Hi delegates!
As we come closer to conference, it is important to keep in mind that we cannot separate economics from politics. For this blog post, I want to provide an overview of the Chinese economy - particularly the challenges for future economic growth.
Although the U.S. is currently the world's largest economy, a new study by PriceWaterhouse Coopers forecasts that China and India will be the two largest economies in the world by 2050.
China was the world's largest economy in 1820 and is the second largest economy today (the largest if measured in PPP terms). Since 2010, the PRC is the world's largest exporter and the second largest importer of merchandise goods. It has experienced an average GDP growth of close to 10% per year until 2014. By 2030, China is expected to retake its place as the largest economy in the world.
The facts above, however, paint a rosy picture of the Chinese economy.
Debt Sustainability
China's addiction to debt has significant implications on its growth. The PRC has borrowed heavily to finance massive construction projects. This credit-fueled splurge led to Moody's Investors Service lowering its rating on China's sovereign debt from A1 to Aa3. The credit rating agency said: "The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years."
Moreover, China holds the world's largest foreign exchange reserves, at $3.1 trillion. This represents nearly 3 years of import value. China's model of growth relies on trade surplus and huge foreign exchange reserves. Note: the PRC's ownership of U.S. Treasury Bonds is significant.
Nonperforming Loans
China's state-owned zombie economy is the Achilles heel of China's financial structure. Loss-making state-owned enterprises (SOEs) were kept alive by steady infusions of credit from the banking system between 1978 and 1993. Since these zombie firms had no hope of repaying their loans, a large buildup of nonperforming loans (NPLs) inevitably occurred. To avert a liquidity crisis, the Chinese government issued 290 billion RMB in special bonds and established 4 Asset Management Companies (AMCs) to purchase NPLs at face value from the Big Four commercial banks. The AMCs served to recover as much value as possible from the NPLs they bought from the banks by selling the loans to third parties, foreclosing on assets, and auctioning them off.
As we come closer to conference, it is important to keep in mind that we cannot separate economics from politics. For this blog post, I want to provide an overview of the Chinese economy - particularly the challenges for future economic growth.
Although the U.S. is currently the world's largest economy, a new study by PriceWaterhouse Coopers forecasts that China and India will be the two largest economies in the world by 2050.
The facts above, however, paint a rosy picture of the Chinese economy.
Debt Sustainability
China's addiction to debt has significant implications on its growth. The PRC has borrowed heavily to finance massive construction projects. This credit-fueled splurge led to Moody's Investors Service lowering its rating on China's sovereign debt from A1 to Aa3. The credit rating agency said: "The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years."
Moreover, China holds the world's largest foreign exchange reserves, at $3.1 trillion. This represents nearly 3 years of import value. China's model of growth relies on trade surplus and huge foreign exchange reserves. Note: the PRC's ownership of U.S. Treasury Bonds is significant.
Nonperforming Loans
China's state-owned zombie economy is the Achilles heel of China's financial structure. Loss-making state-owned enterprises (SOEs) were kept alive by steady infusions of credit from the banking system between 1978 and 1993. Since these zombie firms had no hope of repaying their loans, a large buildup of nonperforming loans (NPLs) inevitably occurred. To avert a liquidity crisis, the Chinese government issued 290 billion RMB in special bonds and established 4 Asset Management Companies (AMCs) to purchase NPLs at face value from the Big Four commercial banks. The AMCs served to recover as much value as possible from the NPLs they bought from the banks by selling the loans to third parties, foreclosing on assets, and auctioning them off.
In his book The China Boom: Why China will not Rule the World, Ho-fung Hung argues that a second government bailout of SOEs and state banks in 2009 will only delay the financial crisis induced by an accumulation of NPLs and make the Chinese economy more vulnerable, which will have repercussions in the global economy. Hung concludes that China's boom will inevitably end.
Further reading
Watch
Tyler Cowen: The Rise and Fall of the Chinese Economy
Here's Why China's Economy Will Be So Hard to Fix | Bloomberg
Arthur Kroeber: "China's Economy: Powerhouse, Menace, or the Next Japan?"
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