How important is China to global economy?
As measured by gross domestic product (GDP), China is the world’s second largest economy after the US. However, when Purchasing Power Parity is used, the Chinese has surpassed the US. Furthermore, in terms of global trade, China is the undisputed leader. As a result, what happens in China in the coming months and years, in all likelihood, will cause a ripple effect across the global economy.
In recent years, headline grabbing crackdowns by the Chinese authorities on corruption, shadow banking, stock manipulation and illegal money transfer overseas have created an atmosphere of uncertainty. This has manifested in sizeable capital outflows from China.
Domestically, the well-flagged massive overbuilding throughout China since 2009, from factories to housing to infrastructure, has resulted in overcapacity and a crushing debt-load on the Chinese economy.
Can the challenges facing China be resolved without major dislocation to its economy and the banking sector?
Without a crystal ball in hand, we could only try to closely monitor some key developments to help gauge if Chinese policy makers are able to navigate safely through turbulent times ahead. Some of these key developments or economic indicators are:-
• The Yuan exchange rate
• The country’s foreign reserves
• Interest rates
• The government’s response to market volatility
• Loan default risks; and,
• Job losses
Restructuring and downsizing across industries are expected to create large redundancies which could impact social stability in this vast country. Many emerging economies and Asia, in particular, are extremely vulnerable to the swings and about-turns of the Chinese economy. The over-indebtedness of many of these countries will limit the policy options available to them to weather the probable economic storm. Like it or not, China remains an important market to watch.