This article suggests China may be headed for a financial crisis similar to the one experienced by the United States in 2007. The article notes that China is currently experiencing similar symptoms to the ones the U.S. observed prior to the crisis as the country has been experiencing skyrocketing property prices, slowing growth and a large increase in leverage. The article notes that property prices have swelled some 113% from 2004 to 2012, yet China's rate of growth in 2012, 7.8%, was its slowest in 13 years. Also, leverage, as measured by domestic credit per gross domestic product, has increased 34% since 2007. The more highly the country leverages itself, the more painful a deleveraging period could be. Do you guys believe China is in for difficult times ahead?
http://www.cnbc.com/id/100562024
3 comments:
I think that is highly unlikely, impossible even, for a nation like China to continue growing at its current pace. Much of China's recent growth has come from playing 'catch-up' with first-world nations and industrializing, similar to what we discussed in class about many Asian economies in the 20th Century (Japan, Korea, etc.). A housing bubble seems to be a very realistic threat for the Chinese government. With their new president Xi Jinping, I think the more rational members of the Chinese Politburo will hopefully realize the potential for destabilization within the economy.
Even though the housing prices increased by 113% from 2004 to 2012 according to official data and China's leverage rose by 34% of GDP in five year, I still don't think China will face the same financial crisis as the U.S. did. Despite being the lowest rate in 13 years, the growth rate of 7.8% was still high. It doesn't mean China could sit still and watch. Government's efforts in controlling housing prices haven't been effective since the prices initially dipped after tightening policies were introduced, then to rebound, so stabilizing prices by stricter enforcement might not be the right path to go.
A economic crisis could mean major changes in China. The regime's major claim to legitimacy to rule has been the country's economic growth. If the economic state were to face a downturn, the right to rule of the communist government would be seriously undermined. As China moves more and more toward capitalist economics, the dependency on the global market and the competition of firms could result in the people's dissatisfaction and challenging of communist rule.
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