Chinese Debt and the Stagnation of Growth

This article by “The Economist” analyzes China’s growth patterns. As China has been hailed as one of the fastest growing and most powerful economies globally, the very recent slow is an interesting point of examination. This ties in with our class discussions of what constitutes development, and how the globalizing effects of inclusion in the global economy impacts country growth. Interestingly, the article names the closed off nature of China’s financial system as both an asset in resilience to the recent crisis, allowing China’s economic growth to soar above other countries, but now this same resilience is harming China’s ability to pay back debt. This also raises questions about the concept of continuous growth.

The article discusses how the very factors that were able to keep the country afloat during the 2008 financial crisis (namely debt and the usage of credit) is now slowing and reversing growth trends, as financial system is relatively closed. As interesting piece of the article:

“The single most important development has been its credit binge. Total debt (including government, household and corporate) has climbed to about 250% of GDP, up 100 percentage points since 2008. This debt allowed China to power its economy through the global financial crisis but also saddled it with a heavy repayment burden. Most worrying, much of the credit flowed to property developers. China’s inventory of unsold homes sits at a record high. The real-estate sector, which previously accounted for some 15% of economic growth, could face outright contraction. New property starts fell by nearly a fifth in the first two months of 2015, compared with the same period a year earlier. From this vantage point, the abruptness of China’s current slowdown looks more cyclical than structural. A period of overheated economic growth tends to be followed by a correction. Not all cycles are created equal, however. Working off a credit overhang can take years. Given that China’s financial system is mostly closed, it has little risk of an acute crisis, but the other side of the coin is that it might need even longer to clean up its bad debts.”