It is a well-known fact the Australian economy is tied very closely to China’s, so is their growing debt something we should be concerned about? Are they still a rising dragon or a debt-fuelled time bomb?
It is estimated China’s debt stands at $29 trillion, and this figure is continuing to rise. In comparison Australia owes approximately $5.6 trillion, and as a country we are concerned about our debt levels. Of course, China has a much larger population so you would expect more debt overall, however $29 trillion is still a lot of debt to be owing.
As we all know debt can be good, and often if an economy is growing debt isn’t seen as an issue. But, China’s economy is slowing down, and this has a number of people worried. But is it something we should be worried about?
In short, it is cause for concern but not alarm.
When debt grows and economic growth slows, many companies and lending institutions become concerned. Investors want to be sure China can pay back its debts, and with an economy slowing down, investors’ confidence diminish as they are concerned China will be able to meet their repayments. This is evident from the GDP decline from a high of 10.6% growth in 2010 to a 6.9% growth in 2015.
Another reason people are sceptical about China’s economic condition is because the Chinese Government seems to be taking measures to fix their economy. When a government takes measures to fix their own country’s economy it raises red flags there is indeed something to be worried about.
Recently, China had to halt trading on stocks and had to prop up their stock market so it didn’t collapse further. Is this a warning sign? I believe it is, and we will continue to see more economic measures put in place in China to deal with their burgeoning debt and volatility.
Another red flag China is heading for trouble is the devaluation of their currency, the Yuan. With China devaluing the Yuan, I foresee there might be more trouble in paradise then what we are being lead to believe. A number of scholars predict more devaluations of the Yuan over the coming year, and this would be an interesting development to follow.
Standard and Poor have downgraded their ratings for China from A+ in 2008 to AA- with a negative outlook for 2016. Similarly, Moody’s has downgraded China’s outlook from A1/positive in 2009 to AA3/Negative in 2016.
This all leads me to ask the question, is China still the rising dragon or is it now a debt-fuelled time bomb?
I think the golden age for China is over, and as they become more globalised they will continue to grow, but not at the unprecedented pace they have been.
Are they a debt-fuelled time bomb? I am not convinced. Certainly they will have to take steps to address the countries debt problem, but I do not believe it will cause a massive economic meltdown similar to what we saw in 2008.
What do you think? Is China going to be the cause of our next GFC?
Rasad Merchant CPA
Strategy and Business Development Manager & Secretary of the Personal Insolvency Professionals Association (PIPA)
Rasad brings over 8 years’ experience working in the insolvency sector to Debt Cutter, where he is dedicated to achieving peak business performance. With a background as both a trusted business advisor, and as a business owner, Rasad uses his foresight to strategically manage business growth and opportunities.