China in ‘Financial Crisis’

Economists are calling China’s property crash, coupled with defaulting government investments and national debt, a “slow-motion financial crisis.”

From Financial Times:

A property market that has contributed around one quarter of GDP has over the past decade turned sour, triggering a series of secondary effects that are smothering growth in the world’s second-largest economy. Logan Wright, a Hong Kong-based partner at consultancy Rhodium Group, calls the situation a “slow-motion financial crisis”.

Contagion is spreading into the deep tissue of China’s political economy. What began as a property crisis — characterised by slumping apartment sales and a rash of debt defaults by developers — is now morphing into a financial crunch at the local government level.

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With the market slump, thousands of local government financing vehicles (LGFVs), which since the financial crisis have provided the main impetus behind China’s investment-driven growth, are either running short of funds or teetering on the brink of unprecedented defaults, analysts say. Local governments have long depended on land sales to property developers to balance their books.

Taken together, the slumping property market, the sputtering investment engines of local governments and a hefty burden of national debt signals the end for a model of growth that has not only transformed China but also been the biggest generator of global economic expansion for well over a decade

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The global implications of a Chinese economic slowdown are stark. The country’s contribution to the world’s economy, already hit by a sharply slowing GDP growth rate this year, would be further enfeebled. Multinationals that derive much of their revenue growth from China may be forced to trim earnings projections.

“China’s growth model has run its course,” says Chen Zhiwu, professor of finance at the University of Hong Kong. He adds that in the past few years, Beijing has tried to stretch the booms in property and infrastructure in order to prolong investment-led growth.

“But now, all these drivers have little space left, if any at all.”