China’s Markets: Potential Bubble?

Written by Adam Xie

The Chinese path forward has massive global implications, as it remains an enormous driver of the global economy and an influential international lender. An economic collapse would cause repercussions around the world and particularly in the U.S. since China is one of its largest trading partners and investors.

China, within the last two decades, has proven to be exceptional in its ability to stimulate strong, consistent economic growth, even through global economic disasters such as the Housing Crisis of 2008. Most would agree that the Chinese economic structure is quite remarkable and that the government, which holds ultimate authority over all aspects of the economy, has done a brilliant job of lifting the country out of poverty and into the “second world”. However, the gilded glory of the economy’s growth has overshadowed the blatant flaws in its design.

The Chinese government has carefully balanced debt, gross domestic product (GDP), and other economic drivers in order to produce the growth the country has seen in recent decades. However, in doing so, it has built a fragile house of cards, in which one false move could crumble the tower it has spent years sculpting. It is commonly understood that debt can be a useful tool in perpetuating growth within economies, but there are concerns that the Chinese have abused debt to a point of low return, raising the potential of severe economic consequences. With its debt burden rapidly growing out of control and an unsteady debt-to-GDP ratio of nearly 300%—compared to roughly 120% a mere two decades ago—an economic collapse could be imminent for the Chinese.

Many have drawn similarities between the current state of the Chinese economy and the U.S. housing market in 2007, prior to the crash. A handful of heavily-indebted companies continue to borrow money that they are unable to pay back, which could prove to be a problem if left unaddressed by the government. Similarly, a looming mortgage debt bubble has worried many economists, with many homeowners owing more than they can afford and unoccupied “ghost towns” continuing to grow. According to NYU Stern Professor Joseph Foudy, the Chinese economy has experienced a sudden spike in debt within its corporate sector that could prove potentially impossible to pay back in the future. He believes that the debt at its current level would be manageable in theory, as the Chinese government could still exercise its authority and safely limit growth; yet, the rate at which the debt is rising in practice remains alarming. It is therefore crucial to observe how the government will react to the issue with the end of its 19th party and President Xi Jinping’s move to consolidate even more power. Only massive concrete reforms may be enough to pull the economy out of potential collapse.

The Chinese path forward has massive global implications, as it remains an enormous driver of the global economy and an influential international lender. An economic collapse would cause repercussions around the world and particularly in the U.S. since China is one of its largest trading partners and investors.

Chinese authorities must play their cards cautiously if they wish to stabilize the economy and produce steady healthy growth for generations to come. The Jenga Tower that is the Chinese economy is teetering on a knife’s edge, and one misstep could be enough to collapse everything that the government has built within the last few decades.