of its exports through Hong Kong as Chinese exports to Hong Kong for statistical purposes, while many countries that import Chinese products through Hong Kong generally attribute their origin to China for statistical purposes, including the United States. Table 5. China's Major Merchandise Trading Partners in Note s : Rankings according to China's total trade in China's bilateral trade data often differ from that of its trading partners.

China's abundance of low-cost labor has made it internationally competitive in many low-cost, labor-intensive manufactures. As a result, manufactured products constitute a significant share of China's trade. A substantial amount of China's imports is comprised of parts and components that are assembled into finished products, such as consumer electronic products and computers, and then exported.

Often, the value-added to such products in China by Chinese workers is relatively small compared to the total value of the product when it is shipped abroad. China's top 10 imports and exports in are listed in Table 6 and Table 7 , respectively, using the harmonized tariff system HTS on a two-digit level.

Major imports included electrical machinery and equipment; 44 mineral fuels; nuclear reactors, boilers, and machinery such as automatic data process machines and machines to make semiconductors ; ores; and optical, photographic, medical, or surgical instruments.

China's biggest exports were electrical machinery and equipment; nuclear reactors, boilers, and machinery; furniture; plastics; and vehicles. Table 6. Major Chinese Merchandise Imports in Optical, photographic, cinematographic, measuring checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof.

Note : Top 10 imports in , two-digit level, harmonized tariff system. Table 7. Major Chinese Merchandise Exports in Source: World Trade Atlas , using official Chinese statistics. Note : Top 10 exports in , two-digit level, harmonized tariff system. China is currently undergoing a major restructuring of its economic model.

Policies that were employed in the past to essentially produce rapid economic growth at any cost were very successful. However, such policies have entailed a number of costs such as heavy pollution, widening income inequality, overcapacity in many industries, an inefficient financial system, rising corporate debt, and numerous imbalances in the economy and therefore the old growth model is viewed by many economists as no longer sustainable.

China has sought to develop a new growth model "the new normal" that promotes more sustainable and less costly economic growth that puts greater emphasis on private consumption and innovation as the new drivers of the Chinese economy.

Implementing a new growth model that sustains healthy economic growth could prove challenging unless China is able to effectively implement new economic reforms.

Many analysts warn that without such reforms, China could face a period of stagnant economic growth and living standards, a condition referred to by economists as the "middle-income trap" Several of these challenges are discussed below. Despite China's three-decade history of widespread economic reforms, Chinese officials contend that China is a "socialist-market economy.

According to the World Bank, "China has become one of the world's most active users of industrial policies and administrations. Fortune's list of the world's largest companies includes Chinese firms compared to 29 listed firms in Of the 28 other Chinese firms on the Fortune list, several appear to have financial links to the Chinese government.

China has become a major global producer of steel.