Our Opinion: 2015
China : Trapped between strong yuan and high debt
Last year, China’s growth rate slipped to a 24 year low of 7.4% – and it’s heading lower still.Chinese data is notoriously unreliable and many think growth has slipped further. Diana Choyleba of Lombard Street Research thinks it fell to 5% last year.
An indicator that is hard to fake is electricity output. It turned negative for the first time since 2009. Inflation has fallen to a five year low of 0.8%, while producer prices are lurching downwards, suggesting profit margins will suffer – after declining 4.3% in January. Imports slid by 20%, in US Dollar terms, evidencing the lack of momentum in the domestic economy.
All this gives rise to the fear that the bursting of China’s property and credit bubble could cause a deflationary slump. John Ficenec in the Daily Telegraph thinks the financial system is looking ropey. The bonds of Chinese real-estate companies are “falling like dominoes.”
China is already in extreme debt that gives the authorities little room for manoeuvre. Taking private and public borrowing into account means debt is 282% of Gross Domestic Product. Non-financial companies owe 125% of GDP – one of the highest levels of corporate debt in the World. Therefore, boosting the economy by encouraging more lending is an unlikely approach.
John Authers of the Financial Times recently said that China can’t count on exports to alleviate the impact of domestic weakness. It has allowed its currency to appreciate in recent years, whilst other central banks have done the opposite. China is less competitive as a result.
The World’s second-biggest economy has become yet another worry for global investors.