Replicating the struggling path of the largest economies, China’s slow economic recovery haunts the global market. With the soaring debt levels and huge political revolution, China has alarmed Mr. Ken Rogoff of the International Monetary Fund.
In the recent interview of Mr. Rogoff, he outlined the threat caused by the second largest economy in the global economy. His concerns involved the debt problem of the country, disappointing economic growth and political revolution.
The financial sector of China has been too unsteady, since the start of the year and the current debt levels magnifies the risk. “If you want to look at a part of the world that has a debt problem look at China. They've seen credit fuelled growth and these things don't go on forever” Mr. Rogoff explained.
In relation to this, the National Australia Bank expressed the nervousness towards the enormous pace of the Chinese debts. Similarly, the Bank for International Settlements has warned the global financial market that the debt load was far too heavy already.
Gerard Burg, senior Asia economist at the NAB, was not surprised with the debt level. A few weeks ago, he wrote in his research released to the public that while the result generates a considerable amount of press attention the story was new anymore. In details, Mr. Burg said that China’s credit gap exceeded 10 percent for the first time in September 2009 and moved even lower in 2011 and 2012 consecutively.
Based on Burg’s estimates, the total debt level is already 315 percent of GDP, in light of the government debt. The shadow banking sector could have been part and parcel of this debt blow-up after the authorities were found of narrowing the burst of traditional credit.
Further, Mr. Burg explained that “The size of the shadow banking sector is often under-estimated – including by the BIS – leading to an inaccurate picture of China’s overall debt level. The distinction between these differing measures is significant when making international comparisons. Either measure puts China above the average for advanced economies (at 245%), however our measure places China among the highest debt advanced economies – an unprecedented position for a still developing economy.”
President Xi Jinping campaign to end the corruption has affected the economic sector of the country. At the start of the year, officials from different hierarchies of the government were arrested and it turned out the effort to lift the current flagging economy got complicated.
According to the reports released, a number of government officials involved in big businesses stopped from operating. Other projects were not signed off or held off which involves investment projects. Despite the assurance provided by the president the private firms that they were valued and protected, their contributions apparently couldn’t support the demands in the business sector.
It turned out a fear to have a business link with the accused government officials emerged. There are government agencies which have become too careful with their decisions and everything seems so hard to accomplish. The anxiety to do business and market confusion hindered the path towards development. This whole breakdown of businesses has ascended even to the foreign investors, whereas most of them probably had second thoughts already.
Link to the Global Economy
The trade links with China, either in financial or trade, are too huge. Thus, the slow economic growth affects the global economy. For instance, currencies which depend on the trades of commodities are sensitive to the state of the economy. Poor economic growth would mean poor trade capability. China has become one of the largest consumers and producers of some precious metals and minerals.
Since it is the second largest economy, the market potential is still considerable despite the current tightening in the business sector. Foreign investors still aim to enter the Chinese market amid the strict rules over the foreign investments. Therefore, the government together with the private sectors is both responsible to the slowdown. Come to think of it, the Brexit pressure has not yet ended, more market volatility is coming. What would happen if it fails to save its economy as soon as possible?