Forex Forecasts

Is the economic era of explosive growth in China coming to an end? : SuperInvestor.Ru magazine


Posted on 28 Feb 2016 in Educational program, Translations, Economics

At the end of 2015, the People’s Republic of China showed the lowest GDP growth in the last 25 years. Perhaps this suggests that the amazing economic era of the Asian giant is coming to an end.

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Chinese corporations have acquired extremely high levels of debt and business models that are not supported by any fundamental economic factors. There has been a long history of “cleaning up unused manufacturing capacity” from the Chinese economy, but analysts have not mentioned that it could result in the loss of hundreds of thousands of jobs.

The first industry to give up the slack was steel. China accounts for about half of the global consumption of this industry’s products. It was soon followed by the real estate, banking, shipbuilding and coal industries. This also affects the global economy. In December 2015, The Economist reported that the share of global payments using the renminbi (China’s national currency) more than quadrupled between 2011 and 2015.

China’s steel market disaster

According to Xinhua News Agency, in 2016, due to problems in the steel industry, up to 400,000 laborers could lose their jobs. The China Metallurgical Industry Planning and Research Institute estimates that no fewer jobs will be lost in the oil and gas industry.

The Chinese authorities tried to avoid losses and closed trading in the stock markets, and also began to provide cheap emergency loans to sectors under the government or favored by the state, and to implement projects in the field of civil engineering. However, these measures are nothing more than a “patch”. The “red economy” is in need of large-scale structural reforms.

100,000 workers were laid off at once

Among the many signs pointing to the instability of the Chinese economy, most prominent was the report that in September 2015, coal giant Heilongjiang Longmay Mining Holding Group laid off about 100,000 workers in one day. This came after the company closed eight coal mines in the first half of 2015 due to reduced production and lower energy prices.

Longmay Group Chairman Wan Xikui explained the massive layoffs as a need to stem the financial bleeding that the debt-laden company was experiencing. In 2014, the company’s losses amounted to $ 815 million. With the current volume of salary payments to its employees, the company would not be able to pay off its creditors. Just three years earlier, in 2011, Longmay Group posted a profit of $ 125 million.

Problems with currency, debt, value of goods and assets

The seeds of the economic problems China faced in 2015 were sown much earlier. They can be summed up in one term: malinvestment (ineffective investment). In other words: when 100,000 people lose their jobs in one day, the question arises why 100,000 people were occupied by unstable (unsustainable) workplaces?

In short, heavily indebted Chinese companies grew on access to easy money and on expectations of further growth in asset values. A familiar story after the 2007-08 crisis, isn’t it? Chinese authorities connived at policies that led to unnecessary sprawl in industries such as shipbuilding, automobiles, housing and coal mining. Chinese companies borrowed from state-owned banks to maintain their growth, and Chinese shareholders were rewarded with record share prices.

After three decades of double-digit GDP growth, most new ventures have followed this development model, even despite artificially attractive interest rates. The problem with these forecasts was that they did not take into account future demand – there was no guarantee that local or even international markets would continue to have an appetite for such expansion of privileged industries.

China’s central government and banking system manipulated stock and currency values, as well as interest rates and domestic demand. Essentially, China created a “make-believe economy” in which companies borrowed subsidized money, took people to jobs that shouldn’t have existed, accumulated surplus goods that no one wanted to buy, and ended up dumping them on the market. prices that relatively few Chinese consumers could afford. If international revenues were to decline, this house of cards would simply collapse.

Eventually, the reality of these inefficient investments became apparent. In January 2016, the New York Times wrote: “In order to keep growth at the same level, the Chinese authorities are taking various measures – building more high-speed rail lines and encouraging state-owned banks to provide loans.” As a result, “the Chinese shipyards were filled with half-finished shells like steel worms sawn in two.”

Is state capitalism just fiction?

Bubbles in China’s commodity, real estate and stock markets raise a serious question: Is the model of “state capitalism” used in the reformed Chinese economy just a fiction?

The Chinese government’s GDP growth target is 6.5% per annum between 2016 and 2020. It is unlikely to be able to achieve this, since a gigantic workforce does not have the skills to make a quick transition from the manufacturing sector to the provision of services for which global demand has not yet fallen.

Moreover, the Chinese authorities have done everything possible to prevent a quick (and painful) reorganization. In June, the country’s authorities introduced unprecedented regulation in the financial markets, which prevents the flow of capital from industries that have proven to be ineffective to those where there is still hope for development. Large-scale civil engineering projects can spur GDP, but, in essence, only guarantee that workers will pull the strap in those industries for which there is no market demand.

China’s first market reforms in the 1970s and 1980s launched an era of tremendous growth. In the event that the Chinese authorities are not ready to accept open markets – that is, not only to make a profit, but also to incur losses, to allow intellectual property rights, not to meddle in the management of the economy – an era of despair may lie ahead.

A source: Investopedia.com.

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Polak Donovan
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Hello! My name is Polak Donovan, I am a private investor, I have been trading currencies in Forex since 2011, I have increased my capital by 70% with growing dynamics. During this time, I have accumulated a lot of experience that I would like to share in my blog. I will tell you how to speculate in the market and at the same time reduce the beginner's mistakes. I will show my results and share my predictions, I also collected the most relevant news for you on the site, which, in my opinion, affect market trends.
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