China’s Third Quarter Disappoints

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Photo courtesy of thechinatimes.com

Photo courtesy of thechinatimes.com

The Chinese economy has experienced its slowest growth since the global financial crises of 2008, causing international concern for investors and economists alike.

China’s government announced yesterday that the 7.3 percent economic expansion in this third quarter is “the new normal” and is not concerned.

However, according to The Financial Times, “Beijing’s actions in recent months show it is quite worried about the slowdown and most evidence suggests the country’s new pace of growth will be a lot lower in the coming months and years. And economists expect this trend to continue.”

Many economists agree that there is reason for alarm. China’s growth is down from 7.5 percent last quarter, which makes the closing fiscal year potentially the worst since the international financial sanctions that followed the massacre of Tiananmen Square in 1990.

China is the world’s second largest economy and is thought to be contemporarily hindered by industrial overproduction, increasing debt levels and a decline in its housing market. It’s property market has been thought to be the major contributor to its economic growth over the last decade.

Overcapacity in real estate and industrial production have been said to be attributed to “longest period of producer price deflation on record.” This deflation has been sustained for 32 consecutive months as of September.

World Bank officials have explained that the Chinese accumulation in debt between 2008 to 2013 as being “rivaled only by Ireland in the years leading up the global financial crisis.”

China’s debt totals have increased from a 147 percent of their gross domestic product (GDP) to 251 percent by June 2014, as reported by Standard Chartered. Its property sales have also experienced a major slump, even since last year.

The Financial Times explains:

“Despite the enormous debt build-up and a recent slowdown in new loans, credit is still growing at nearly twice the rate of nominal GDP. For the past several years, Beijing has in effect banned local governments from borrowing money using opaque, poorly-regulated “local government finance vehicles” because of concerns this hidden debt could destabilize the entire financial system.”

Bloomberg data suggests that the government had issued $278 billion dollars of debt by October, which was more that 50 percent more than they had in the entire 2013 fiscal year.

This is of major concern to the global financial system not only because Chinese investment, growth, and industrial production is integral and symbiotic with most developed countries around the planet – especially the United States – but also that China has been thought to be one of the greatest economic powerhouses post the 2008 meltdown. It is also the major holder and purchaser of U.S. Debt. If the fiscal downward trend continues, it could mean more financial problems for both developed and developing economies alike.

 

 

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